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Coalition may scrap bank guarantee scheme within months

The Government is looking at proposals to scrap the controversial bank guarantee scheme within months, the Irish Independent has learned.

Senior officials are currently examining proposals not to renew the scheme when it expires in December.

That would mean that the Central Bank would earn hundreds of millions of euro less than it did last year from special payments from the banks.

The Department of Finance is said to he happy to forgo the money because an end to the so-called ELG scheme would probably bolster confidence in the economy and help banks return to profit.

"The ending of the guarantee is high on the agenda. We would probably look at phasing it out over time," a source said.

He said that while the ending of the guarantee would mean the State would technically lose the payments from the banks, the "normalisaton" of the banking sector was more important.

The State was originally on the hook for an eye-watering €375bn when the guarantee was first introduced but that figure has dropped steadily to around a quarter of the original sum by July this year, the latest month for which figures are available.

Much of the original money covered by the guarantee has been paid off by the banks, in part through €64bn of taxpayer-funded recapitalisation and rescues.

The guarantee under review, the eligible liabilities guarantee (ELG) scheme, covers customer deposits of more than €100,000.

There are no immediate plans to scrap the deposit protection scheme which covers smaller deposits.

The troika and the European Central Bank have repeatedly expressed worries about the amount of money in the scheme.

The ELG is one of the biggest factors preventing banks from making money because the Government charges fees in return for guaranteeing the deposits in the covered banks. Allied Irish Banks paid out €465m last year to take part in the scheme. Bank of Ireland paid almost €449m.

The European Central Bank, which is also involved in the ELG scheme, wants the fees to be high to prevent other banks from using the scheme.

At the end of July, there were €87bn of deposits in the ELG scheme, which was down from €102bn at the end of 2011 and €375bn in September 2008. Over that period the covered banks have paid €2.3bn in ELG fees to the Central Bank which has passed on most of the money to the Exchequer.

Magnitude

"Given the magnitude of these fees, it is clear that extrication from the ELG is one of the key prerequisites to restoring Irish banks to profitability in the medium term," Davy Stockbrokers banking analyst Emer Lang said in a report earlier this week.

The bulk of the cash now covered by the ELG is made up of customer deposits in banks, according to the official data. However, 30pc of the remainder is still owed to bank lenders, compared with 70pc protecting customer deposits.

The scheme helps keep money in the Irish system and prevents bank runs. Irish bailed-out banks suffered a massive flight of deposits in 2010 and 2011 as international deposits fell by almost €100bn and Irish deposits dropped about €60bn.

Finance Minister Michael Noonan did consider letting the scheme lapse when it expired last year but decided to extend the scheme until the end of this year. Instead, he changed the rules last year to allow banks to move liabilities outside the ELG to reduce their costs.

Banks have already begun removing their foreign deposits from the scheme. Deposits placed with Allied Irish Banks in Britain and First Trust Bank in Northern Ireland have not been covered by the guarantee since the summer.

Bank of Ireland moved UK deposits outside the ELG scheme in March.

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