When Minister for Finance Brian Lenihan announced the bank guarantee, he said the Government was not in the business of bailing out banks or assisting people who invested in banks to make a profit.
He was referring to shareholders and investors who would take a punt on buying into a bank in the hope of turning a profit. Banks hold money in reserve, known as capital or shareholder funds, which is set aside to protect against any unforeseen losses. Investors have been watching the level of capital set aside by the Irish banks closely to ensure they have enough money to cover any rising losses on borrowings by property developers, for example.
As Irish Life Permanent chief executive Denis Casey has said, losses incurred on loans in the deteriorating economic climate will be covered by the banks and their shareholders, as capital is not covered by the guarantee.
The four Irish publicly-quoted banks have set aside about €28 billion in capital to cover bad debts that are estimated to top between €8 billion and €10 billion this year and over the next two years.
Banks believe they can weather the storm on their own by cutting dividends to shareholders and slowing lending. If the turmoil worsens, they could also sell assets or ask shareholders for cash.
The State guarantee solves a different problem - it helps the banks raise much-needed and scarce short-term funds to tide them through the liquidity famine.