Revisiting the Cost of the Bank Guarantee

The Government charged the banks €1 billion for the two-year guarantee announced on 30 September 2008.  How was this amount arrived at, and does it represent good value for the taxpayer?

According to the Annual Report of the Comptroller and Auditor General issued in September 2009 (available here), the charge of €500 million per year appears to have been calculated as:

{The increase in the cost of funding government debt due to the guarantee}TIMES {The liabilities covered by the guarantee}

The former was set at 0.15%.  Liabilities at the end of December 2008, as shown in Figure 23 of the C&AG Report, came to around 345 billion.  The product of these two terms comes to around 500 million. (Not an exact match because average rather than  end of quarter figures would presumably have been used).

The 0.15% figure comes from the “the advice of the National Treasury Management Agency  ..  that the cost of funding Government debt would rise as a result of the guarantee by between 0.15% and 0.3%”. 

Note that the lower figure was chosen, while many might argue that even the higher value is low, given the extent of the spread over German rates (though part of this is due of course to the budgetary crisis).

Figure 23 of the C&AG Report indicates that the expansion in the Deposit Guarantee Scheme announced on 20 September 2008 (which raised the guarantee per depositor from around €20,000 to €100,000) was not charged for.  This would have raised the second term in the equation from 345 billion at end December 2008 to 427 billion. (According to footnote 15, the Deposit Guarantee Scheme is apparently “not regarded as a State guarantee”).

Note also that the charge is based on the cost to the government, not on the value to the banks, which would have been very high. Section 7.23 of the C&AG Report reports however that “account was also taken of the capacity of the covered institutions to pay the charges”!

29 replies on “Revisiting the Cost of the Bank Guarantee”

Wow! Another multi-billion euro annual subsidy to Irish banks by Irish taxpayers arranged (and discretely hidden) by the government. Fifeen basis points is an extreme under-estimate of the funding cost of the bank guarantee. The bank guarantee is regularly cited as a key source of the 145 basis point premium paid by Irish taxpayers for sovereign borrowing.

@ Frank

in fairness, the deposit guarantee was there to safeguard depositors, while the more general ‘bank liability’ guarantee was there to protect the banks (or their debt holders), although the deposit guarantee obviously indirectly benefitted the banks. It still makes sense to ignore the deposit guarantee in terms of how much to charge the banks.

@Gregory O’Connor/Frank Barry
I think the consensus now is that the guarantee was an unqualified disaster. Now we have NAMA coming along.
For a long time although there was mounting evidence of it being a disaster many held off calling it that because we were promised “amendments”.
Now we can see that the effect of those amendments, even though they were limited, was bogus.
I said the following on another thread but I think the financial gerrymandering above just confirms it:

I really believe it is time for another letter from the academic economists

1. Paying any LTEV is a high-risk gamble.
2. This is especially true because the risk-sharing is bogus.
3. The assets should be valued at current market price no matter how “low”.
4. Stating once again that there are MANY better alternatives.
5. Proposing a conference of academic economists – because they are independent – to decide by majority vote the best alternative & to report within weeks.

With tens of billions on the line it would be well worth doing.

“It still makes sense to ignore the deposit guarantee in terms of how much to charge the banks.”

How do you square that statement with the fact that the FDIC charges banks for deposit insurance? Your statement is utterly wrong in my opinion. And even then, there is a subsidy of from 1 to 10 billion.

@ Garo

i meant in the context of the government “bank guarantee” it should be ignored. By all means, include it as a seperate stand alone cost and decide to either (a) recharge it against the banks or (b) continue to accept it as a necessary implicit subsidy from the taxpayer to allow for the economy as a whole to function properly. I dont have a particular preference for either.

However, that said, in this country the deposit guarantee acts less as a form of insurance in case of a bank going bust, and more as a form of insurance on there being a run on the banking system.

It should also be noted that the recipients of any government guarantee being called are not the banks themselves, but actually the depositors and bondholders (and other liability holders) of the banks. In reality we should be implementing a liability-holding sur-tax if we want to actually charge those who got the biggest benefit from the guarantee.

It is not a “necessary” implicit subsidy. And it is not essential for a functioning economy. You provide no evidence for the unfounded assertion.

There is no reason why it should not be charged to the banks. The taxpayer footing the bill is morally wrong and creates moral hazard as there is no incentive for banks to take care with depositor money.

A deposit guarantee is an insurance against a bank run not only in this country but everywhere else too. So I don’t see the difference you make in your second paragraph.

Regarding sur-tax: No that is a form of risk perversion. Liability holders should be in fear of losing their money. That is enough of a sur-tax. That’s why bonds are investments and not savings.

