Ireland: Credit Institution (Financial Support) Scheme, 2008

The government said the blanket guarantee would “remove any uncertainty on the part of counterparties and customers of the six credit institutions” (Dept. of Finance 2008). Its objectives were “to maintain financial stability for the benefit of depositors and businesses” and “to safeguard the Irish financial system and to remedy a serious disturbance in the economy caused by the recent turmoil in the international financial markets” (Dept. of Finance 2008). The announcement came amidst significant depositor runs from Irish banks (Baudino, Murphy, and Svoronos 2020; EC 2008; Woll 2014).

The government made its decision to announce the blanket guarantee on September 29, 2008, focusing on the need to prevent Anglo Irish from failing. Anglo Irish had lost EUR 2 billion in deposit runs that day. An official in attendance at internal meetings on September 29 said there was a consensus that letting Anglo Irish fail was not an option. The same official reported that only one other option was considered, besides the blanket guarantee: nationalizing Anglo Irish and guaranteeing the other banks (Houses of the Oireachtas 2015).

The minister for finance announced the blanket guarantee independently of other policies. However, the Irish government introduced subsequent policies in reliance on the CIFS Act and with the aim of supporting the banks guaranteed by the CIFS Scheme (EC 2008; Whelan 2013). Additional policies adopted by Irish authorities in late 2008 and throughout 2009 included recapitalizations, the purchase of distressed assets on banks’ balance sheets, nationalization of Anglo Irish Bank, and recapitalization through investments from the National Pensions Reserve Fund; Ireland also received a support package from the EU and IMF in 2010 (Baudino, Murphy, and Svoronos 2020; CBFSAI 2008; Petrovic and Tutsch 2009).^FSee the New Bagehot Project website for case studies on Ireland 2009 Recapitalization Program for Financial Institutions (Kelly 2021), National Asset Management Agency (NAMA) (Nye 2021), and Credit Institutions (Eligible Liabilities Guarantee) Scheme (Simon n.d.).

The government introduced the Eligible Liabilities Guarantee Scheme as a new, more limited guarantee on newly issued debt in the year before the CIFS Scheme was set to expire. The two schemes ran in parallel from December 9, 2009, until the CIFS Scheme expired on September 28, 2010 (Dept. of Finance 2015; EC 2009). All institutions eligible for the CIFS Scheme were eligible for the ELG Scheme. They had a 60-day window in which to apply for participation. The coverage under the ELG Scheme was more limited than under the CIFS Scheme, and once ELG started, neither new subordinated debt nor covered bonds were eligible under either scheme. To incentivize banks to switch to ELG, the government planned to raise the CIFS Scheme fees 60 days after the ELG Scheme began so the fees under both schemes would be the same. The ELG Scheme ran until March 2013 (Baudino, Murphy, and Svoronos 2020). Deposits up to EUR 100,000 were covered by the original deposit insurance during both the ELG and CIFS schemes and continued to be covered by this deposit insurance after both schemes ended (EC 2008).

The Irish blanket guarantee was announced on September 30, 2008, by the minister for finance following consultation with the governor of the central bank and representatives of the Regulatory Authority. This announcement was made without consulting the ECB or receiving approval from the European Commission, which was required under European Commission regulations (Baudino, Murphy, and Svoronos 2020). The same day, following the minister’s announcement, the European Commission requested information from the Irish authorities. The next day, the European Commission followed up with a list of questions, and the Irish minister reached out to the ECB requesting an opinion on the draft CIFS Act, the legislation intended to give the minister the authority to adopt a guarantee scheme (ECB 2008a; EC 2008).

The CIFS Act was passed by the Irish Parliament and entered into force on October 2; Irish authorities received the ECB’s opinion on the act the following day. The CIFS Act established a process for creating a guarantee scheme; namely, the minister would prepare a draft scheme that he would lay before each house of the Irish Parliament for approval before the minister could officially adopt the scheme (CIFS Scheme 2008b). On October 10, the minister requested an opinion from the ECB on the draft CIFS Scheme. The European Commission approved the CIFS Scheme on October 13, and the ECB returned its opinion to the minister on October 15^FIn its opinion, the ECB highlighted the importance of State Aid rules and that the Irish government should have sought approval from the European Commission before announcing its guarantee because of these rules (ECB 2008a, 2). (ECB 2008a; ECB 2008b; EC 2008). The CIFS Scheme came into effect on October 20, 2008 (Petrovic and Tutsch 2009).

