Guarantee plan will limit bank loans and deposits

IRISH banks will be prevented from growing bigger, lending more money or taking in more deposits, under the Government’s guarantee scheme, Finance Minister Brian Lenihan has said.

There will also be limits to the amount of individual bank assets and liabilities covered by the guarantee, as well as an examination of dividend payments.

The details of the €420 billion scheme were being finalised yesterday in conjunction with the European Commission and the European Central Bank, before being approved by the cabinet last night.

The Government has said it will extend the guarantee to Irish banks abroad and foreign banks based in Ireland, but this will only be done on a case-by-case basis to ensure there is no market distortion in Britain especially.

Mr Lenihan said they will look at the issue of banks paying out dividends to shareholders, but they had not got to the stage of examining dividend policy yet.

The Government will appoint a public interest director to the board of each of the six Irish banks covered under the scheme to look after the taxpayer's interest, he said.

The Government was still working out the details, but the amount to be covered by the guarantee would not be open-ended. “There will have to be limits in terms of the assets and liabilities of a particular institution,” he said.

These will be based on the traditional assets and liabilities held by the banks he said. Banks will not be allowed to offer extra attractive interest rates to entice in more money or easier credit terms to encourage greater borrowing, an official explained.

Competition Commissioner Neelie Kroes said she was content that the Irish scheme, which is unique in extending a guarantee to commercial and inter-bank borrowing, complies with competition and state aid rules.

The Government has taken flack from a number of member states — Germany and Britain in particular — since announcing the scheme last week. But Mr Lenihan said yesterday that he got a better reception from his fellow finance ministers at their meeting in Luxembourg yesterday.

He said that the German minister was missing and the British chancellor Alistair Darling had a lot of other things on his mind with British bank shares taking a hit in London, but that they had a very cordial meeting.

The ministers agreed that each country should take its own action, but co-ordinate and keep in touch, and they each exchanged their mobile phone numbers at the suggestion of the French minister Christine Lagarde.

After much discussion they agreed that the minimum guarantee for ordinary deposits and savings should be increased from €20,000 to €50,000 though some, like Ireland, have already increased this to €100,000.

The minister also welcomed the agreement that countries should be given some leeway on breaching the three percent of GDP budget deficit limit, which Ireland is expected to do in its budget.

The commission is to draw up guidelines on national recapitalisation and guarantee schemes for member states that have not yet introduced them.