COMMENT:The Government must prove to taxpayers that it is getting its pound of flesh from the banks for its landmark injection of liquidity this week, writes Simon Carswell
THE GOVERNMENT and the Central Bank will be re-ordering fresh supplies of midnight oil to burn this weekend and the coming days as they hammer out the charges to be applied to the six banks covered under the State's €400 billion guarantee scheme.
The terms and conditions of this guarantee will most definitely not be in small print.
The Central Bank has developed the scheme this weekend, in consultation with Department of Finance officials.
Central Bank governor John Hurley has said that this would be "a complex task" but that it was at an advanced stage and would be completed this weekend.
Officials will be under pressure to complete their work by Monday evening or Tuesday morning so it can be passed to Minister for Finance Brian Lenihan, and on to the Cabinet on Tuesday.
The Government will be keen to show a strong hand in dealing with the banking sector in return for taking on an exposure of at least €400 billion so that the taxpayer will not be left out of pocket.
The scheme must include some controls on directors' pay and put in place controls to rein in lending so the banks don't create any further risks for the State now that it has agreed to protect them.
The Government must prove to taxpayers that it is getting its pound of flesh from the banks for saving some of them with an injection of liquidity in the face of the greatest financial crisis to have affected the world economy since the Great Depression.
The cost of the most radical bank guarantee to be introduced in Europe since the Scandinavian banks were saved in the early 1990s is the crucial issue, for the Irish taxpayer, the Government, the regulators and the banks.
Mr Hurley said yesterday that the charge should "minimise moral hazard implications such that the banking system will not take on additional risks on the back of this guarantee".
Department of Finance officials have indicated to banks that they will be seeking a charge equal to 0.2 per cent of the total value of the banks' deposits and own borrowings covered by the scheme.
The total liabilities of the six Irish-owned banks and building societies stand at €400 billion, though this is likely to increase to €500 billion or higher when the four foreign-owned Irish institutions which have applied to be covered by the scheme are included.
This would mean that the State would earn a total charge of €1 billion from the guaranteed institutions for each of the two years of the scheme. However, the banks do not appear happy with this figure and are likely to seek an upper limit on the cost, at about 0.1 per cent of liabilities. This would translate into a charge of €500 million a year, or €1 billion in total.
The charge could well end up falling somewhere in the middle, at about €750 million a year, though the banks will come under increasing pressure to pay the higher amount for receiving such a massive insurance policy from the State at what the public regards as being at their expense.
One senior bank executive pointed out that the Government is likely to have to pay a higher charge for the estimated €11.5 billion it will have to borrow this year to balance the country's books because of the high risk they have assumed with the guarantee.
This cost must be passed on to the guaranteed banks at the very least.
Some banks who have less exposure to riskier assets appear to be growing uneasy at the guarantee, as they are concerned that the scheme will not differentiate between lenders who have taken on significant risks by bankrolling vast amounts of commercial and residential property development and the lower risk institutions.
AIB, Bank of Ireland, Irish Life Permanent and EBS building society will be keen that they do not have to pay as high a proportion of the charge because they do not have the same exposure to the property development and investment sectors that Anglo Irish Bank and Irish Nationwide Building Society have.
The guarantee charge to each must reflect this, they feel.
But the perception internationally is that the difference between the lenders will go unnoticed.
Financial sources in London criticised the State's guarantee scheme, saying that the Government was applying a one-size fits-all approach to protect the Irish banking sector and this would contaminate the stronger lenders by linking them with the weaker institutions under the same guarantee scheme.
"They should have dealt with the weak, but they have polluted the strong by guaranteeing the entire system. Now investors will not know which one is good and which one is bad. It reinforces the belief internationally that the Irish credit sector and the Irish banking system is weak," he said.
AIB and Bank of Ireland did not appear to be seeking any emergency measures to protect themselves when they joined the emergency talks last Monday night.
It seems they were there to stress to Government, their officials and the regulators that the entire Irish financial system was at risk if they did not move to protect the weaker institutions.
The Government's decision to guarantee the entire Irish-owned segment of the system was regarded as decisive in providing much-needed liquidity to cash-starved Irish institutions.
However, the risk now is that by effectively agreeing, if required, to move the deposits and the banks' own borrowings onto the State's balance sheet, the country has assumed a weaker financial position for the next two years.
As bank debts rise, the country's credit rating will fall. The cost of the scheme should reflect that. In that context, a charge of €2 billion for insuring as much as €500 billion for two years appears relatively small in a rapidly deteriorating economic environment and worsening global financial crisis.