Credit Institutions (Eligible Liabilities Guarantee) Scheme

On September 29, 2008, Irish bank shares fell sharply, and the shares of Anglo Irish Bank collapsed almost entirely. In response, the Irish government quickly passed the Credit Institutions (Financial Support) Act 2008 on October 2, 2008, in order to establish a legal framework for the CIFS Scheme (“Bill allows State to take stake in any financial institution given aid” 2008). Though the act was passed specifically for this purpose, it gave the Minister of Finance broad authority to provide “financial support,” which was defined as “a loan, a guarantee, an exchange of assets and any other kind of financial accommodation or support,” (Credit Institutions [Financial Support] Act 2008). As the crisis persisted, the Irish government cited the Credit Institutions (Financial Support) Act as the legal authority for a range of interventions, including recapitalizations and loan purchases. Though these interventions, including the ELG Scheme, all fell under the legal framework of the Credit Institutions (Financial Support) Act 2008, they were not rolled out as a package of measures like was seen in some other countries during the crisis.

According to the Credit Institutions (Financial Support) Act 2008, the Minister for Finance was authorized to provide assistance (referred to as “functions” in the act), including guarantees, following a determination made in consultation with the Governor of the Irish Central Bank and the Irish Financial Services Regulatory Authority that “(a) there is a serious threat to the stability of credit institutions in the State generally, or would be such a threat if those functions were not performed, (b) the performance of those functions is necessary, in the public interest, for maintaining the stability of the financial system in the State, and (c) the performance of those functions is necessary to remedy a serious disturbance in the economy of the State.” Section 6(4) specifically authorized the Minister for Finance to provide this support in the form of a scheme and was cited as the legal authority underlying the Statutory Instrument that established the ELG Scheme. According to Section 6(5) of the Credit Institutions (Financial Support) Act 2008, this scheme then had to be presented to and approved by each House of the Oireachtas, the Irish parliament.

On November 20, 2009, the EC approved the ELG Scheme, ruling that it was permitted under Article 87(3)(b) of the EC Treaty (European Commission 2009b).^FAt the time that the ELG Scheme was initially reviewed by the EC, it was ruled consistent with State Aid rules established by Article 87(3)(b) of the EC Treaty. Once the treaty was renamed the Treaty on the Functioning of the European Union (TFEU) on December 1, 2009, the relevant State Aid provision was renumbered to Article 107(3)(b). Later decisions on extensions to the ELG Scheme referenced the new article numbers. Article 87(3)(b) permits state aid “to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State” (European Union 1992). This decision was consistent with an earlier communication published by the EC, which stated that Article 87(3)(b) could be used as a legal basis for aid measures like general schemes to address the financial crisis (European Commission 2008). As discussed in more detail below, the need to structure the ELG Scheme in such a way as to ensure EC approval significantly influenced the design of certain program features.

In their correspondence with the European Commission, Irish authorities committed to limiting the size of the guarantee to these estimated amounts (European Commission 2009a).

According to the terms of the scheme, the institutions eligible for participation in the scheme were any “systemically important and solvent credit institution or a subsidiary of such a credit institution (including any Irish subsidiary of a credit institution authorized in another Member State)” as specified by the Minister of Finance (S.I. No. 490/2009). In 2012, some subsidiaries based in the UK and the Isle of Man were removed from the scheme because they were already covered by similar schemes in those jurisdictions (Bank of Ireland 2013).

Any eligible institution wishing to participate in the ELG Scheme was required to apply. Covered institutions that were previously included in the CIFS had 60 days following the beginning of the ELG Scheme to apply. Any other institution could apply at any point before or during the issuance window. In addition, each institution had to enter into an agreement ensuring it would be bound by the terms and conditions of the ELG Scheme. Once these requirements were met, the participating institution would receive a certificate confirming their participation in the ELG Scheme (S.I. No. 490/2009).

The ELG Scheme covered all deposits of participating institutions not already covered by the Deposit Guarantee Scheme (DGS) in Ireland or by deposit insurance in another country.^FThe Irish DGS was increased earlier in the crisis, on September 20, 2008, to cover up to €100,000 per individual per institution. The previous limit was €20,000. The guarantee expired once the issuance window closed. In November 2011, the rules of the ELG Scheme were amended to allow participating institutions to offer unguaranteed corporate and institutional deposits. To do so, the depositor had to acknowledge in writing that the deposit in question would not be guaranteed by the ELG Scheme and the terms of the deposit had to state that it was not guaranteed. Only deposits over €1 million made after November 16, 2011, were eligible for unguaranteed treatment (Bank of Ireland 2013).

