Irish bank guarantee, included short-term interbank deposits, despite ECB request

The Government included short-term interbank deposits in its bank guarantee in 2008, despite a request from the European Central Bank president Jean-Claude Trichet to exclude them from the scheme, according to documents released by the Oireachtas banking inquiry.

Mr Trichet made his request in a letter to then taoiseach Brian Cowen on October 16th, 2008, just over two weeks after the guarantee was dramatically announced by the government.

He asked that interbank deposits with a maturity of up to three months be excluded from the covered liabilities.

Mr Trichet cited an opinion adopted the previous day by the ECB’s governing council and said the extension of the guarantee to cover these deposits could “entail a substantial distortion” of the euro area money market.

Fully co-ordinated

He said he “would wish that the Irish government would maintain such an exclusion until this matter has been fully co-ordinated throughout the euro area member states” so as to avoid distortions in monetary policy.

In a reply, dated November 14th, then minister for finance Brian Lenihan told Mr Trichet that legislation for the guarantee had been listed for approval in the Dáil the next day.

Mr Lenihan said the parliamentary process to provide legal certainty to the guarantee did not allow “for any amendment” to the scheme. He also pointed out that any change to the terms of the guarantee would have required “further discussions” with the commission and “given rise to further delay in finalising its status”.

He said market conditions were such that there was a “high degree of reliance [by Irish banks] on interbank deposits” of short maturity to meet their ongoing liquidity needs.

“In this context, there was a concern that any change in the scope of the guarantee at a late stage could impact adversely on the liquidity and stability of the Irish banking system and . . . on the credibility and reputation of the guarantee overall.”