ANALYSIS:There is some confusion about what the Government is protecting at the Irish banks and building societies covered by the €400 billion State guarantee scheme - and what caused last week's emergency measure.
So to explain - think of the Irish banks and building societies as cars speeding down a road, with some clearly needing serious repairs to prepare for the road ahead as it gets more bumpy and pothole-ridden.
The fuel that has kept them on the road - and which has becoming more expensive over the last year - started running out and was about to evaporate completely last week if something wasn't done. The Government stepped in, offering a special kind of insurance policy that helped the cars top up their tanks.
There is no doubt that there many potholes on the roads ahead - and it's a concern that we don't know how deep those holes are or whether some cars have the ability to drive out of them. However, the problem last week was predominantly an issue of fuel shortage rather than vehicle roadworthiness.
Certainly the weakened state of the vehicles meant fuel providers were charging a premium for Irish banks to fill their tanks over the past year and there are still concerns that some cars may not be able to keep their engines going over the years.
Funding and capital are two very different problems, however. On the funding side, liquidity dried up because the international credit crunch grew so severe following the collapse of US investment bank Lehman Brothers that banks stopped lending to each other and could not raise vital short-term funding.
This is what brought the Irish banking sector to verge of collapse on the evening of September 29th last week, Ireland's very own black Monday. Anglo Irish Bank chairman Sean Fitzpatrick said over the weekend that Irish banks were going to fall if they didn't get money and that the Government was the only place that banks could turn to in a bid to have their tanks filled to keep them on the road.
Capital - the money that banks hold in reserve to protect them against unforeseen losses - is another matter entirely and will become a growing problem for Irish banks. Losses on loans will continue to rise as commercial property values fall by up to 40 per cent and banks become more realistic about their property values and developer clients, and stop postponing interest payments. Some builders will obviously not survive.
The four Irish public banks have almost €30 billion sitting in reserve to protect them against their own rising bad debts, which will total more than €10 billion this year and over the next two years. However, the fear is that bad debts will rise far higher than anticipated during and beyond that period as the property market claims bigger casualties and some developers do not survive.
Some commentators have suggested that Irish banks will have to write down up to 20 per cent, or €22 billion, of the €110 million loaned to property developers, builders and investors. Clearly, the banks with a greater exposure - in other words, a larger percentage of their loan books - will suffer the most. These include Anglo Irish Bank and Irish Nationwide, in the first instance, as 80 per cent of their loan books are primarily secured on commercial property assets, but AIB and Bank of Ireland, which also have sizeable exposures to these sectors, will not be left unscathed.
There is no doubt that Irish lenders must try to add capital in their reserves to strengthen themselves further. If the international financial crisis has taught us anything, it is to expect worse-case scenarios or even envisage even harsher new doomsday situations, as scenarios may become even worse.
AIB, Bank of Ireland and Irish Life & Permanent have painted possible pictures of Armageddon during recent results presentations and have shown that they can weather a far more difficult situation, even where unemployment surges and arrears spiral.
Banks currently have four options open to them to bolster their capital. They can slash dividend pay-outs to shareholders and curtail any new lending, particularly on what is now regarded as high-risk - the commercial and residential property development and investment. They can also sell assets or turn to their shareholders to raise cash in what is known as a rights issue.
All banks have reduced new lending. Bank of Ireland's halving of its dividend and Irish Life & Permanent's decision to freeze its pay-out make sense, but AIB's decision to increase dividend by 10 per cent seems strange, given the current climate, rather than as that show of confidence it was intended as.
Selling assets in a distressed market would mean selling businesses at severe discounts and will be hard to convince shareholders and the market. A rights issue would be a nightmare as investors have little appetite for buying into banks, particularly Irish banks with so many unknowns out there.
So what's next? The Government has issued a brave but wide-ranging two-year insurance policy which will give the Minister for Finance controls on the new risks that banks take on and a say on appointments to their boards. He will also charge an annual fee to the banks that avail of the guarantee scheme.
The next move facing the Government is consolidation - in other words, arranging shot-gun marriages between Irish banks and building societies to strengthen them.
Brian Lenihan, then Minister for Finance, has made it clear that he can set aside the competition rule-book in an effort to protect the Irish banking market, and Department of Finance and Central Bank officials have been casting their eye around the dancehall, seeing who can be matched with whom.
Last month
The Irish Timesreported that Anglo Irish Bank had expressed an interest in taking over Irish Nationwide but only with Government support. It was also seeking some help from AIB and Bank of Ireland to encourage a marriage between Anglo and Irish Nationwide.
This would have linked two commercial property lenders, with the bank aggressively managing the building society's loan book, though a marriage would have joined what are regarded as the two weakest links with the greatest exposures to the deteriorating sectors.
The joke within financial circles in London is that the credit crunch has turned into the credit munch, devouring banks and jobs.
Marrying Irish lenders, with Mr Lenihan as registrar, would mimic similar steps around the world, further safeguard the Irish banking system and help keep the credit monster at bay.