The CIFS Act also provided the legal authority for the National Pensions Reserve Fund Miscellaneous Provisions Act 2009, the establishment of a National Asset Management Agency, and the ELG Scheme (EC 2009; Petrovic and Tutsch 2009).

The CIFS Act made the minister responsible for deciding whether financial support was needed. When making this decision, the minister had to evaluate the potential threat to the credit system, the stability of the financial system, and potential economic disturbance. The minister was also responsible for determining the quarterly fee, creating the process for joining the scheme, and other actions as deemed “necessary to achieve the goals” of the CIFS Act (EC 2008). Other actions included regulating the commercial conduct and competitive behavior of the credit institutions (ECB 2008a; EC 2008).

The governor and the Regulatory Authority were also responsible for monitoring the operations of the scheme and reporting to the minister. The governor and the Regulatory Authority had the power to set regulatory requirements of participating institutions and instruct their behavior to decrease risk to the state.

The CIFS Act empowered the minister to create the CIFS Scheme by creating a draft scheme that then needed to be passed by each House of Oireachtas. The minister was also required to report to each House of Oireachtas on any financial support given, starting at the end of 2009 and continuing each subsequent year (CIFS Act 2008a).

In running the CIFS Scheme, the minister was required to consult the governor and the Regulatory Authority when making decisions. The minister, governor, and Regulatory Authority each had administrative tasks relevant to the operation of the CIFS Scheme and monitoring tasks overseeing the others’ administrative tasks (ECB 2008a).

In correspondence with the European Commission before the Commission’s approval of the CIFS Scheme, the Irish government committed to biannually reporting to the Commission on the functioning of the scheme (EC 2008).

The primary communication from the Irish government was the minister’s announcement of the guarantee on September 30, 2008 (Dept. of Finance 2008). The Central Bank and Financial Services Authority of Ireland’s Annual Report from 2009 addresses the government’s policy regarding the financial crisis and categorizes the blanket guarantee as a “fundamental change to the regulation of financial service providers” (CBFSAI 2010, 8).

The initial announcement of the blanket guarantee on September 30, 2008, established the use of fees in funding (Dept. of Finance 2008). The CIFS Scheme further specified that it would be funded from fees collected from covered institutions, and any charge to the Ministry for Finance as a result of exercising the guarantee would be recouped from participating institutions.

To determine the quarterly fee, the minister estimated the aggregate cost borne by the state combined with the risk profiles of covered institutions. The fact that the cost would eventually be recouped by the government was important in gaining approval from the European Commission (EC 2008, 13).

The guarantee covered about EUR 400 billion of banks’ liabilities, more than 200% of Ireland’s GDP (Baudino, Murphy, and Svoronos 2020; IMF 2009; Pop 2013).

The government included a list of eligible institutions in its initial announcement on September 30, 2008: Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society, and the Educational Building Society (Dept. of Finance 2008).

Following communication with the European Commission in early October 2008, the minister specified that the scheme would exclude intragroup borrowing and debt due to the ECB. It also extended the guarantee to subsidiaries of foreign banks with a “significant and broad based footprint in the domestic economy:” Ulster Bank, First Active, Halifax Bank of Scotland, IIB Bank, and Postbank (EC 2008).

Any of the institutions the minister identified in the two announcements could join the scheme by executing a guarantee acceptance deed (ECB 2008b). All six initially identified banks and one foreign subsidiary (Postbank) participated in the CIFS Scheme (Dept. of Finance 2015).

Upon the commencement of the ELG Scheme, any institution eligible to participate in the CIFS Scheme was also eligible to participate in the ELG Scheme. If a firm elected not to switch schemes, it continued to be covered by the CIFS Scheme until that facility’s expiration on September 28, 2010 (EC 2009).

Initially, the September 22, 2008, announcement increased the existing deposit insurance from EUR 20,000 to EUR 100,000 and eliminated coinsurance by covering 100% of insured deposits instead of the previous 90% (EC 2008; Keena 2008; Laeven 2014; Logue 2008).

Then, the September 30, 2008, announcement listed “all deposits (retail, commercial, institutional and interbank), covered bonds, senior debt and dated subordinated debt” as the eligible liabilities covered at the eligible institutions (Dept. of Finance 2008). Only perpetually subordinated debt was not covered by this original statement (Baudino, Murphy, and Svoronos 2020).

