Bank Guarantees - Clarification

Scofflaw

There are two (or three) bank guarantees, which seems to cause more than a little confusion. The main point here is that the original Guarantee has expired. The current guarantee is a different scheme.

1. CIFS: the Credit Institutions (Financial Support) Act 2008 - this is the original "blanket guarantee" of September 2008. This guaranteed all the debts of the covered banks of all classes, however and whenever required.

However, this guarantee would only pay out on debt during the lifetime of the guarantee, and this guarantee expired in September 2010. The debts of the banks were largely paid off during the lifetime of this guarantee, primarily by borrowing from the ECB - most of the debt originally in the banks at the time of the guarantee has been replaced by debt owed to the ECB and the Irish Central Bank.

2. ELG: the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009. This is a subsequent guarantee covering only specifically named debt newly issued by the covered banks and accepted for guarantee in writing by the Minister.

However, this guarantee has not expired, and in any case guarantees the named debt for the lifetime of the debt. This is the guarantee that covers any currently guaranteed bank debt, and, yes, the banks are still issuing more debt under this guarantee, currently due to expire in July 2011.

(3. The Deposit Guarantee Scheme - this is totally separate, and guarantees your deposits in an Irish bank or credit union up to the value of €100k per person per institution. This scheme has been running since 1994 with an original limit of €20k - the limit was increased in 2008, along with some other amendments. It's an EU-wide scheme, so all other EU countries have similar cover for their banks. Just to keep ei.sdraob happy, I'll add that the scheme doesn't contain enough funds to cope with more than single bank failures, so in a systemic failure scenario, the burden will generally fall on the taxpayer rather than this scheme.)

Courtesy of kenrr:

The ELG and CIFS guarantees only extend to the 6 covered domestic banks AIB, BOI, EBS, ILP, Anglo, INBS - the Deposit Guarantee Scheme covers all institutions.

CIFS This covered not only senior and junior bonds but also deposits up to any value. After expiry in Sept 2010, bonds and deposits were then guaranteed separately under the ELG and DGS.

ELG This applies only to senior bonds with a duration not exceeding 5 years. It overlapped the CIFS e.g. a qualifying 5 year senior bond issued early in 2010 would have been guaranteed for the life of the bond even after the CIFS expired. Currently, qualifying senior bonds issued up until end June 2011 will be guaranteed for the life of the bond. Even if the ELG is not extended beyond June 2011, the bonds already guaranteed will be guaranteed until they are reach maturity.

DGS There is no expiry date for this scheme.

Currently, for the 6 covered banks there are 21bn senior bonds guaranteed under the ELG until the maturity date of the bonds; this may be for another 4 to 5 years. There's 35bn of unguaranteed secured/unsecured senior bonds (presumably these are longer term bonds issued before the ELG and originally guaranteed under CIFS but now having lost the guarantee in Sept 2010?) There's 7bn of junior bonds.

If anyone has anything they'd like added, feel free to PM me!

cordially,
Scofflaw

hatrickpatrick

In other words, which of the guarantees listed in that sticky is the one which requires that we, the taxpayers, pay for something like €70bn in losses from the banks so that bondholders don't suffer for losing bets?

Scofflaw

The first one - the CIFS. One can point the finger to some extent at the second one, though, since the banks' ability to issue guaranteed new debt allows them to raise debt to pay off some of their older debt.

cordially,
Scofflaw