every year. no need, it seemed, for restraint in spending, and so, after years of relatively disciplined government budgeting, there was a relaxation of spending controls – one i will say which was broadly welcomed across most of the political spectrum. alas, that the apparent solidity of the public finances was all a mirage was brutally exposed when global financial confidence collapsed. already the irish boom was well over : house prices were falling and the government deficit widening from early 2007. the global recession did its damage to the budget also through the direct effect on world trade and accordingly on economic activity, given the very open nature of the irish economy. but a more direct effect on the budget was yet to become manifest. the progressive tightening of short - term financial markets during the second half of 2007 and through 2008, peaking in those dramatic weeks after the bankruptcy of lehman brothers, eventually exposed the fact that, not only had the banks fuelled an unsustainable property bubble, but they had not safeguarded their own solvency through adequate collateral and guarantees. the government had little alternative to announcing an extensive guarantee of bank liabilities. this has proved not to be costless, and is imposing a net cost which will place a heavy burden on taxpayers and the users of public services in ireland for several years – though it is manageable and much less than some alarmist commentary had suggested. to be specific, every one of the top eight retail lenders – three of them subsidiaries or branches of well - known international banking groups – are recording loan losses which would eventually eat substantially into their capital were it not for the fact that this is in the process of being replenished. thus the entire banking sector got caught up in an unreal scenario. each firm was looking over its shoulder at the others and reluctant both to miss out on a seemingly profitable growth business and fearful of the shareholders ’ reaction to declining market share. in an ideal world, the prudential regulator would have called a halt, but – as i have recently documented in my detailed report to the minister for finance on the matter – despite some misgivings about the growing exposure, the regulatory apparatus did not fully appreciate the scale and imminence of the risks whether at the systemic or individual bank level and acted only timidly and ineffectually to restrain the lending boom. rather than see the banks limp on, crippled by non - performing loans that would both inhibit their ability to retain depositor funding and discourage any new lending,

of the recent eu - wide stress tests, the central bank conducted its own stress tests, which we called the prudential capital adequacy review ( pcar ), starting with the two main banks. this entailed a detailed assessment of loan - loss prospects across the non - nama part of the portfolio to the end of the current loan - loss cycle, assumed to be 2012, as well as a projection of operating income. as a result of this assessment, which challenged and went further than not only the banks ’ existing provisions, but their management ’ s projections of loan losses, the central bank determined for each of the banks an additional capital amount that they would have to raise, one way or another. the additional amount was designed to cover not only the loan losses implied by reading across the first nama haircuts to the rest of the non - nama book, but also to ensure that the banks would have ample capital to meet the future losses. thus, on the base case projection – which as mentioned is highly stressed relative to ifrs provisioning and relative to the banks ’ own projections – the banks will come through the bottom of the cycle with at least 8 per cent core tier 1 capital ( 7 per cent equity ). these new capital requirements for irish banks were announced at the end of march, to be met by the end of the year. bank of ireland already satisfies the requirement, having inter alia raised equity capital through a rights issue. aib, the other large core bank in the system had more to do, and is still working on it, having announced the satisfactory sale of its polish subsidiary within the last few days. to the extent that aib may not raise the full amount on its own, the government has undertaken to meet any deficiency, through the conversion of its preference share stake and if needed with an additional equity injection, presumably using the resources of the national pension reserve fund. recapitalization and restructuring of the three smaller institutions is well under way also. bids have been received from a number of interested parties in ebs, and i expect its future ownership to be resolved quite soon. the disposition of the retail business of irish nationwide will follow soon thereafter. the pcar exercise for the bancassurer ilp has recently been completed and involves only a small additional sum to be raised. the recapitalization process also benefits the banks ’ liquidity position, both in terms of cash raised and by reducing the