EC to investigate Ireland's €400bn bank safety net

Competition inquiry is launched after complaints from rival British banks

The European Commission is investigating whether Ireland's decision to guarantee €400bn of deposits, bonds and debts at its six biggest banks is a breach of EU law. Neelie Kroes, the EU's Competition Commissioner, said yesterday that she was "in close contact with Irish authorities" after British banks complained about the Irish policy.

A spokesman for Gordon Brown, who is facing increasing pressure to offer a similar pledge to UK lenders, said he backed the inquiry, adding: "Where there is a policy of one of the member states that impacts on single market rules, it is to be looked at by the EC."

The EC, which also unveiled new rules on capital adequacy for European banks, is asking members whether a EU-wide policy on deposit protection should be adopted, with the French Prime Minister hinting yesterday that he was considering following the Irish example.

Shares in Royal Bank of Scotland fell sharply after a warning from Alex Potter, a banking analyst at Collins Stewart, who said RBS's Ulster Bank was at particular risk of losing deposits to Irish rivals. "We now anticipate depositors withdrawing funds from non-guaranteed banks such as RBS's Ulster Bank, which is a major high street clearer in Ireland, and moving to locals," he said.

Last night, RBS said it had applied to the Irish government for Ulster Bank to be admitted to the scheme and that it "fully expected" to be accepted. However, British banks are furious that such a major competitive advantage has been ceded to their Irish rivals, many of whom are active in the UK. Post offices, for example, reported high demand for savings accounts yesterday – their products are provided by Bank of Ireland, which is covered by the guarantee. Bank of Ireland itself and Allied Irish Banks, both of which have branches in the UK, also reported unusually high demand.

Angela Knight, chief executive of the British Bankers' Association, said many banks were concerned about the Irish guarantee, as well as the lack of detail from Whitehall about exactly when it would raise the British guarantee from £35,000 to £50,000, as announced by Mr Brown on Tuesday. "The guarantee has clear consequences for firms competing to win retail deposits," Ms Knight said. "While we support proposals aimed at reintroducing stability to the financial markets, we need fair play for financial institutions across Europe."

Mr Brown would welcome an EC ruling that Ireland's pledge breaches competition laws because it would help him to head off calls for a complete guarantee for UK savers. While he has promised to "do whatever it takes" to protect bank depositors, he has repeatedly refused to offer the same cast-iron pledge as the Irish government.

Providing an identical guarantee in the UK would mean taxpayers accept liabilities of £2.053trn. However, one option is to limit the pledge to individual savers, small businesses and charities, excluding large commercial depositors and bondholders. That would reduce the guarantee sum to just over £1trn.

About 96 per cent of UK savers are covered by the £35,000 compensation cap in the event of banking failure. This will rise to about 98 per cent once the limit is £50,000.