Bank guarantee scheme to be extended

THE bank guarantee scheme is expected to be extended by the European Commission to the end of the year.

The Department of Finance also confirmed that the Central Bank has received €808 million in fees from the financial institutions during the scheme.

The commission has already approved the extension of an aid scheme for Austrian credit institutions and a Latvian bank guarantee scheme to the end of the year. It has also extended bank support schemes in Sweden and Germany and a recap scheme in Hungary.

Davy Stockbroker analyst Emer Lang said these announcements from the EU in relation to Germany, Latvia, Austria and Hungary shows Ireland is not the only country looking for an extension and “provide encouraging approval precedents”.

She said there is speculation that although the Irish guarantee may continue as it is until end September, an extension from then until the year end may be on a more restricted basis.

“The fee for issuance beyond the end of June is expected to be at a higher cost. The EU has recommended a minimum increase of 20bps to 40bps, depending on a bank’s credit rating,” she said.

The vast majority of support schemes for financial institutions, put in place at the end of 2008 to ensure financial stability at the height of the financial crisis, expire at the end of June.

According to the commission, expiring schemes have “been periodically extended, generally for six months, when requested by the member states concerned and justified”.

The two-year blanket banking guarantee is due to expire at the end of September. The current two-year scheme was introduced amid fears of a run on Anglo Irish Bank.

The scheme, introduced in September 2008, provides guarantees to all deposits, senior debt, and covered bonds of six Irish banks: AIB, Bank of Ireland, Anglo Irish Bank, Permanent TSB, EBS Building Society and Irish Nationwide.

The scheme also covers certain subordinated debt, although Minister Lenihan has already said the new scheme may exclude this class of liability.

Last week, the commission extended the German rescue scheme for banks until the end of the year.

Under the extended scheme, banks will have to pay higher premiums for the guarantees provided by the state. The commission said it hopes the increased premiums will encourage banks to finance themselves without state support.

It also said it considered the extended measures to be well targeted, proportionate and appropriate for remedying the serious disturbance in the German economy.

The Department of Finance figures show €718m was paid by banks to the Central Bank during the original scheme, which ran from September 2008 to the end of May 2010.

And €90.5m has been paid since then.