# Does the state guarantee bank deposits?



## oysterman (4 Mar 2008)

A little bit off topic but I guess that in the wake of the "National Rock" fiasco, all financial institutions are now the beneficiaries of state guarantees so it's prudent for governments to intervene before rather than after the balloon goes up. I wonder how much Bertie knows about the solvency of the central/eastern European subsidiaries of _our_ clearing banks?


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## Brendan Burgess (5 Mar 2008)

HI Oysterman

I have moved this post to here, as it is off topic. 

Some people might find your post misleading, so you might want to clarify what you mean and edit the title accordingly.

Brendan


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## Dum_Dum (8 Mar 2008)

I hope there is no such thing - it essentially socialises any risk in banking. Northern Rock ought to have gone under. Why should the taxpayer bail out feckless bankers?


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## Grus (8 Mar 2008)

Dum_Dum said:


> I hope there is no such thing - it essentially socialises any risk in banking. Northern Rock ought to have gone under. Why should the taxpayer bail out feckless bankers?


 
As feckless as they are, they are still responsible for minding a lot of the publics money. I don't think waking up to find all your savings with an institution have vanished and there's nothing you can do about it, would be an ideal situation either. Maybe heads of companies should be held responsible for the failings of their institutions, but luckily for them there is such a thing as limited companies.

As for the state guarantee on bank deposits in Ireland; AFAIK you get 90% of your deposit back upto a limit of €20000 per institution (not account).


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## Brendan Burgess (8 Mar 2008)

Let's be quite clear. There is no state guarantee for Irish bank deposits. 

There is a Deposit Guarantee Scheme. This is funded by all the deposit taking banks and not guaranteed by the state. 

The current amount of money in the fund is €400m. 

By comparison, the much abused Savings Protection Scheme of the Credit Unions has €110m in it. 

Brendan


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## Grus (8 Mar 2008)

Thanks for the correction Brendan


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## Slim (8 Mar 2008)

Brendan said:


> There is a Deposit Guarantee Scheme. This is funded by all the deposit taking banks and not guaranteed by the state.
> 
> The current amount of money in the fund is €400m.
> 
> By comparison, the much abused Savings Protection Scheme of the Credit Unions has €110m in it.


 
The Credit Unions hold approx. €12billion in savings. How much do the deposit taking banks hold for the €400million?


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## Afuera (8 Mar 2008)

Brendan said:


> Let's be quite clear. There is no state guarantee for Irish deposits.


Is the protection scheme for deposits in the Post Office not state guaranteed?


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## Brendan Burgess (8 Mar 2008)

Hi Afuera

Sorry. The thread was dealing with bank deposits. I have edited my thread accordingly. 

Brendan


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## kaplan (9 Mar 2008)

The Irish state does not explicitly guarantee 100% of bank deposits. It provides for what is called a explicit deposit insurance under EC directive of a maximum guaranteed compensation amount of €20,000 to qualifying depositors. See here : http://www.irishstatutebook.ie/1995/en/si/0168.html The scheme is administered by the Central Bank and funded by banks and building societies.

(Others provide higher amounts ie UK Stg31.7k, France €70k, US $100k). It is an ex-post scheme which means the banks are only obliged to fund the scheme at a rate of .2% of insurable deposits. It has what is called a reconstitution provision where if the fund is depleted it can call on further deposits from the banks. 

Because of what’s called the too big to fail doctrine (TBTF) it is recognised that governments are forced to step in with blanket guarantees when a systemic crisis emerge. Banks are simply too big to fail. Or some times, too many to fail. So there can be said to be an implicit state backing for banks and thus depositors funds. There are many examples of this, more recently Northern Rock. 

Most governments quite rightly do not provide blanket 100% guarantees as this would create unacceptable moral hazard problems with some banks taking on too much risk. Some people believe the markets will exert sufficient pressure on banks to behave ie pricing subordinate debt up where risks are seen to be too high and argue against the need to deposit guarantees. But this ignores the consumer protection dimension. People have to trust their deposits are safe and will be protected by the state. 

Deposit insurance is part of the financial safety net which also includes regulation and supervision and lender of last resort facilities for banks. The best forms, it is argued, have to be administered by statutory agencies such as the Central Bank and IFRSA here and the FSA, Bank of England and FSCS in the UK. 

Of course credit unions are not covered under the banks scheme and as yet there are no state provisions or it appears intention to provide a statutory compensation scheme for credit union savers. Internationally stand alone credit union deposit insurance is funded at higher levels typically 1.2-2% of insurable deposits reflecting the higher concentration of risks. This explains the difference between the banks deposit scheme here and the ILCU stabilisation scheme (not to be confused with depoist insurance) which had a low target of 1% and is currently only about .73%. If it were constituted as proper deposit insurance it should be between €210 - €280m. But that's another story for another thread. 