Lastly, after the announcement and introduction of the ELG Scheme, dated subordinated debt and covered bonds issued after the start of the ELG Scheme were not covered by either scheme. Once banks joined the ELG Scheme, their newly issued debt was covered by the ELG Scheme instead of the CIFS Scheme (EC 2009). See Figure 1 for the breakdown of liabilities guaranteed by the Irish Government as of September 30, 2008.

In the original announcement of a blanket guarantee on September 30, 2008, the government announced that participating institutions would pay a fee. Institutions paid a quarterly fee, determined by each institution’s risk profile, which was recalculated each quarter (ECB 2008b; EC 2008). Documents reviewed did not provide details about the levels of CIFS fees.

To incentivize switching to the ELG Scheme, Irish authorities planned to raise the fees for institutions that chose to stay in the CIFS Scheme to match the ELG fees, after a 60-day window.

The plan for the ELG Scheme included different fees based on the maturity of guaranteed liabilities, following ECB recommendations. For liabilities with maturities greater than one year, the fee was 50 basis points (bps) of the insured amount plus a relevant credit default swap spread, reflecting the market’s view of the risk of the insured institution. For liabilities with maturities of a year or less, the fee was a flat 50 bps (EC 2009).

However, the Irish authorities received EC approval to include a three-month transition period for newly issued securities and deposits with maturities of one month or less. For the first three months of the ELG Scheme, the fee was set at 25 bps of the insured amount; after that, it was set at a flat 50 basis points, following ECB recommendations. The ECB agreed with Irish authorities that this transition period “will provide a phase-in phase where the lower fee will prevent a destabilizing impact on funding conditions and improve the stability of the institutions concerned . . . [G]iven that instruments with maturities up to three months constitute a substantial amount of all guaranteed debt under the CIFS Scheme, a transitional period is necessary to keep the ELG Scheme meaningful” (EC 2009, 12).

In the event of a default by an institution covered by the CIFS Scheme, the institution’s creditors were to make a claim with the minister. Any such institution was then required to develop a restructuring plan within six months (EC 2008).

If an institution activated the guarantee and the government payment was not fully recouped from that institution, the burden passed to other covered institutions that, over time, paid back the government in full. Despite this intent, the government’s banking policy did end up costing taxpayers (OCAG n.d.).

The CIFS Scheme and Act gave the minister, Regulatory Authority, and the central bank governor the ability to set targets on assets and liabilities, impose restrictions on subordinated debt, and limit exposure to certain sectors or customers. In communications with the European Commission following the announcement of a blanket guarantee and before passage and approval of the official legislation of the CIFS Scheme and Act, the minister expressed the intent to impose more specific restrictions on subordinated debt coverage, although this did not happen (EC 2008). Banks covered by the guarantee were also subject to heightened supervision (CBFSAI 2010).

The Regulatory Authority was responsible for monitoring the growth of participating institutions to ensure their annual growth in balance sheet volume did not exceed the highest of: (i) “the annual rate of growth of Irish nominal GDP in the preceding year, (ii) the average annual historic growth in the balance sheets of Irish credit institutions during the period 1987–2007, or (iii) the average growth of the balance sheet volumes in the credit institution sector in the EU in the preceding six months” (EC 2008).

A blanket guarantee was announced on September 30, 2008, to last two years, ending September 28, 2010. The CIFS Act and then Scheme were passed and came into effect in the following month. The government announced the ELG Scheme in the year before the scheduled end of the CIFS Scheme. Once the ELG Scheme started in early December 2009, dated subordinated debt and covered bonds issued after the start of the ELG Scheme were not covered by either scheme, and once banks joined the ELG Scheme, their newly issued debt was covered by the ELG Scheme (EC 2009). Although the two schemes ran in parallel until the CIFS Scheme’s scheduled end on September 28, 2010, once banks joined ELG, coverage under the CIFS Scheme dropped sharply at the beginning of 2010 before ending that September (Dept. of Finance 2015). The ELG Scheme ran until 2013 (Baudino, Murphy, and Svoronos 2020). Deposits up to EUR 100,000 were covered by the original deposit insurance during both the ELG and CIFS Scheme and continued to be covered by this deposit insurance after both schemes ended (EC 2008).