@ Garo

Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes requires all member states to have a deposit guarantee scheme for at least 90% of the deposited amount, up to at least 20,000 euro per person. This was enacted for the aim of, among other reasons, “increasing the stability of the banking system and protection for savers”. Obviously the EU felt that this safeguard was ‘necessary’, or else they wouldn’t have made it mandatory.

The banks are still heavily incentivised to take care of depositors monies as recklessly using these funds will result in losses and potentially bankruptcy, and therefore obviously negatively impact on the share price. As i commented above, the bank does not receive the insurance payout from a deposit guarantee scheme, so its not a case of them thinking “well if we lose the money, the government will just give it back to us”. Moreover, the deposit scheme only kicks in after the insolvency and winding up of the failed bank. The bank essentially ceases to exist by the time the guarantee is called, it doesn’t get called when a bank is merely struggling or having a bad year. How would the lack of a deposit guarantee scheme more heavily incentivise the banks?

Re sur-tax: at the moment the chief beneficiaries of the bank guarantee scheme are bond holders. Yet we are basically charging shareholders for it. There two stakeholders in a bank have very different priorities and reward dynamics. Why charge one for the benefit due to another? The government guarantee scheme is no different to a CDS contract, and should be levied on the bondholders if we were setting one up from scratch tomorrow.

Hasn’t one of the ECB and the EU Commission recently released guidelines on how access to Guarantee schemes should be priced?

Did anyone else notice that when Joan Burton reminded Brian Lenihan that he had said that the Guarantee was the cheapest bail out that he reminded her that he had said it was the cheapest bail-out “yet”. He obviously doesn’t think it is the cheapest bailout anymore!

@ Garo

also re “A deposit guarantee is an insurance against a bank run not only in this country but everywhere else too. So I don’t see the difference you make in your second paragraph.”

In the US the banking sector is so fragmented that 99% of banks (by licence volume, not asset volume) could get in to trouble (individually, not at the same time) without causing a run on the entire system. Lots of small banks have already gone under and required the FDIC to step in. In Ireland, and much of Europe, the banking sector is much more concentrated, to the point where where none of the main banks was allowed to get into trouble, for fear (and i say ‘fear’) of a systematic run. Hence our guarantee is designed from a systematic point of view as much as anything else, while the FDIC one is more targetted against individual bank failures (there’s not enough money in it to cover an even remotely systematic failure).

There is definitely an ECB guideline on pricing guarantees and it has been linked on this site. I can’t find it but I have found reference to it in the Commission’s Annual Statement on the Euro Area 2009:

“….the Commission adopted three major guidance documents outlining how State aid rules would be applied in the context of the current global financial crisis: the Banking Communication of 13 October 2008, the Recapitalisation Communication of 5 December 2008 and the Communication on the treatment of impaired assets of 25 February 2009. They were complemented by recommendations on the pricing of recapitalisations and government guarantees for bank debt issued by the ECB.”


Garo said that the subsidy (i.e. not charging for deposit insurance) was not necessary. Saying, as you do, that the EU insists on some level of deposit insurance does not make it necessary that this insurance should be free.

Also, the previously existing Irish deposit insurance scheme was radically extended by the bank guarentee, so let’s not pretend the two things are seperate. The idea that it should be “not regarded as a State guarantee” is laughable.

Finally you say:

“The banks are still heavily incentivised to take care of depositors monies as recklessly using these funds will result in losses and potentially bankruptcy, and therefore obviously negatively impact on the share price.”

This reminds me of Alan Greenspan’s famous sorta kinda mea culpa:

“Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.”

Obviously the point is moral hazard and the mis-pricing of risk. Clearly a bank probably won’t just set the vault on fire because, “sure it’s all insured anyway!” But they have less interest in maintaining a reputation for safety, sobriety etc. than they otherwise would if they don’t have to worry about depositors getting spooked. Depositors might not be constantly checking their bank’s loan-to-deposit ratios but maybe in a world without insured deposits they’re more reluctant to shift their saving s from the post office to an Icelandic bank offering 15% interest rates. To be clear, I’m not against some level of deposit insurance, but let’s not pretend it’s unproblematic.

Likewise, the reduced risk to bondholders due to the guarantee encourages them to lend more and at lower rates to the banks.

One big concern here is with government honesty and accountability. In particular here is the sequence of events:

1. Lenihan announces a bank liability guarantee to be paid for via an insurance premium by the banks at a fair market rate.
2. Under (I suspect) government pressure an “independent” government agency gives a very low range of possible costs of the guarantee to the taxpayer. The government chooses the lowest possible value, and hides the resulting decision in an obscure publication (at least to me). Good detective work by Frank Barry brings it to broader attention.
3. By under-pricing the insurance premium so dramatically the government has provided the banks with a per-annum subsidy of over 1.5 billion, conservatively estimated. This subsidy was hidden away and so never openly debated in public fora.

