The Irish government move to guarantee deposits in Irish banks has generated a lot of commentary. In particular politicians have thrown their hands up in the air and waffled about the exposure of the Irish taxpayer to a vast financial risk. I’m going to start by saying that I’m not an expert on banking. I generally only have a passing casual interest due to having worked for around 7 years at a software company supplying solutions to banks (back office systems, internet banking, integration and middle office type stuff mainly). That is, I was involved in the software side and not core financial activities.

Many people seem to see this as the government opening up the taxpayer’s wallet to dole out cash to the banks when it’s really an insurance at best and an exercise in shoring up confidence in the banking sector. The last thing that was needed was for Irish depositors to get the jitters and start transferring or pulling deposits. This kind of a run on a banks liquid assets would lead to the likes of the Northern Rock scenario. The Central Bank of Ireland subscribes to policies of the EU Capital Adequacy Directive and similar for financial institutions. This gives rise to various rules around an institutions liquidity for example. One of these is that a bank has sufficient liquidity to cover 90% of liabilities arising over 8 to 30 days which is more conservative than in other countries. This requirement does tend to guard against a cash run like that which affected Northern Rock and the aim of the government’s guarantee would surely be to allay depositor fears so that we don’t see a run on deposits which would threaten a bank’s solvency. It’s all about confidence and the feel good factor not cold hard cash.

I’m happy to be corrected and put back in my place if commenters wish to do so :)