So what’s happening?

The Central Bank is carrying out stress tests on Bank of Ireland, Allied Irish Banks, Irish Life and Permanent and building society EBS. The results will be announced at 4.30pm today.

A capital test will show how much more cash they need to meet losses. A liquidity test will show how many loans they will need to sell – and the capital required to encourage those sales or cover losses on the sales – before the end of 2013. The aim is shrink the banks so they are self-sufficient.

Anglo Irish Bank and Irish Nationwide are not being tested as they are to be run down over time.

How much do the banks need?

The running total is €46 billion and the lion’s share (€34.7 billion) has gone on Anglo Irish Bank and Irish Nationwide. The four other banks are expected to need a further €18 billion to €23 billion as a result of the tests.

Most banking analysts reckon it will come in at around €23 billion, although bankers were estimating that it could fall in or around €22 billion. Either way, it’s a lot and will come from the €35 billion set aside in the €85 billion EU-IMF bailout for the banks.

How much is the State giving?

Most of this will come from the State’s own rainy-day fund, the National Pensions Reserve Fund (NPRF), which has been raided for the previous €7.2 billion and €3.5 billion bailouts of Allied Irish Banks and Bank of Ireland, respectively.

The Government is drawing €17.5 billion more from the NPRF. Anything over the €17.5 billion for the banks will be borrowed at an average interest rate of 5.8 per cent.

But haven’t the banks got enough Government capital?

The international markets don’t think so, given how the scale of lost deposits and the banks’ inability to borrow on their own, even with a Government guarantee.

The banks raised bonds in these markets to meet their day-to-day requirements as loans exceed deposits by about 80 per cent. Investors don’t believe that the full extent of the losses has been recognised at the banks. That is why they won’t lend to them.

The inadequacy of past bailouts certainly has failed to reassure them. The running cost has risen from €5.5 billion in late 2008 to €11 billion in the first half of 2009, to €35 billion March 2010 to €46 billion last September.

A further €10 billion was due to have been injected last month under the EU-IMF deal but this was postponed by the former minister for finance, Brian Lenihan.

Another reason for more bailouts is that the Central Bank has raised the capital threshold 8 per cent to 12 per cent (roughly €12 in reserve for every €100 on loan).

The tests will overcapitalise the banks to such high levels that should really reassure investors.

So why do they need more?

Most of the losses revealed in the last two stress tests (in March and September 2010) focused on the losses on developer loans as a result of the transfers to Nama.

Today’s capital test is particularly focusing on potential losses on home loans and buy-to-let mortgages. The loans are being fed through models created by the Central Bank and outside consultants BlackRock, where they are tested for unanticipated shocks such as more severe house price falls, slower economic growth and higher rates of unemployment.

How will the banks emerge?

EBS is fully nationalised. AIB is effectively there too but is expected to be hit with a substantially larger bill beyond the €4.7 billion it previously still had to find.

Irish Life and Permanent and Bank of Ireland, the last two banks to stay out of Government control, face the inevitable loss of majority control to the Government.

Irish Life and Permanent is considering selling its most profitable and biggest businesses, Irish Life and Irish Life Investment Managers, to help meet an estimated capital bill of €3 billion or more that will land on its table today.

Will the EBS still be sold?

No, the Government called off the proposed sale to the Cardinal private equity consortium yesterday because its bid was “not sufficiently commercial attractive to the State”.

Cancelling the sale could allow the Government merge nationalised EBS with Permanent TSB if it falls under State control.

So what does all this mean?

The virtual nationalisation of the Irish banking sector, paving the way for a major restructuring.