Credit Institutions (Eligible Liabilities Guarantee) Scheme

The financial crisis in Ireland was preceded by booms in construction and in bank lending. By 2008, bank lending had grown to 200% of national income (Kelly 2009). This lending was largely funded through wholesale borrowing: by 2008, only 22% of bank funding in Ireland came from domestic deposits, while 37% came from international capital markets (Connor, Flavin, and O’Kelly 2010). Non-Irish credit institutions in particular were the single largest source of funding at nearly 30% of total bank funding (Connor, Flavin, and O’Kelly 2010).

Following the failure of Lehman Brothers on September 15, 2008, liquidity in the interbank lending market dried up. Irish banks found themselves unable to roll over their significant foreign borrowings. In addition, banks’ balance sheets diminished rapidly as a result of losses in the domestic property and construction sector (Connor, Flavin, and O’Kelly 2010). Fear that they were facing a rapidly intensifying liquidity crisis caused the Irish government to issue a blanket guarantee of bank liabilities through the Credit Institutions Financial Support Scheme (CIFS). CIFS was announced on September 30, 2008, and covered all deposits, senior debt, covered bonds, and dated subordinated debt of covered institutions, which included six Irish banks and their subsidiaries (Bank of Ireland 2013). The guarantee was only extended to Irish-owned banks and building societies, and the scheme did not cover institutions owned by foreign institutions (Carswell and Ó Caollaí 2008). The blanket guarantee was much more extensive than the more targeted approaches taken in the U.S. and other European countries (Schoenmaker 2015). At the time CIFS was introduced, the guarantee covered around €400 billion in bank deposits and liabilities, which was more than double Irish GDP (Connor, Flavin, and O’Kelly 2010).

According to a report commissioned by the Irish government in 2011, the decision to implement a blanket guarantee was based on the Irish government’s conclusion, based on insufficient or inaccurate information available at the time, that Irish banks were facing a liquidity crisis but were still solvent. The solvency crisis became apparent once Anglo Irish Bank had to be nationalized on January 19, 2009 (Commission of Investigation into the Banking Sector in Ireland 2011). As the blanket guarantee failed to staunch the intensifying crisis, in 2009 the Irish government was forced to perform capital injections and purchase risky loans off of banks’ balance sheets through the National Asset Management Agency. Notwithstanding this assistance, Irish banks continued to face liquidity pressures, with a substantial portion of their funding still with maturities under one month (European Commission 2009a). At the end of 2009, as the deficit reached 14.5% of GDP, the Irish government designed a new guarantee scheme to replace CIFS (Connor, Flavin, and O’Kelly 2010). Irish authorities intended the scheme to lengthen the maturity of banks’ funding (European Commission 2009a).

On December 9, 2009, the Credit Institutions (Eligible Liabilities Guarantee) Scheme (ELG Scheme) commenced. The Minister for Finance was authorized to create the ELG Scheme by the Credit Institutions (Financial Support) Act 2008, and it was subsequently approved by both Houses of the Oireachtas (the Irish parliament), and by the European Commission (EC).

Notably, the ELG Scheme was introduced a year before the closure of the CIFS issuance window. When CIFS was introduced, the guarantee covered “liabilities existing from 30 September 2008 or at any time thereafter up to and including 29 September 2010.” Therefore, any existing liabilities and new liabilities would be guaranteed by the Irish government only until the scheme closed on September 29, 2010 (S.I. No. 411/2008). The two schemes ran in parallel until CIFS closed. However, once the banks joined the ELG Scheme in early 2010, no new liabilities were guaranteed under CIFS. As a result, coverage under CIFS fell sharply at the beginning of 2010, and ceased altogether at the end of the third quarter of 2010 once the issuance window closed (Ryan, Hart-Moran, and Preston 2015).

The new ELG Scheme moved away from the blanket guarantee provided by CIFS to an opt-in approach (Bank of Ireland 2013). Systemically important and solvent credit institutions and their subsidiaries were eligible to become participating institutions in the ELG Scheme. In order to participate, any interested eligible institution was required to apply to join the ELG Scheme and to execute an agreement to follow the ELG Scheme’s terms and conditions. The ELG Scheme initially covered all of a participating institution’s deposits not covered by existing deposit protection (S.I. No. 490/2009). This changed in November 2011, when participating institutions were allowed to offer unguaranteed deposits under specific conditions (Bank of Ireland 2013). Deposits were guaranteed until the ELG Scheme closed (S.I. No. 490/2009).

