Dublin waters down bank scheme

The Irish government has bowed to pressure from its two biggest banks and dropped an insistence that the industry as a whole help to pay the costs involved in settling the debts of any insolvent bank.

To minimise the cost to Irish taxpayers, the original plan envisaged that where the guarantee is called upon, and the creditors repaid, any cost not recovered from the bank in trouble would be recouped from the other covered institutions “over time in a manner consistent with their long-term viability and sustainability”.

An official with one of the big banks said the way the scheme was originally drawn up could have exposed them to an “unquantifiable liability”.

The change, published among a series of amendments on the finance ministry’s website this week, makes clear that “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”.

But bankers say this is particularly important for Bank of Ireland and Allied Irish Banks if, as many expect, Ulster Bank, their only rival as a universal lender, now chooses to gain a competitive advantage by remaining outside the guarantee scheme.

The six Irish-owned banks were on Monday night expected to sign up to be covered by the guarantee. Five non-Irish banks have until the end of next week to decide.

A spokesman for Ulster Bank, part of Royal Bank of Scotland, said its “application is progressing”. HBOS said it was “still looking at the detail”.

Finance ministry officials say there is no formal indication they will not join. Officials say there will be some consternation as Alistair Darling, the UK chancellor, vigorously lobbied Brian Lenihan, the Irish finance minister, on behalf of RBS to be included, on the grounds that to be left out would put the non-Irish banks at a disadvantage.

However, a lot has happened in the three weeks since Ireland announced it was stepping in to guarantee the liabilities of its lenders – not least the UK’s recapitalisation plan, which covers RBS and HBOS.

Irish bankers believe the issue for Ulster Bank is not so much the levy for the guarantee, which the government estimates could come to €1bn ($1.25bn, £800m) for the 11 institutions over the two years of the scheme. The main concern is the interference in management, with “public interest” directors appointed to the board, setting lending policy and limits on wholesale funding – not to mention the remuneration of directors.