It reminds me of the FF TD asked to explain the special purpose vehicle with 51% private ownership, constructed in this way to keep NAMA debt off the the government books. He explained that although the government had only 49% ownership it actually controlled all key corporate decisions. In other words, fraudalently deceptive corporate governance as a openly admitted government strategy. Does this apply to private sector companies as well?

So much for cleaning up the corporate sector, as long as our government is one of the worst culprits.

@ James

i said i was ambivalent to whether we decided to charge it back or not. The point was that we decided on whether we wanted the banks or the “economy” to take the charge.

Given the concentration of the Irish banking system, i’d argue its a systematic insurance scheme rather than an individual one, as outside of EBS, no deposit book could actually call on the scheme without risking a total collapse in the scheme. A call by one bank would also likely lead to a run on all banks, something which does not happen, for instance, in the US. The Irish scheme benefits the depositor as much as the banks, if not more so, as there is no truly ‘safe’ home for funds in an Irish domiciled bank, outside of the guarantee.

I think my position is strengthened by the fact that credit unions previously operated under a significantly reduced deposit protection scheme to the big banks, this being because (a) there’s more chance of one of them going bust and (b) an individual credit union failure could easily be covered by the State. The current increased deposit protection scheme, both in terms of scope (credit unions) as well as scale (unlimited) is a direct response to a systematic breakdown in sector solvency, and is again non-targeted in terms of individual banks. Also by not including the credit unions in the guarantee, there would of course have been a huge run on them simply by not being covered, rather than any actual fear of bankruptcy.

Given the systematic nature of the Irish scheme, by making it mandatory you’re already running a moral hazard problem (the FDIC is opt-in as far as im aware), so the issue of cost again becomes ambiguous as to who should pay. You can either hit the banks for it as a cost for keeping them liquid, or you can charge the broader economy for it for ensuring that their funds are safe no matter where they are in the deposit system. As i said, there’s decent argument for both options.

I agree that the deposit protection scheme mean that people don’t carefully enough consider where they put their funds, but if we had limited schemes in scale or scope we’d suffer from a far higher frequency of banks runs, which in a concentrated market like ours would be seriously detrimental for systematic stability as well as the overall economy. If we have banks that we believe are too big to fail, we probably need a deposit protection scheme to go alongside them. The goal should be to create a system that doesnt have banks that are too big too fail and that is therefore less concentrated.

@ Gregory

do you (or anyone else?) know how a standard PPP works in terms of ownership and decision making? Lets say on an infrastructure project like a motorway – is there similar veto powers in favour of the government/local authority?

Bogus Cheap Bailout.
Bogus LTEV.
Bogus Estimate of Current Market Value.
Bogus Business Plan.
Bogus Pursuit of Developers.
Bogus Risk-sharing.
Bogus Levy.
Bogus Government Contol of NAMA.
Bogus Bank Guarantee Fee.

I am noticing a disturbing pattern developing.

And he still hasn’t finalised the legislation. There is time for a few more Lenimanders yet.
I am going to bring out a “Bogus Lenihan Bear” for Christmas.
It is going to cost about €20 Billion to develop though.
I will also bring out Mary Coughlan and Brian Cowen Inaction Figures.

After the legislation goes through it will be time for another letter.

@ Bond. Eoin Bond…

Great handle that you have, Mr. Bond!

My main point was about the latest cover-up — the backsliding on the plan to fair value the liability insurance premium, and the subsequent hidden underpayment by the banks.

The 49%-ownership-plus-effective-majority-control of the SPV is bog-standard bad corporate governance. Brussels already said that it was ok. Taking advice on good corporate governance from Belgium is perhaps not a great idea but they are the EU centre; so be it. A financial accountant (Donal Byard are you out there?) might have an opinion on how flagrant this is as abuse of corporate governance standards. It is certainly not illegal since it has been openly aired and approved. It makes ownership and decision-making quite murky.

The big news is regarding the insurance premium underpayment and how it was hidden from view rather than being openly discussed.

“.. in this country the deposit guarantee acts less as a form of insurance in case of a bank going bust, and more as a form of insurance on there being a run on the banking system.

