Thanks to Joan Burton for drawing attention to this bill, which was published on Friday. It hasn’t received any media attention as far as I can tell. However, despite its dreary name, it has some important stuff in it. Among other things, it proposes an extension of the bank liability guarantee.
Section 6(3) of the Credit Institutions Support Act of 2008 had been worded as follows:
(3) Financial support shall not be provided under this section for any period beyond 29 September 2010, and any financial support provided under this section shall not continue beyond that date.
The new bill proposes replacing this with:
(3) Financial support provided under this section shall not continue beyond—
(a) 29 September 2010, or
(b) a later date specified by the Minister by order.
(3A) The Minister may specify a date under subsection (b) if and only if—
(a) he or she is satisfied, after consulting the Governor and the Regulatory Authority, that the circumstances set out in section 2 exist and are likely to continue to exist until the date to be specified, and
(b) he or she is satisfied that it is necessary in the public interest that assistance continue to be provided under this section until that date.
(3B) The Minister may specify by order a period or periods during which credit institutions may incur borrowings, liabilities and obligations in respect of which financial support may be provided under this section.
My reaction to this proposal is that this (effective) announcement of the extension of the bank guarantee is a bad idea. Even if some class of extension of the guarantee is deemed appropriate, I would have thought it more appropriate for it to be explicitly more limited in scale than the original guarantee, so as not to include subordinated debt holders.
By announcing that this almost-blanket guarantee is being extended (which is my reading of this—though I’m happy to be corrected on this if I’m wrong) the government will end up bidding up the prices of the subordinated debt on the open market. The ability to buy back subordinated debt at low prices — because their weak capital position could lead to extension and\or default on these bonds — has been one of the few things that has allowed the banks to improve their core capital position without government help. So it seems somewhat counter-productive to their own strategy for the government to be encouraging certain classes of subdebt holders to believe they’re definitely going to get their money back.
The temporary guarantee was supposed to save a well-capitalised banking system from a temporary liquidity problem. Now we clearly have an under-capitalised (and perhaps insolvent) banking system that is supposed to fixed by the NAMA-and-recapitalise solution. One interpretation of this extension of the guarantee is that, even post-NAMA, the government may not have recapitalised the banks properly and that the drip-feed of state support won’t necessarily end with the NAMA process.