THE GOVERNMENT has offered the banks the option of raising deposits from corporate and institutional investors without having to apply the automatic and costly State guarantee to this funding.

Announcing an extension to the existing guarantee by one year to the end of December 2012, Minister for Finance Michael Noonan said the unguaranteed option was being offered in response to a request from the banks.

Bank of Ireland, AIB and Irish Life and Permanent have all asked for the option of raising unguaranteed deposits from corporate and institutional investors.

The reason for the request was the cost of the fees paid to the Government for use of the Eligible Liabilities Guarantee Scheme, which is automatically applied to deposits of more than €100,000 for the term of those deposits.

Sums of less than this amount are covered by the Government’s deposit guarantee scheme.

The unguaranteed option is not open to retail depositors and the conditions of the offer “made it crystal clear” that any decision by a depositor to place an unguaranteed funding with an Irish bank is “voluntary”, the department said.

The Minister understood that while the demand to place unguaranteed deposits was “still being determined and may be relatively low at this point”, the request was “a very positive sign of a return of confidence in the banks”, it said.

The department said that this, taken with the extension of the guarantee, showed that while depositors may still need to be reassured on the security of the Irish banks, the repositioning and strengthening of the sector was “having a positive effect”.

The profitability of the banks has been squeezed by the higher cost of paying for deposits and other types of funding in volatile markets on top of higher guarantee fees over the past year.

Removing the automatic guarantee on corporate and institutional deposits will increase the the profits that the banks make.

AIB spent €256 million on guarantee fees in the first half of this year, up from €117 million for the same six-month period last year.

The guarantee cost Bank of Ireland €239 million in fees in the first half, compared with €151 million in the same period last year.

The guarantee fees have squeezed the banks’ net interest margins to about 1 percentage point in June 2011 from about 1.4 percentage points a year earlier.