Anglo Irish Bank Now In Safe Hands

Ireland's third-largest lender has been nationalised. What does this mean for its savers and borrowers in the UK?

Yesterday, Anglo Irish Bank -- Ireland's third-largest lender -- was nationalised by the Irish government. The Irish Department of Finance reached the conclusion that the bank, which is suffering in a painful housing crash, would be safer under public ownership.

Anglo Irish had _50 billion of savers' cash, so the government needed to act fast in order to avoid a sustained run on these deposits. Its share price has dived in recent days, hit by withdrawals from worried savers. Although the Irish government had planned to inject more capital into Anglo Irish, it decided that full nationalisation was the better option.

Winners and losers

The losers in Ireland's first major bank nationalisation are undoubtedly its owners: its shareholders. Anglo Irish's shares were suspended in London and Dublin yesterday, when they were trading at just 20 euro cents, having peaked at over _17 twenty months ago. Most likely, shareholders will lose their entire investment and be left with nothing. Sadly, that's the risk that you take with shares, as they are ranked below bonds and secured creditors when a company is bailed out.

On the other hand, Anglo Irish's workforce is safe, as the bank will continue to "trade normally as a going concern" and no redundancies are planned -- for now, at least. Likewise, its borrowers are not off the hook, as they must continue to meet their repayments according to the terms of their mortgage, loan or credit card. So, how about savers?

Backed by the Irish government...

Having been nationalised, Anglo Irish is now owned by the Irish state, which means that it enjoys `the full faith and credit' of the Dublin government. Of course, Anglo Irish is a member of the Irish Deposit Protection Scheme, a safety-net which covers 100% of the first _100,000 of savings per person per bank. With the euro at 1.1243 to the pound as I write, this threshold comes to £88,944, or almost twice the £50,000 guarantee offered by the UK's own savings safety-net.

Nevertheless, faced with falling confidence in big banks, the Irish Department of Finance issued a blanket guarantee on 30 September 2008, agreeing to protect all deposits in six leading Irish banks, including Anglo Irish. So, until yesterday, Anglo Irish had an implicit government guarantee for savings accounts. Today, as a state-owned bank, it has the government's explicit guarantee.

...but no UK safety-net for savings

Keen-eyed Fool reader Richard M found the following paragraph in Anglo Irish's frequently asked questions covering savings accounts:

"Under European law, banks which have a greater level of protection in their state of incorporation are not permitted to remain a member of the UK Scheme. Consequently, Anglo Irish Bank ceased to be a member of the UK Scheme on 28 November 2008."

As we know, the Irish Deposit Protection Scheme offers a higher level of protection than its UK equivalent, the Financial Services Compensation Scheme (FSCS). Unfortunately, this means that Anglo Irish can no longer remain under the protection of the FSCS, from which it withdrew seven weeks ago. There was little or no Press coverage of this announcement, so hardly anyone will be aware of this development.

In short, there is no UK-based protection for depositors in Anglo Irish, who must instead rely on the Irish Deposit Protection Scheme and the Irish government itself. Until last year, I would never have believed that the once-mighty Celtic Tiger economy could fail. However, since the collapse of the Icelandic economy and its banks, I'm going to admit the possibility that Ireland could default on its sovereign debt.

Then again, although a default by Ireland is a possibility, it's also highly unlikely. Thus, I suspect that our savings are safe across the Irish Sea. Indeed, I imagine that Chancellor Alistair Darling would step in to guarantee UK savers' deposits in Irish banks, as he did with UK savers in Icelandic banks Icesave and Kaupthing. On the other hand, the Chancellor stood by and did nothing as British savers lost £860 million in offshore subsidiaries of UK-registered banks, so Darling has already destroyed the hopes and dreams of at least 8,500 savers!

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