In addition to deposits, the ELG Scheme also covered certain debt securities with a maturity of five years or less. The government does not appear to have established minimum maturity requirements for eligible debt. Eligible liabilities included senior unsecured certificates of deposit, senior unsecured commercial paper, and other senior unsecured bonds and notes and had to be single denominated in euro, sterling, U.S. dollars, or a currency approved by the Minister for Finance (Bank of Ireland 2013). Participating institutions were required to apply for guarantees of stand-alone liabilities or for guarantees covering all liabilities issued through a specific program (European Commission 2009a). To be eligible, securities had to be issued during the issuance window. The guarantee lasted through the security’s maturity, even if that date fell outside of the issuance window (S.I. No. 490/2009). The government charged a fee starting at 50 bps per annum for guarantees based on the maturity of the liability and the creditworthiness of the issuing institution. For liabilities with a maturity of one month or less issued during an initial three-month phase-in period, a fee of only 25 bps per annum would be charged (European Commission 2009a). 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. The Minister for Finance could direct any participating institution to draw up a restructuring plan if the institution’s solvency was in question (S.I. No. 490/2009).

All six of the covered banks that participated in CIFS also participated in the ELG Scheme through a total of sixteen institutions including subsidiaries of the covered banks.^FNFor the full list of participants, see National Treasury Management Agency n.d.b. Note that Anglo Irish Bank is listed as a participant in the ELG Scheme under Irish Bank Resolution Corporation Limited. All of the institutions joined in 2010, with 15 of the 16 institutions joining in January or early February (National Treasury Management Agency n.d.b). In 2012, certain participating institutions that were foreign subsidiaries of Irish banks were removed from the ELG Scheme after they became covered by similar schemes in their own jurisdiction (Bank of Ireland 2013).

According to the statute establishing the ELG Scheme, the Minister for Finance was required to review the ELG Scheme at least every six months, and to provide an update at that time to the EC. As a result of these reviews, the Irish government extended the ELG Scheme multiple times; each extension was approved by the EC pursuant to State Aid rules (Bank of Ireland 2013). In 2011 and 2012 the Irish government began to consider scaling the ELG Scheme back, and in 2012 an interdepartmental group led by the Department of Finance was assembled to formally consider how to close the scheme. The group found that “the market was recovering for unguaranteed products, the capital markets conditions for Irish banks had recovered and that deposit market dynamics allowed for the strategic withdrawal of the policy support that had been in place since 2008” (Ryan, Hart-Moran, and Preston 2015). As a result, in February 2013, the Minister for Finance announced that the ELG Scheme would end on March 28, 2013 (Hancock 2013). This termination marked the closing of the issuance window, but any existing guarantees of liabilities with outstanding maturities remained in effect. As of March 28, 2018, there were no outstanding guarantees (National Treasury Management Agency n.d.a).

Shortly after the ELG Scheme began, it covered around €139 billion in liabilities. The peak amount covered by the ELG Scheme was €153 billion at the end of the second quarter of 2010. Coverage fell steadily throughout the scheme, and when the ELG issuance window closed on March 28, 2013, it had fallen to €74.6 billion. As guaranteed securities matured following the closure, the coverage dropped sharply: by July 2015 it had fallen to €3.9 billion (Ryan, Hart-Moran, and Preston 2015). The decline in coverage over time can be seen in Figure 1, which illustrates the amount of total liabilities covered by the two schemes from September 2008 to June 2015 (the most recent publicly available data).

One “compensation event” occurred under the ELG (Ryan, Hart-Moran, and Preston 2015). Payment was triggered by the liquidation of the Irish Bank Resolution Corporation (IBRC) in 2013. IBRC was formed in July 2011 when the assets and liabilities of Irish Nationwide Building Society (INBS) were transferred to Anglo Irish Bank (Anglo) and the combined entity was renamed IBRC (Taylor 2011). At the beginning of the crisis in Ireland, Anglo and INBS were among the most troubled banks due to their activity in property lending. As the initial crisis response measures, including CIFS, failed to contain the intensifying financial crisis, the Irish government had to nationalize Anglo in January 2009. INBS was nationalized a year later, in March 2010. Both Anglo and INBS received support from the Irish government through guarantees and numerous recapitalizations, all of which were incredibly costly and were partially responsible for the government’s decision to request a bailout from the EU and IMF. In 2011, the two banks were merged into IBRC following a decision by Irish authorities that resolving the two banks would be easier if they were combined into a single entity (Galand and Gort 2011). In 2013, the Irish government liquidated IBRC. This liquidation triggered compensation under the ELG Scheme. As of June 30, 2015, €934 million had been paid out to IBRC guaranteed bondholders and €138 million had been paid to depositors. At that time, the National Treasury Management Agency was still accepting claims for compensation (Ryan, Hart-Moran, and Preston 2015).

Over the course of both CIFS and the ELG Scheme, the Irish government collected over €4.4 billion in fees. The majority of this fee income came during the period preceding the closure of the ELG Scheme’s issuance window, though the government continued to collect fees from guaranteed liabilities that had maturity dates later than March 28, 2013 (Ryan, Hart-Moran, and Preston 2015). For example, in 2011 alone the three banks still covered by the ELG Scheme, Bank of Ireland, AIB, and Permanent TSB, together paid €1.1 billion in fees. These fees, in addition to the revitalized interbank lending market, were one of the reasons that executives at the three banks “welcome(d)” the closure of the scheme (Hancock 2013).