Noonan to consider scrapping guarantee on banks
Signs of stabilisation bode well for a return to normal practice
FINANCE Minister Michael Noonan is considering an end to the controversial bank guarantee at the end of this year.
The current guarantee expires at the end of December. Yesterday the minister told a meeting of the Dail's select finance sub committee that he may not renew the guarantee. The minister said he would decide on the issue in the coming weeks. Bonds that are already guaranteed under the scheme -- such as those owed by Anglo Irish Bank -- would still be guaranteed to be repaid by the Government even if the scheme was not renewed.
The controversial temporary guarantee was first introduced exactly three years ago and has been extended since then every time it was due to expire.
Yesterday, the minister said he would consider the issue carefully. He said there are signs of stabilisation in the bank sector that bode well for a return to normal practice, but also hinted that the guarantee may have to be reinstated.
"There were liquidity issues in the banks over the summer, but deposit flow increased in August," he said.
The bank guarantee was put in place to enable Irish banks to borrow on the money markets by making the State responsible for any guaranteed loans. Banks pay a fee to the State for access to the guaranteed loans.
The guarantee was also aimed at preventing a run on banks during the initial phases of the financial crisis by protecting any deposit, of any size, placed with an Irish bank.
Ending the guarantee would be a sign of a return to normal financing rules for the bank, but there is a danger that removing the guarantee will prompt investor flight.
The minister made the comments at a hearing of the Dail finance sub committee where he presented amendments to the draft Bank and Credit Institutions (Resolution) Bill.
The bill sets out the system for the State and the Central Bank to deal with a financial institution in danger of collapse.
The new bill is set to come into force from the end of 2012, when emergency banking laws introduced last year expire.
The minister said the first preference outlined under the new regime is simply to allow a bank or institution to collapse.
"Let the losses fall where they may," he said.
However, where an institution is deemed by the Central Bank to be of importance to the wider finance sector it will be merged with another bank or put into a temporary "bridge bank" to be worked out over time.
Yesterday amendments were added to the Bill setting out the terms for creditors of a rescued bank, such as bond holders.
Bondholders of a failed bank will only be eligible if the institution was not in receipt of state help in the four years prior to its collapse. They must also be able to prove to the High Court that they suffered a greater loss from a state-directed rescue than if the bank they lent to was put into liquidation.
Compensation for bondholders is to be paid out of a levy on the banking sector, however the minister said the State would supply any shortfall in the fund raised from the levy and charge it back to the banks later.