Renewing the ELG

The Sunday Business Post’s Money section has an article on the possibility of not renewing the Eligible Liabilities Guarantee (ELG) when it expires at the end of the year.   (A FAQ on the guarantee is available here.)   The article focuses on arguments made by Wilbur Ross for not renewing the guarantee. 

Ross, who owns 7.7 percent of Ireland’s only privately-controlled bank and sits on its Board, told The Sunday Business Post that the extended liabilities guarantee (ELG) was “severely impeding the recovery of the banks” because of its high cost and should be scrapped.

“There is no reason for [the] government to extend the ELG,” he said.   “Ending [it] will be viewed favourably by the markets as a major step toward the normalisation of Ireland’s financial system and will facilitate the sovereign’s access to international credit markets.”

Ross said that the low interest rate environment, combined with the high cost of the ELG, which will cost Bank of Ireland €400 million this year, was keeping the banking system from returning to profitability.

An aspect worth considering is that, even if the explicit guarantee is not renewed, past experience suggests that the liabilities in question will be implicitly guaranteed at zero cost to an 85 percent privately owned bank.

18 replies on “Renewing the ELG”

Perhaps if Mr. Ross is so keen to get rid of the ELG, he might propose an effective mechanism to guarantee that the Government cannot bail out the bank or accept liabilities to anyone else who might choose to do so. Fully open books and a constitutional bar on new bank bailouts should do the job nicely if he has trouble coming up with ideas himself.

It is Wiilbur’s job to lobby for this the moment it appears non-renual of the ELG will not provoke a run. He is there to harvest profits.

The state has to ask itself if it would conclude it had to reintroduce a ELG type guarantee should credit conditions start to result in deposit outflows. If the answer to that is ‘yes’ then it has to ask itself what it would get for providing this service without receiving the fee.

Maybe it might get a bit more lending / slower deleveraging by BOI.

@ John Foody +1

Thanks for the link, this story is picking up momentum all the time and is now on the radar screens of both France and Germany. France, desperate for money, is not hanging around for the EU bureaucrats and is just sending out the bills for tax ‘evasion’ (the companies call it avoidance) knowing that these companies are going to come under pressure on stock markets and will settle. Inevitably the tax regimes are going to be harmonised and countries drawing down funds from ESM are going to find themselves squeezed relentlessly into conformity.

Dear Wilbur,

We here at North Pole Global Entertainment Manufacturing (Ireland) are glad to acknowledge receipt of your timely seasonal request.

As is our custom, we shall be double-checking our real-time behavioral tracking database to match your performance to date to the value of our product delivery.

We will be coming to town shortly and hope you will like your surprise.

Yours sincerely,

Michael Noonan (on behalf of the Big Man)
North Pole Global Entertainment Manufacturing (Ireland)

Nicely read in conjunction with Wolfgang Munchau’s Sunday night broadside:

And finally, the banking union faces further delays and is now subject to a lack of ambition. It will have no positive effect on the crisis because it will not separate the banks from their sovereigns, and contains no power of resolution and no deposit insurance. The debate has degenerated into a typical inter-institutional fight about who gets to do what.

Cant blame him for trying I guess but why was the reporting in the business post so benign?

Colm McCarthy was calling for implicit guarantees to be made explicit and paid for.
Wilbur wants to make explicit guarantees that are paid for implicit and unpaid for again.

I wouldn’t be surprised if Wibur gets at least some of his way.

Noonan seems to think bankers are higher sentient beings that must be protected and cushioned at all costs.

Methinks Wilbur Ross is pissed off that he’e bought a pig in a poke. He bought he shares in BOI at 10c in the summer of 2011 and todays price is 9.7c and it must be remembered that Fidelity have since sold their investment which they made at the same time as Wilbur Ross so chances are he’s feeling none to clever having tied up a sizeable amount of capital for the best part of 18 months without generating a dime. This was not in the script so I’d take any suggestions from Mr Ross with regards to BOI with a large dose of salts and whatever else your having – he’e learning the slow way that this is not a normal economic banking environment and the usual rules may not apply for a considerable period of time.