It should also be noted that the recipients of any government guarantee being called are not the banks themselves, but actually the depositors and bondholders (and other liability holders) of the banks. In reality we should be implementing a liability-holding sur-tax if we want to actually charge those who got the biggest benefit from the guarantee”

You are correct I believe in indentifying the depositors etc. as poteentially the main benefactors, but there is one major problem with the arguments on this thread. The entire discussion is only meaningful if the guarantee actually meant anything. Martin Wolf in the Sunday Tribune posted by Philip yesterday commented ” Ireland is a small open economy and simply does not have the national balance sheet to bail out all the institutions in trouble.”

This is only stating a rather obvious fact. The guarantee is only of psychological value, since we couldn’t possibly honour it in the event of a run on the banks. I think charging the depositors etc for the guarantee would just about be the trigger to precipitate that run, and then we’d see the house of cards collapse.

The basic flaw in NAMA and I am no economist, is that the lttle guy is being asked to subsidise the bankers through a system that will copperfasten their place in the food chain.
The anti NAMA side are to be criticised for failing to identify where the money can be found to deal with the crisis. I am sure it is there and can be found and am therefore on the antiNAMA side.
I would like to see you guys spell out for me how this can be done

@ Aidan

i probably wasnt actually suggesting we put the charge on the deposit/bond holders right now, merely noting that if we’re going to get all high and mighty about how much it ‘really’ costs or how much moral hazard is involved by not charging adequately, then we should at least be honest about who should actually be footing the bill. Also remember that im generally the one looking out for the bondholoders! At least if we look at it like this, when we finally emerge from this crisis and try to build a ‘better’ banking system, we can look to deal with all the various stakeholders in a more balanced fashion.

As for who was the real benefactors – well look at the performance of bonds, deposits and equities of the Irish banks since the day before the guarantee was enacted – deposits still whole, bonds a lot more secure (dont have the figures to hand), equity lower despite the added bonus of NAMA.

“What effect do you think another letter would have? Id say…zero.”

I believe Shane Ross remarked recently that the valuers would produce the valuations their employers were looking for. We know that the minister is looking for very generous valuations. Anything that makes him and his valuers more cautious will save us money. If it makes him really cautious it will really save us money.

I also think that the Pro-NAMA side have substantially weakened.
Expressions of confidence in it by commentators are rare.
Even those who actively support it like Dan Boyle and Thomas Byrne are admitting that it may well make losses.
The business plan was almost universally derided.
Peter Mathews figures are not being challenged.
Finally the pesky property market is continuing to head south.
The formidable spin machine still exists but now it has to be more cautious as the public will be shocked by the reality of NAMA’s losses if it is overhyped now.

As well as this many original assurances have been discarded when they have served their purpose. The minister seems to be conceding that he no longer believes NAMA will be enough to restore the banks to health.
The legislation itself is now a dogs dinner.

I think if
(A) The costs and risks of the final version of NAMA were spelt out.
(B) The lie that there is no alternative is once more nailed.
(C) A swift process to produce a better alternative was suggested.

there would be a strong public appetite for it.

But if it only curbs the enthusiasm of the valuers it will save us billions.

And if it sticks in the public mind that there were alternatives, and if possible that a means of selecting one was spelt out, it will be really valuable.
If nothing else it would deprive NAMA’s backers of their most powerful lie.
One I can see them deploying again and again in the future.


Picture a current affairs show five years from now.

Interviewer: NAMA looks likely to result in huge losses. How do you justify your support for it?
NAMA backer: No one could have predicted the continuing decline in the Irish property market. At the time when NAMA was proposed there was no alternative. It is time to look forward not backward. We have had five years of this criticism. It is time we all pulled together.

Interviewer: Brian Lucey, what do you say to that. There really was no alternative to NAMA was there?

Brian Lucey: I dispute that. There were many alternatives to NAMA. The The opposition proposed alternatives, Patrick Honahan proposed risk-sharing…

NAMA backer interrupts: And we included that risk-sharing. There was no agreed opposition alternative. FG and Labour had different proposals which were much worse than NAMA.

Brian Lucey: There were many alternatives. The government chose the worst. And the risk-sharing was…

Several voices at once. Interviewer invites comment from remaining guest.

Independent Commentator: Realistically speaking NAMA was the only game in town. There was no agreed opposition alternative.

Brian Lucey interrupts: But the worst alternative was chosen….

NAMA backer interrupts: NAMA would be succeeding if it wasn’t for the mismanagement of our economy by the new government. This is keeping property prices far below what they should be.

Interviewer: We’ll have to move on. Brian Lucey, they have had five years, but is it now all over for Jedward?


I was at the Leviathan on the 28th of October, with about 300 other people or as it turned out, witnesses. It was an event none of us are likely to forget.

