THE DEPARTMENT of Finance is considering extending the €440 billion bank guarantee scheme in a limited form so the six covered Irish-owned banks and building societies can raise longer-term funding beyond the two-year duration of the guarantee.
Rather than extending the blanket guarantee beyond two years, the department is considering guaranteeing individual bond sales which would allow the banks to raise longer-term money of two to five years.
A spokesman for the department said: "The guarantee extends for two years but the scheme and any other issues arising are constantly kept under review."
The spokesman indicated that the possibility of guaranteeing individual bond sales - rather than an extension of the blanket guarantee beyond its two-year duration - was "being considered", but that no decision had yet been made.
Some of the guaranteed institutions have expressed concerns about their ability to raise any debt funding with a term longer than 21 months, which would fall due to potential investors after the guarantee expires in September 2010.
As the guarantee currently stands, any term funding raised by the banks that matures beyond 21 months would lose the top AAA credit rating assigned to Government-guaranteed bonds sold by the banks and building societies.
This means that any bonds sold with a maturity beyond September 29th, 2010, will have a lower credit rating and will cost the institutions more or be more difficult to sell. This will affect their ability to raise longer-term funding for their day-to-day operations and their financial strength.
The banks also believe that longer-term funding will strengthen their capital bases, as some longer-term debt is regarded as a type of capital, which would help to absorb higher loan losses.
Other countries have protected their banks for longer periods. The UK has guaranteed bank debts for up to three years, while Spain has guaranteed its banks' debts for as long as five years.
The six guaranteed Irish financial institutions submitted reports yesterday to the Government-appointed three-person committee showing how bonuses to their senior executives will reflect a reduction in riskier lending under the terms of the guarantee.
It has emerged that one of the private equity groups in discussions with Bank of Ireland about a potential investment in the bank provided the Department of Finance with a letter confirming that it had a fund of €5 billion.
The Irish-led Mallabraca consortium, which comprises US private equity firms JC Flowers and the Carlyle Group, New York investment bank Sandler O'Neill and two sovereign wealth funds from the Middle East, provided the letter of comfort several weeks ago.
US private equity firms Kohlberg Kravis Roberts (KKR) and Texas Pacific Group, as well as the UK private firm Apax Partners, have also been in talks with the bank about a possible investment.
KKR has had contact with Mallabraca about joining the larger private investment consortium.
It is understood that one Middle Eastern sovereign wealth fund is providing the largest share of the €5 billion pooled by the group, though the second fund from the Middle East, which is part of the consortium, will provide funds if a larger investment is required.
Bank of Ireland has told the Government that it needs €2-2.5 billion to recapitalise, but Government advisers believe that this is insufficient. The bank has said it would look at raising more capital from private equity but that the Government should use State funds instead.