Not sure why this excites John McHale, and what is an “implicit guarantee” anyway.

Min Noonan said last week in aftermath of BoI bond issuance

“Today is an important milestone on the path to full independence for our banks. It is the first time since October 2010 that Bank of Ireland has been able to access international term debt markets in a benchmark public issue. I understand that 98% of the interest in these bonds came from foreign investors. This issuance is further evidence of the strengthening and normalisation of our banking system. It is a clear show of confidence in the restructuring of the sector and its viability into the future by international investors.”

So is it not a DoF ambition to see the normalisation of the banking sector, and what place does ELG have in a normalised sector.

Mind you, as with other matters, perhaps DoF doesn’t see eye to eye with the chairman of the Fiscal Advisory Council.

The pressure is now on from all sides to get rid of ‘expensive’ guarantee.
The Troika, Lex, investors, shareholders.

The State now provides the following to investors in banks;
1. DGS Guarantee for deposits up to €100,000, free of charge.
2. ELG for deposits over €100,000 but also for bonds etc, chargeable.
3. Implicit (at ECB pistol point) guarantee to all bank investors.
4. A virtual constitutional guarantee on pay and pensions of bankers because some important believe them to be property rights.

Surely it is time to end the shakedown. When is this State going to wise up and stand up for its citizens?

Once ELG is withdrawn, it will have to be for all ‘Irish’ banks, otherwise deposit flight will occur.
All financial institutions should have to pay for DGS and ELG.

Of course BOI are perfectly entitled to withdraw from any element of the ELG at any time according to the document referenced.
Some of this is high level political pressure from the Troika and in particular the ECB element of the Troika, that want a ‘banking success’ story. They do not care very much who pays for their much needed success story, but they will not pay for it.

What a pity that the ECB does not publicly withdraw it ‘no bank must fail policy’ and its refusal or lethargy in putting a bank resolution schemes and a deposit protection scheme in place.
When all those elements are in place the government could look at the ELG scheme, in its own good time.

@ Hogan

was just about to say the same. Think you lodge money into a non-interest-bearing “deposit protection account”. Credit Unions have to put 0.2% of depos in it, not sure about the banks.

Not sure how off-topic this is really:
Some of you might find this from Taleb resonates a bit (from alphaville)

“Are you saying that capitalism is good, but that 21st-century capitalism has gone too far?

What we do today has nothing to do with capitalism or socialism. It is a crony type of system that transfers money to the coffers of bureaucrats. The largest “fragiliser” of society is a lack of skin in the game. If you are mayor of a small town, you are penalised for your mistakes because you are made accountable when you go to church. But we are witnessing the rise of a new class of inverse heroes – bureaucrats, bankers, and academics with too much power. They game the system while citizens pay the price. I want the entrepreneur to be respected, not the CEO of a company who has all the upsides and none of the downsides.”

@Joseph R

“4. A virtual constitutional guarantee on pay and pensions of bankers because some important believe them to be property rights.”

You should note that post the amendment to the constitution to facilitate the Fiscal Compact, this will no longer apply, provided the state claims the pay and pensions need to be reduced to meet the obligations of the Treaty.

This will also apply to politicians’ pensions hitherto protected by claims of “legitimate expectation”.


re:Fiscal Treaty implication.
Thanks for that. So Mr Noonan is not so powerless after all!.

@Bond @Hogan.

re: DGS
I should have checked my statement re DGS, but I assume it is free of charge. At least I have never seen an income item crop up in the exchequer statements.
Perhaps somebody will clarify.

@ Joseph

i dont think the state earns anything off it, but i think it costs the banks money in terms of having to park funds in the CBoI and getting nothing for it. The whole issue of DGS’s is changing anyway, there will be EU-harmonised fee regimes soon enough i think

The DGS is funded by a levy on bank deposits.

Whether the levy is pitched at a realistic level I have no idea.When I enquired how much was in the actual fund backing the DGS the CB would not tell me. They told me that the Exchequer would make up any shortfall (and not to worry!).

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