Finally the Financial Regulator here is a bit shy about advertising the existence of a scheme unlike the UK. Compare and contrast the consumer information here: http://www.fscs.org.uk/
With 
http://www.financialregulator.ie/frame_main.asp?pg=/industry/in_bci_dps_intr.asp&nv=/industry/in_nav.asp and http://www.itsyourmoney.ie/index.jsp?1nID=93&2nID=96&pID=145&nID=385&aID=0

Kaplan
[broken link removed]


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## Brendan Burgess (9 Mar 2008)

Hi Kaplan

If AIB or Bank of Ireland got into trouble, the government would probably have to step in.

But would it have to step in to bail out a smaller deposit taker such as Anglo or Irish Nationwide?  I don't think so. The Deposit Protection Scheme would sort out those who have guaranteed deposits and the other banks would replenish the fund. 

As a taxpayer, I would be annoyed if the government bailed out any bank. I would not have any problem with them providing liquidity which is what the UK government did for Northern Rock. 

Brendan


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## Duke of Marmalade (9 Mar 2008)

_Boss_, I think your comparison with the Credit Unions' compensation fund is a bit misleading. As I understand _Kaplan's_ comprehensive post, the Central Bank *do* guarantee bank deposits up to that 90%/20K max. They will fund this as explained but if the fund is inadequate in a particular situation they will simply *by* *right* levy the other banks more. The current size of the fund is somewhat irrelevant.

By comparison, if the CU fund is inadequate in a particular situation there is no guarantee that the other members or anybody else will stomp up the extra funds.


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## Brendan Burgess (9 Mar 2008)

Harchibald

I was only comparing the size and not the function. 

I don't think that the Central Bank provides the guarantee. The Fund provides the guarantee. If the fund is not adequate, the guarantee might not be worth that much. 

It could well cope with the collapse of a small deposit taker, but would have problems with AIB or Bank of Ireland. 

Brendan


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## Marie (9 Mar 2008)

The news on Friday was that AIB had 464 billion 'wiped off' its value but AIB doesn't seem phased; they've merely said they will be 'very cautious' in terms of their loan commitments.  Given what you've said Brendan, does this make AIB risky for a depositor with savings over the compensation limit..........? Don't want to lose my pension nest-egg


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## Brendan Burgess (9 Mar 2008)

> The news on Friday was that AIB had 464 billion 'wiped off' its value



Marie. I don't know what papers you are reading. AIB is worth about €8 billion. 

That is the number of its shares multiplied by the price of the shares. 

This goes up and down a lot. It doesn't always reflect what is happening to the business. 

I don't know the credit ratings of the Irish banks, but they are all fairly good. Rabobank is the safest with an AAA rating.

Brendan


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## kaplan (10 Mar 2008)

Financial stability rather than consumer protection objectives underpin the Irish scheme. Brendan's probably correct; the To Big To Fail doctrine is likely to apply only to BOI and AIB with a reliance on the guarantee scheme to pay for the potential failure of other banks and building societies. However this has never been tested. There is a risk that a run on a small bank(s) could trigger runs on bigger banks. Even the best designed schemes could never be expected to deal with a catastrophic systemic failure or the risk of one occurring. In such cases the tax payer does have to step in and support or bail out troubled banks. It's also a concern that the scheme promises to pay out within three months ( with provision for extension) whereas in the US deposits are available for withdrawal after 48 hours. 

As far as coverage is concerned Ireland has the minimum required under EC directive at €20.000. However international experience shows the average coverage ratio at about 2.7 times per capita GDP. This may indicate that the current level of Irish coverage may be too low to engender public confidence in the event of a bank scare. Given that Irish GDP per capita is €41.2k (2006) this would suggest that coverage should be increased well above the current level. 


Kaplan


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## Duke of Marmalade (10 Mar 2008)

_kaplan_, is the 20k/90% EU thing an absolute State guarantee? i.e. if the fund is depleted can't the State *of right* levy the other banks to meet the shortfall? In that respect it is different from the CU fund.

I accept that above the 20K there are no State guarantees.


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## Protocol (10 Mar 2008)

Marie,

it was Anglo Irish Bank, not AIB.

And it was 464 million, not 464 billion!!!!


