ECONOMICS:THREE BANKS have now indicated that they will stay outside the Government's guarantee scheme. These are National Irish Bank, which has a nationwide branch network, and Bank of Scotland (Ireland), which has a smaller, but extensive, network. The other, Irish Intercontinental Bank (IIB/KBC), has only a handful of branches.
Ulster Bank, with its sister company First Active, has an even more extensive branch coverage than National Irish Bank, and is regarded as the third largest retail bank. Ulster has yet to announce whether it will participate.
Whatever the Ulster Bank decision, the Irish retail banks which have joined the scheme - including the two biggest, Bank of Ireland and Allied Irish - will face competitors with national coverage which, while not beneficiaries of the scheme's guarantee, also escape its constraints on competitive behaviour in the marketplace.
Bank of Scotland (Ireland) was quick off the mark to announce, in full-page national newspaper advertisements yesterday, that its motive for not joining was to free itself from competitive constraints. So the fateful decision of September 30th has notched up another unintended consequence, a non-level playing field in competition between Irish retail banks.
Those who have not joined did not cite the potential costs of reimbursing the Government for bailing out failed banks, for the simple reason that this contingent liability appears to have been removed. As I argued in these pages last week, the "market notice" posted on the Department of Finance website on October 22nd effectively removed from participating banks any liability for cross-indemnity in the event of another bank defaulting.
Thus the costs of the guarantee, should there be any, will fall on the taxpayer. The Financial Times reported last Wednesday that the removal of the cross-indemnity came at the behest of Bank of Ireland and Allied Irish Bank, which were understandably nervous of the unquantifiable contingent liability.
Large amounts of smoke have billowed from Government Buildings into the eyes of reporters in the days since the climbdown, designed to retain the fiction that there is no taxpayer exposure. In the Dáil, the Taoiseach, asked about the treatment of the two main banks as reported in the Financial Times story, stated only that ". . . the banks are part of the State guarantee scheme the same as everybody else". This, note, is not a denial that the cross-indemnity has been removed.
The market notice states: "A covered institution is not required to indemnify the Minister in respect of any payments made by the Minister under a guarantee given to any other covered institution . . ."
The guarantee acceptance deed, as signed by the participating banks, states: "The indemnities given by a covered institution and the related party relate only to payments made by the Minister under the guarantee given in respect of covered liabilities of the covered institution and not in relation to any other guarantee . . ."
The Dáil debate on September 30th, the day after the all-night meetings at Government Buildings which resulted in the announcement of the across-the-board guarantee scheme, included the following statements from the Taoiseach: ". . . It is my intention that the Irish taxpayer will not be held liable in any way for any deficit that might occur . . ." and ". . . if a deficit emerged, the sector would pay, not the Irish taxpayer. That is my commitment to the House."
I do not doubt that the Taoiseach sincerely believed these statements were true at the time he made them. But no amount of spin-doctoring makes them true now. The cross-indemnity has been removed, as it had to be. Without it, any bank with a sporting chance of solvency would have had every incentive to stay out of the scheme.
We now have a situation where there will be two categories of retail banks competing in the same marketplace. Those participating in the Government's scheme will face restrictions and handicaps, courtesy of direct regulatory involvement in their management. They will of course benefit, for two years, from the guarantee on liabilities.
Non-participating banks, which have access to their own governments' support schemes, will be free of these commercial handicaps in the Irish market.
If any participating bank defaults, the taxpayer will pick up the tab given the climbdown on the cross-indemnity. It would be refreshing if the Government would now acknowledge this, and call off the spinners.
Finally, nothing has been done to address the problem of capital adequacy in the Irish banking system, already faced head-on in the bailout schemes implemented in Britain and in continental Europe. The Law of Unintended Consequences is nocturnal, and stalked Merrion Street on the night of September 29th last.
Colm McCarthy lectures in economics at University College Dublin
