and deposits continued to be guaranteed on a second scheme which has been rolled forward on a six - monthly basis. this is still in force, but it is probably no longer necessary, and will likely be discontinued in the near future. as i have noted, during the pre - crisis credit expansion, banks became increasingly reliant on shorter - term wholesale funding. the guarantee was introduced in the belief that the main problem facing the banks was merely difficulties attracting funding following the collapse of lehman brothers. that the system faced a solvency problem was not recognised at the time. however, as doubts emerged about the solvency of the banks in light of increased property losses and the ability of the sovereign to backstop such a large guarantee, the irish banking system suffered a massive withdrawal of funding. over time, irish banks were shut out of almost all debt markets, while a flight of retail and, particularly, corporate deposits also occurred. to fund the resulting liquidity deficit and ensure the irish banking system ’ s ability to function, the ecb has provided an unprecedented level of liquidity support. as the property market continued to decline it became clearer that the banking system needed capital to remain solvent. the initial step to recapitalise banks in december 2008 marked the beginning of a series of injections over the following years, as estimates of the capital needs were made in a highly uncertain environment characterised by systematic loan underwriting errors, inadequate management information and intrinsic uncertainties about borrowers ’ ability to repay loans in negative equity. an initial independent assessment of the banks covered by the guarantee was already undertaken in 2008. based on the results, the government decided to recapitalise the banking system and to nationalise anglo - irish bank in early - 2009. by june of that year, the government had injected €10 billion into the three major banks. despite already receiving a 4 billion injection, by the end of 2009, it was clear it is important to note that as judged by the fiscal criteria of the maastricht treaty, ireland ’ s record before the crisis was exemplary : it was exceeded the deficit criteria only in 2008 and the debt criteria in 2009. the policy responses to the banking crisis are reviewed by governor honohan in the address on “ recapitalisation of failed banks : some lessons from the irish experience ” given at the 44th annual money, macro and finance conference, trinity college dublin, september 2012. see www. centralbank. ie. the initial guarantee scheme covered a broad range of

, its causes and consequences for the irish economy. next i will review the main policy measures adopted by the irish authorities in response to the crisis. finally, i will review what the most pressing challenges are this year. 2. the crisis ireland experienced a massive housing bubble, whether measured in terms of prices, credit or the scale of construction activity within the economy. unfortunately, this appears to have been one of the worst boom - bust cycles on record. 3 the exceptional size of the shock is of course the main reason why it is so difficult to overcome. the bubble took the form of a very large increase in residential and commercial property prices which rose almost four - fold between 1997 and 2007. like many other bubbles, it started from strong growth, which in ireland ’ s case began around 1990 and largely resulted from greater economic integration with europe. during the 1990s, growth was underpinned by fundamentals, as exceptional export performance was accompanied by moderate wage and price inflation and healthy public finances. the expansion was aided by eu structural funds of up to 3 per cent of gdp per annum. of course, the large fall in irish interest rates as part of the move to monetary union also exerted a powerful force. for instance, mortgage rates fell from over 11. 5 per cent in 1990 to lows of close to 3. 5 per cent in 2005. in the early 2000s, however, as the economy approached full employment and technological constraints began to bind, the nature of the boom changed from one that reflected strong fundamentals to one that was fuelled by excessive credit expansion. strong economic growth and lower interest rates led to an increase in both the demand for and price of housing and rapid growth in credit. both domestic and foreign - owned banks with branches or subsidiaries in ireland participated in this expansion, lending heavily to developers and retail mortgage borrowers. as a result, the fraction of non - financial private - sector lending that went to the property sector – that is, mortgages and lending for commercial property – rose from 60 per cent in 2000 to 80 per cent in 2007. 4 the boom was not just a price bubble, but involved a huge expansion in lending and construction activity. a recent imf working paper by laeven and valencia ( 2012 ) assesses the size of banking crisis since 1970 in a number of countries and in a number of ways and concludes that the irish crisis has been one of the costliest. figures are exclusive of residential mortgages securitisations. bis central bankers