*€464m wiped off Anglo value after risk warning*

*SIMON CARSWELL*
Fri, Mar 07, 2008


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## Askar (10 Mar 2008)

Surely, the question of whether the taxpayer ultimately foots the bill depends on the governments perception of the systemic risk at the time of the crisis? If all savers suddenly felt their monies were not safe, and there was a possibility of a run on all the banks, then a smaller bank would be bailed out to prevent a snowball effect? Was this not the sort of thinking that led to the UK governments guarantee for Northern Rock deposit holders?


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## oysterman (10 Mar 2008)

Brendan said:


> HI Oysterman
> 
> I have moved this post to here, as it is off topic.
> 
> ...


I've just caught up with this thread split now.

I am convinced that the level of guarantee in fact goes way beyond the 90%/€20k of the scheme.

I simply can't see an Irish government standing by while bank customers lose following a failure.

I'm thinking back to the emergency legislation they rushed through in the wake of AIB's negligent purchase of Insurance Corporation of Ireland and the fact that the government rushed on to Morning Ireland the moment the Ruznak story broke to reassure AIB customers.

They'd do it again.

The moral hazard argument is, in my view, compelling but I simply don't see depositors with any significant financial institution in this country being left out in the cold if there is even an argument made for a failure of regulation in the specific circumstances. The political cost would be too high.

Nobody is going to get too worked up over the failure of some little credit union but there would be too big a political price to pay if a big player went down. That's politics.


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## Marie (10 Mar 2008)

Protocol said:


> Marie,
> 
> it was Anglo Irish Bank, not AIB.
> 
> ...


 
Read and sent in haste so thank you for the correction.  Yes, it was Anglo Irish Bank (the other A.I.B.) which has sustained a loss.  I have some of my savings in Anglo, an amount over the compensation maximum) and wondered if the news is sufficiently serious to warrant withdrawing the excess.


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## kaplan (10 Mar 2008)

The 90% limit at €20,000 is what is called co-insurance. It's used in the rather naïve belief that it will force unsophisticated depositors to monitor banks – as if the ordinary man in the street can call bank risk. It’s nonsense of course which is why the UK scheme will probably consider moving away from co-insurance to a 100% guarantee up to a limit of say Stg 50k. 

The Irish scheme has reconstitution provisions which means the fund can be replenished through additional calls on banks should it become depleted. It does not appear to be an “absolute” state guarantee as it is not clear what would happen if banks could not replenish the fund. This is what is called “constructive ambiguity” which is a way of allowing governments some leeway in the event of a catastrophic failure. 

Deposit insurance is designed to prevent runs. The intention is that depositors won’t take flight and run at the first sign of trouble. Of course when they fail government has to step in. AIB appeared to have benefited from the TBTF doctrine in the ICI case. It’s not at all certain what would happen if a smaller bank crisis emerged. 

The credit union scheme is not deposit insurance. It is something altogether different. It provides no guarantee merely a statement that savers may be compensated up to €12,700 subject to the discretion of the ILCU.. It is what is termed a stabilisation fund where credit unions have clubbed together to provide discretionary assistance to a troubled credit union ie liquidity and solvency support. It is a finite fund without an ability to be replenished. It is administered by a sub-committee of the volunteer board of the ILCU and can be used even where a credit union has not or is not in compliance with membership conditions for what’s called “the good of the Movement”. It should not be confused with deposit insurance. Of course the problem with these little banks is the risk of a contagious run on many of them. 

Kaplan


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## Duke of Marmalade (11 Mar 2008)

kaplan said:


> AIB appeared to have benefited from the TBTF doctrine in the ICI case.


 
Very clear explanation _Kap_, I think I was right in challenging the _Boss_ on the interpretation of the respective sizes of the CU fund and the Deposit Scheme - completely different animals.

BTW, on a semantic point, the above quote should really read that ICI customers benefitted from TBTF. AIB were not bailed out, they were entitled to walk away from a limited liability company.


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## Protocol (11 Mar 2008)

Marie,

to be clear, Anglo did not "suffer a loss".

It is a strongly profitable bank.

What happened was its share price fell, causing its market cap to fall.

This has no direct impact on its savings customers.


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## Marie (11 Mar 2008)

Thanks for that Protocol.  It confirms Anglo's own statement.   I have always been aware of the upper cut-off for compensation.  The precedent of Northern Rock plus Brendan's comment about smaller institutions raised a brief concern which your response allayed.


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## kaplan (12 Mar 2008)

Harchibald said:


> On a semantic point, the above quote should really read that ICI customers benefitted from TBTF. AIB were not bailed out, they were entitled to walk away from a limited liability company.


 
Harchibald

Very interesting archive articles here on AIB & ICI [broken link removed] here 
[broken link removed] and here http://www.independent.ie/national-...llowed-disastrous-takeover-of-ici-316163.html

Seems the TBTF was triggered in favour of AIB as well as ICI.

