Professor Patrick Honohan:

The whole design of where we are going involves putting in a much larger buffer of capital. I would actually go a lot higher than the level proposed in Basel III and CRD IV, which are lifting the capital buffers much higher than they were. Between 3% and 5% of the liabilities of our main banks were in the form of equity. As soon as that was wiped out, they were in trouble. There would be a whole layer of different types of instruments - not just equity - that would be easier to bail into.

When buying one of these instruments, it will be possible to know that one will get a bit more, that this bank can be trusted. The cushion will be so high and also the quality of the regulation and supervision. That is the mechanism. In theory then after that, there will be creditors who would have to suffer losses before the taxpayer does. However, nobody envisages it will get to the point of the small depositor or even the medium depositor. I do not think this resolution directive should be a matter for investors to worry about. In fact they get better clarity and, more important, they get better management of the banks because the old system with so little equity meant that banks which had started to get into trouble had an incentive to behave in a more reckless manner. Now with so much equity at stake, they will be managed more prudently and cautiously - more like a public utility than some kind of high risk speculative activity.

Ms Phil Prendergast, MEP, asked about the position taken by President Higgins on the dominance of neoclassical economists. I was amused at his recent remark about untested theories. Since then, we have had a very high profile case in which some scholars discovered that they made mistakes and they had somewhat overstated their conclusions in this area. In fact, the conclusions are still in the same direction but not as dramatic nor as convincing as they seemed to be. One thing I like is that there is not so much labelling of neoclassical economists. If somebody talks about neoclassical economists, it means they are anti-neoclassical economists. Nobody who is a neoclassical economist will label themselves as such. President Higgins also talks about radical individualism which is a wider context. I would emphasise that side of his vision of where we should be and where we are not.

A lot has been learned about the strengths and weaknesses of different views of economics. I would not agree that there is something called the austerity experiment where this is something we could choose - either the austerity experiment or some other experiment - and that we have backed this losing horse. I do not think that is correct. It is a concept of balance. We know that governments all around have become very heavily indebted and that this has costs for the borrowing they want to make. It creates uncertainty and it defers investment decisions. In itself it produces these negative consequences which may not be as evident as the potential benefits of spending a little bit more on this high profile expenditure need or a decision to lower this politically sensitive tax rate. That is a very direct and obvious apparent benefit but the consequence is the pressure on the indebtedness. It is a question of balance. As a result of what happened and because of the indebtedness - a lot of which came from the banking system and the imbalances in public expenditure after the revenue just vanished - it means that the correction has tilted over to a need to cut back. There can be argy-bargy about by how much - perhaps the last billion or perhaps €500 million more spending.

In the case of Ireland, we have discussed this in the Central Bank. It may be different for big countries which have more ability to make judgment calls. We are much more constrained here. What was agreed with the troika was not beyond what we would have been recommending in terms of the need to get the house in order. In fact, it might have been better to do it a little bit faster so that we would have it all done by now. I am not saying we should go further; I am just saying that we should get it over with. We would all probably be happier now if we thought we did not have to do any more but that is a matter of judgment. It does not matter now because we are doing it according to the schedule and we are on track.