Senior unsecured certificates of deposit, senior unsecured commercial paper, and other senior unsecured bonds and notes were also eligible for guarantee under the ELG Scheme (S.I. No. 490/2009). Covered bonds, subordinated debt, and senior term debt were not eligible for guarantee (Bank of Ireland 2013). This differed from the earlier guarantee scheme, CIFS, which included senior unsecured debt, asset covered securities, and dated subordinated debt (S.I. No. 411/2008).

Another crucial difference from the CIFS was that in order to obtain a guarantee under the ELG Scheme, participating institutions had to apply to the Minister for Finance for a guarantee of a stand-alone liability or for a guarantee covering liabilities issued through programs (European Commission 2009a).

Eligible liabilities could only be guaranteed if they had a maturity of five years or less (S.I. No. 411/2008). The guarantee lasted until the maturity date, even if it was after the issuance window of the ELG Scheme closed (Bank of Ireland 2013). The government does not appear to have established minimum maturity requirements for eligible debt.

Program documents did not provide a specific rationale for limiting the ELG Scheme to these currencies.

Program documents did not specify any cap on an individual institution’s participation.

The Irish government charged an annual fee for participation in the ELG Scheme. The fee was assessed per eligible liability, and was calculated based on the liability’s maturity, as outlined in Figure 2 below. The government could also charge an additional fee for liabilities denominated in a currency other than the euro (European Commission 2009a).

For the first three months of the ELG Scheme, the government phased in fees for liabilities with maturities of one month or less, charging a 25 bps per annum fee (S.I. No. 490/2009). This fee was approved by the EC despite being below the 50bps fee called for by EC guidelines. The EC allowed this phase-in approach because even at 25 bps the fee was higher than the fee charged under CIFS, which followed a model that calculated charges for each covered institution individually based on long-term credit ratings (European Commission 2009a; S.I. No. 411/2008).

Guidance issued by the European Commission in October 2008 on the creation of credit guarantee programs called for the inclusion in programs of a set of safeguards “to minimize…distortions and the potential abuse of the preferential situations of beneficiaries brought about by a State guarantee” and “to avoid moral hazard.” This guidance did not specify exactly what safeguards a program should include, but required “an adequate combination” of elements including restrictions on advertising based on the guarantee, balance sheet growth, share buybacks and executive compensation” (“Communication from the Commission”).

Under the statute establishing the ELG Scheme, the Minister for Finance, in consultation with the Governor of the Irish Central Bank and the Irish Financial Services Regulatory Authority, could impose requirements on conduct, transparency, and reporting in order to meet the objectives of the scheme and comply with EC guidance. Additionally, the Minister for Finance, once again in consultation, could direct any participating institution to draw up a restructuring plan if the institution’s solvency was in question (S.I. No. 490/2009).

According to the statute establishing the ELG Scheme, a liability was only eligible for guarantee if it was issued between December 9, 2009 (when the ELG Scheme began) and September 29, 2010, when the issuance window was initially supposed to close (S.I. No. 490/2009). However, in accordance with the powers granted to the Minister for Finance and approval by the EC, the issuance window was extended multiple times until finally expiring on March 28, 2013.

According to the statute establishing the ELG Scheme, the Minister for Finance was required to review the ELG Scheme every six months, if not more frequently. Following each review, the Minister for Finance would forward the results to the EC. The Statute also recognized that the continuation of the ELG Scheme had to be approved by the EC every six months in accordance with Article 87(3)(b) of the EC Treaty, which permits state aid that prevents serious disruptions to a member state’s economy (S.I. No. 490/2009). The EC initially approved the ELG Scheme with an issuance window that closed on June 1, 2010. The Irish government subsequently extended the issuance window multiple times; each extension was reviewed and approved by the EC (Bank of Ireland 2013). The final extension, granted by the EC in June 2012, allowed the Irish government to continue the ELG Scheme until June 30, 2013.