Kaplan


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## Duke of Marmalade (12 Mar 2008)

_kap_, I think most of these articles are based on the premise that AIB was technically liable for ICI's losses. I doubt whether that was the case unless somehow it had gone guarantor. Interesting that the State had only recently sold ICI to AIB so one wonders just where the "moral" culpability lay.

Interesting archive articles though, these journos must cringe when they read their past comments like the Examiner stating that AIB was a certain take-over target - that was 6 years ago!


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## kaplan (13 Mar 2008)

Deposit Insurance may have a wider remit than compensation in the event of a failure. It has two objectives. The first is stability : to remove the incentives for bank runs to develop; the second, consumer protection through compensating small depositors in the event of a failure. The critical overall objective is the strengthening of public confidence.

Deposit insurance sits alongside effective supervision and regulation which aims to limit the amount of risk incurred by banks to acceptable levels which counteracts the weakening of market discipline caused by the existence of a bank safety net (deposit insurance + lender of last resort).

DI schemes may provide for (a) compensation and (b) early stage intervention. In the latter case the aim is to step in and insist the bank take action to reduce risk. This is done with the threat that coverage will be withdrawn triggering regulatory withdrawal of authorisation to carry on business. Refusal to provide DI cover means a bank would have to close. 

With credit unions it is recognised that an effective supervision and regulatory system does not exist. In addition there is no deposit insurance system and credit unions cannot access lender of last resort facilities. For these reasons many are concerned with the financial stability of the sector given the impaired state of its financial safety net provisions. 

There is some anecdotal evidence of a loss of saver confidence in credit unions evidenced through consistent media stories of financial losses and regulatory investigations and intervention. The sector proposes a concentration of risks in which €14bn of household savings are exposed with 80% of savings concentrated in the top 100 credit unions and over €5bn in the top 50. 

The soundness of the system needs to be underpinned by more effective supervision and regulation and deposit insurance (with both compensation and early stage intervention powers) bringing it into line with the banking system and credit union systems elsewhere.

The notion that a trade body such as the Irish Bankers Federation would ever provide deposit insurance would be unacceptable. Yet the government is attempting to broker such a deal with the ILCU at this time. In doing so it is exposed to a justifiable allegation of political capture of trade body self interests with all the known risks inherent in credit union trade body controlled private deposit insurance. Its position is relegating credit union savers to second class consumer status in recognition that they are not customers but “members”. 

Somehow I doubt if the millions who save would consider themselves to be second class when it comes to their legitimate consumer protection expectations.


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## fred44 (15 Mar 2008)

Could somebody please explain the Anglo irish IOM 100% capital security claim
on this page.  [broken link removed]
So far this is the only bank that I have seen making this type of claim.

Thanks.


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## Duke of Marmalade (16 Mar 2008)

_Fred_, that's a fairly common statement. In fact Tracker Bonds are often described as *Secure* ever since IFSRA imposed a ban on calling them *Guaranteed*.

You will note that the Anglo IOM product is described as having a parent guarantee - ergo suggesting that everything about the bond including its interest and capital security is only as good as the company offering it or in its failure its parent. 

In short, I don't think there is anything wrong with the description of this product.


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## fred44 (18 Mar 2008)

Thanks Harchibald..

I have a deposit well over the protected amount and I must admit that the "100% guarantee" did sway my decision to a large extent.
I do realise that even now that the chances of a serious problem with my deposit and Anglo are remote but looking at the banks recent share price perhaps a little less remote than when I deposited last year..
It is a worry,I`ll admit.
Fred.


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## Duke of Marmalade (18 Mar 2008)

The Fed made what to me was an astonishing admission of the TBTF philosophy when it bailed out that Bear.

They said "_maintaining_ _financial stability is much more important than the risk of moral hazard_".

Even the BoE in bailing out NR pretended it was only because it was solvent, suggesting that if, say, Barclays went insolvent that's tough luck. That's bull - Barclays would be bailed out even if insolvent otherwise the resulting financial instability would be a vista too appalling to contemplate.

So how far down the food chain do AAM contributors think the various Irish Banks are effectively underwritten by TBTF? Presumably the Big Two. But any more?


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## Sunny (19 Mar 2008)

Harchibald said:


> So how far down the food chain do AAM contributors think the various Irish Banks are effectively underwritten by TBTF? Presumably the Big Two. But any more?


 
I don't think depositors in any bank would be allowed to lose money in this country.  Shareholders are another story. People talk about the moral hazzard that the BOE and FED have created with their actions but remember that shareholders in both Bear Stearns and Nothern Rock have been practically wiped out which is the way it should be. Ask Mr. Lewis if he believes in TBTF!

