Department of Finance: favours 'covert' private sector takeover

A "covert" private sector takeover of financial institutions which could be presented as a fait accompli to the public was the Department of Finance's favoured solution to the crisis facing Irish banks. However, the department was worried such a move would not stand up legally.

A secret document dated 8 February 2008 examined the lessons learned from the run on Britain's Northern Rock and stated that no legally binding state guarantees should be part of the "tool kit" for management and resolution of the crisis.

The government later changed its position with a €440bn bank guarantee. The decision has proven hugely expensive for the Irish taxpayer as the bailout has so far cost nearly €32bn, much of which was sunk into Anglo Irish Bank, which had consistently lied about its financial position. By contrast, Britain's Treasury said in June that the total cost for rescuing the main banks there is now likely to be 14 times less at just €2.4bn.

Meanwhile, in July 2008 the department admitted that "no guarantee will restore confidence" as fears grew over the deposit guarantee scheme. The department wanted to "let the dust settle" before it considered increasing the amounts covered. It later increased the guarantee from €20,000 to €100,000 and extended it to credit unions.

The documents also show that Irish banks were effectively pulling out of the UK by the summer of 2008. One of the banks had completely stopped lending, a transcript released last week states. Another institution was "trying to price" itself out of the market – this could be done by charging uncompetitive rates.