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It's a long, long road back to redemption

We were told to expect bad news, and yesterday's announcement on the capital requirements of our banks certainly lived up to its advance billing.

Between them the four remaining Irish banks -- AIB, Bank of Ireland, EBS and Permanent TSB -- will require an additional €24bn of capital.

This will bring the total cost to the taxpayer of fixing the banking system to a massive €70bn.

If that sounds like an awful lot of money it's because it is.

For that kind of money we could fund the health service for almost five years or pay all social welfare benefits for next three-and-a-half years.

Unfortunately there was no alternative.

The banking system, the lifeblood of any advanced economy, has completely seized up. With new loans virtually impossible to obtain and existing lines of credit being pulled as soon as they fall due for renewal, the Irish economy is being slowly asphyxiated.

Meanwhile nervous depositors have withdrawn tens of billions of euro from the Irish banks, which are now utterly dependent on short-term lending from the ECB and the Irish Central Bank in order to survive.

Healthy companies with full order books can't get the working capital loans which they need to fund those order books, while even people with good jobs and steady incomes are finding it virtually impossible to get mortgages or car loans.

This drying up of credit has meant that business and consumer spending, the main generators of economic activity, have collapsed.

Quite clearly, when faced with such a dreadful situation, doing nothing was not an option.

After two-and-a-half years it is vital that we get the banking system functioning once again.

Which is why yesterday's announcement was so important.

The government hopes that by literally stuffing the banks with new capital it will be able to get them lending again, while at the same time persuading former depositors to put their money back into the banks they took it out of.

Will the government's high-risk strategy work?

On the plus side, the banks now have more than enough capital and, while €24bn is a huge figure, it falls considerably short of the €35bn which many analysts had been expecting.

It is also encouraging that the September 2010 forecasts for losses at both Anglo Irish and the Irish Nationwide also seem to be holding and that neither of these two basket cases is looking for even more money from the taxpayer.

As against that, the Irish Government was unable to agree a deal with the ECB to convert some of its short-term loans to the Irish-owned banks, almost €150bn when related lending by the Irish Central Bank is added to the total, into a longer-term facility.

While no-one expects the ECB to suddenly demand the return of this money any time soon, the fact that these loans have to be constantly rolled over represents an unwelcome source of instability at a time when what the Irish banks desperately need is stability.

However, despite these reservations, the Irish banking glass is half full rather than half empty. Anglo and Nationwide have, at long last, been despatched to the knacker's yard, while the EBS will be subsumed into a strengthened AIB.

The new, slimmed-down Irish banking system will consist of two full--service banks, AIB and Bank of Ireland, with Permanent TSB reverting to its previous role as a specialist mortgage lender.

This two-and-a-half-bank model almost certainly represents the best way forward for the Irish banking system.

It is only by getting rid of the current plethora of "zombie banks" that we can create a handful of strong lenders with the capacity to supply the credit the Irish economy so desperately need.

With sufficient capital on their balance sheets these stronger banks will be able to resume lending once again and convince depositors to entrust their money to them.

Yesterday's announcement was merely the first step on what will almost certainly prove to be a long road back to health for the Irish banks.

However, even the longest journey has to start somewhere.

With all of the bad news out in the open we now have the opportunity to rebuild our banks on a solid foundation while avoiding the crazy excesses of the Celtic Tiger years.

Irish Independent