Having said that, I work in the credit markets and as a senior bondholder in Bear Stearns I am laughing all the way to the bank and there is now an argument to load up on Goldman Sachs, Merill Lynch etc debt because the FED have admitted they won't let them enter bankruptcy and risk contagion with other banks because of the way that credit markets have developed. Thats where the moral hazard has been created. You would want to be a brace man though!!


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## Duke of Marmalade (19 Mar 2008)

Sunny said:


> Having said that, I work in the credit markets and as a senior bondholder in Bear Stearns I am laughing all the way to the bank


 
_Sunny_, would the value of those bonds have gone up?

A thought has occurred to me.  Isn't _Northern Rock_ a strange name for a bank?  Is not _Bear Stearns_ truly weird?  The moral is avoid silly sounding names.  Most of the deposit takers discussed in this forum have truly sensible and conservative monikers either using the words "_bank_" or "_building society_" or invoking the national dimension but one bank sticks out with a truly silly name...


*Rabo*


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## Sunny (19 Mar 2008)

Harchibald said:


> _Sunny_, would the value of those bonds have gone up?
> 
> A thought has occurred to me. Isn't _Northern Rock_ a strange name for a bank? Is not _Bear Stearns_ truly weird? The moral is avoid silly sounding names. Most of the deposit takers discussed in this forum have truly sensible and conservative monikers either using the words "_bank_" or "_building society_" or invoking the national dimension but one bank sticks out with a truly silly name...
> *Rabo*


 
Well there are still hardly any bids on the street and still some doubt about everything but I had a 2009 Bear Stearns bond valued at 86 on Thursday. Similar JPMorgan bond was trading at around 99 so you can see the upside for bondholders if the takeover goes ahead and JPMorgan assume the debt.

You could be right about the names. You should publish a research piece!!


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## Joody1 (4 Apr 2008)

Can someone please explain to me how much of your saving on a deposit with say the BoI is guarantee by them.

Many thanks 

Joody


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## kaplan (5 Apr 2008)

BoI guarantees 100% of its customer’s deposits. The value of its guarantee or its worthiness is dependent on (a) its financial strength and stability and (b) the states financial safety net.

Most banks engage in what is called fractional reserve banking. At any one time they will retain only a small amount of customer deposits in cash, the rest they lend. They bet on an understanding that all depositors will not withdraw all their savings at any one time. Secondly as each loan is in turn deposited back into the banking system, banks lend multiples amounts of original deposits. Finally banks lending is constrained by their capital base – risk capital . “If I have a 10m in capital, I am permitted to lend €100m.” 

Banking is a high risk business. Borrowing short and lending long. Most of the money on deposit (borrowed from customers and other banks) is withdrawable on demand or within a short time whereas most loans are repayable over much longer periods of time. 

Governments realise that banks are both very important and risky. They respond in three ways. The first is to make sure that banks can pay out on demands for deposits and fund their loan books – this is called the lender of last resort function. The governments banker – called a central bank will lend money to banks to shore up their liquidity requirements. So if a bank is under cash flow pressure it can call on its (overdraft) line of credit with a central bank and access a supply of liquidity. 

The second thing governments do is to regulate and supervise banks to control their risk taking. Banks are the most regulated of enterprises. 

Thirdly governments recognise that things do go wrong which is why governments guarantees customer deposits with two aims : to underpin confidence and prevent runs from happening and to pay out should a bank goe bust. 

Thus the value of a bank guarantee depends on (a) its financial strength and (b) governments willingness and ability to support it should it get into trouble; if it threatens failure, to arrange a rescue or if it fails compensate its savers. In other words the value of any guarantee is ultimately down to the full faith and guarantee of the state. The question then becomes what value is the states “guarantee” ?


Kaplan


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## stir crazy (5 Apr 2008)

kaplan said:


> AIB appeared to have benefited from the TBTF doctrine in the ICI case.



If we consider under which conditions bank mistakes have been in the past guaranteed by government; when I found the links below I did wonder if the fact AIB bank wrote off the debts of senior members of governments made it easier for those members of government to respond in like manner at the time for example with ICI. I could be wrong and I'm no expert about economics,politics or the timeline but to me it looks fishy...

[broken link removed]

[broken link removed]


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## marcee (17 Sep 2008)

Sorry my posting seems to have gone up of its own accord before I had a chance to complete it. If a couple have a joint account with a bank and then close it and open two accounts, is each of those accounts guaranteed up to 90% of 20,000? I would have thought so but one never knows.

Many thanks in advance


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