It was shortly after the Greens voted for NAMA yet there was Dan Boyle admitting that he thought the numbers upon which NAMA was based were fantastically optimistic (not a direct quote but very close). He actually said he did not expect NAMA to make a profit but that he’d “settle for a small loss”. A small loss when it comes to NAMA would be a few billion.

Minister Fahy, was there too and he asked with incredulity, where Peter Mathews was getting his figures from? Only to be politely told, that the figures he was using were none other than the governments own figures. Silence!

Boyle’s lack of belief in NAMA begs the question as to why the Greens demanded that a windfall tax be part of the NAMA legislation. Also, why would you argue for your party to support something which is going to loose the tax payer billions?

The following is an extract of a message sent at the w/e to all senators:

A detailed analysis of Nama’s business plan indicates that it fails to disclose rolled up interest arising over the ten years to 2020. It can be established from the plan’s limited projections that this will amount to almost €5 billion for 2010-2012. You can see this for yourself by comparing the total “interest income” for 2010-12 in table 7 with the total “interest income from borrowers” for these years in table 5. The difference of €4.85 billion (9.35-4.50) is rolled up. I estimate that a further €5.9 billion could be rolled up over the following seven years. In the absence of proforma projections, it is impossible to know exactly how this interest, totalling €10.75 billion, is being accounted for but the following alternative treatments can be deduced:

1. It is included in the €62 billion of principal repaid by borrowers. In this case, the “real” principal repaid is only €51.2 billion and the the “real” default rate on the €77 billion of loans acquired is 34% rather than 20% indicated in the plan. This would transform Nama’s projected cash surplus into a trading deficit of at least €5 billion. It would signify that the bank/building crisis will be far more serious than implied in Nama’s plan and that Nama would be extremely costly for taxpayers.

2. It is included in the plan’s assumed €15 billion write-down. This means that the “real” write-down on borrowings would be only about €4 billion to yield a “real” default rate of 6% on loans acquired. This rate would be extraordinarily low given the scale of bank write offs to date and widespread expectations about the depth and duration of the crisis.

3. Rolled up interest is not being paid at all and written off at some point in unpublished trading accounts for 2013-2020.

One way or the other, this is a huge issue which should be addressed before the Nama bill passes into law. I should also point out that my concern about the €10.75 billion of rolled up interest is separate to the €9 billion of rolled up interest included the €77 billion of loans to be acquired by Nama. It is also additional to the €11.65 which Peter Mathews (letter in Irish Times on 6th November) claims will be lost due to overstatement of the realisable value of properties underpinning these loans.

Even if we are both only half right, about €10 billion of taxpayers’ funds will be sucked into the Nama black hole.

Further details and spreadsheet file at <

Nama ensures that the Irish economy pays for the bad fiscal environment that existed in Ireland from 1999 on. The shareholders and bondholders should take a hit but have decided that they will force the Irish government into Nama. Irish developers may have a chance to survive under Nama. The risk was theirs but it is now that of the taxpayer.

If the share and bond holders were Irish resident then overall, the Irish economy gains reputation but loses the increased costs of international borrowing. Land being over valued is a by-product.

If the share and bond holders were not Irish resident, then allowing them off costs the Irish economy what they are let off. Irelands rep takes a hit and we may face higher costs of borrowing.

We still do not know who these owners are? But the lack of knowledge suggests that Ireland gains by not Nama and therefore loses by Nama.

Do we all agree on this simplified view? Please do not attack the simplification. Suggest your own, by all means!

If there is a Dail dissolution, then the legislation does not pass until after the election when it must go through the entire process again.

“Boyle’s lack of belief in NAMA begs the question as to why the Greens demanded that a windfall tax be part of the NAMA legislation.”

Ah well jayz that’s an easy one. They don’t expect to be in Government by the time the windfall comes, and won’t have to take the heat for the effect of the windfall on the long term impact to deposit interest rates, credit card interest rates and all the other ways the banks will seek the money to pay the tax.

On the last big bank failure in Ireland:

Ó Gráda, Cormac. Should the Munster Bank have been saved?
Jul-2001 Working Paper

Ó Gráda, Cormac. Moral hazard and quasi-central banking : should the Munster Bank have been allowed to fail?
Chapter in Dickson, David and Ó Gráda, Cormac(eds.). Refiguring Ireland : essays in honour of L.M. Cullen
2003 Liliput press

Irish banking history:–Ireland–History

Complete list of Ó Gráda papers:

@Robert Browne
On NAMA our politicians are still exhibiting the bubble psyche, no fact can dent their confidence.

@Brian Flanagan
Rolled up interest: We are going to hear more and more about this.

@Pat Donnelly
Entirely agree.

@Mark Dowling
Gormley made a statement, supporting your view, about Green parties eventually being destroyed after being in government.

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