INSTITUTIONS:EVERYDAY SAVERS will have responded favourably to the Government guaranteeing customer deposits at the six Irish-owned banks and building societies.
However, senior executives in the six lenders must have been rubbing their hands with glee as the State-sponsored €400 billion insurance policy covers commercial, institutional and interbank deposits, and investors who have bought some of their debt.
The terms "covered bonds", "senior debt" and "dated subordinated debt (lower tier II capital)" may be gobbledegook to most bank customers, but to senior bankers they are their lifeblood.
These are what Minister for Finance Brian Lenihan has guaranteed in an effort to protect the six banks and building societies.
The State guarantee allows the six lenders to borrow more freely and more cheaply for short-term funding that had become scarce due to the global credit crunch.
Mr Lenihan said on Tuesday that the increase on the cap on deposit guarantees to €100,000 from €20,000 last month covered 97 per cent of customer deposits, so the guarantee has clearly been introduced for the benefit of the banks rather than the savers, though it will buoy the confidence of frazzled ordinary depositors.
Exactly what is covered is not clear because the finer details have yet to be agreed by the Government, the Financial Regulator and the Central Bank, in consultation with the six financial institutions.
Working back from the estimated €400 billion given by Mr Lenihan, Davy Stockbrokers estimates this would cover less than 80 per cent of the money borrowed from other banks by the four publicly quoted Irish banks - AIB, Bank of Ireland, Anglo Irish Bank and Irish Life Permanent.
So what is guaranteed?
Visualise a bank's balance sheet. On one side are its assets - mostly loans to customers. These include mortgages, personal loans and any loans provided to businesses such as developers and builders, for example. These are not guaranteed by the Government so if a property developer defaults on a loan, the bank must absorb the loss without any State support.
On the other side of the balance sheet are the bank's liabilities - all deposits, including retail (regular customers), commercial and institutional depositors in addition to deposits from other banks sourced in the interbank markets. These are guaranteed.
Also on the liabilities side of the balance sheet is money provided by investors who buy bank debt, essentially packages of loans sold to raise money. Some of this debt has been covered by the State.
The unprecedented Government guarantee is aimed at encouraging depositors and investors to keep their money in the Irish-owned institutions and to attract new depositors and investors, helping the banks to raise hard-to- get short-term funding.
The shut down the markets where banks raise their money. The Government believes its guarantee will unfreeze these markets for Irish banks, shoring up the Irish financial system and the economy.
Denis Casey, chief executive of Irish Life Permanent, said the guarantee would allow Permanent TSB and the other Irish banks covered to borrow more cheaply.
"The oxygen supply for Irish banks was being cut off and healthy banks were starting to gasp for breath. This guarantee turns on the oxygen supply."
