Professor Patrick Honohan:

There was evidence from Professor Eamonn Walshe, and more colourful evidence from Professor William Black, on what bank accounting can and cannot do. It cannot cope very well with situations of this nature and it gives highly misleading signals. However, that is what people work with and capitalise based on the accounting standards. They presumably said they had checked the capital and, in accordance with accounting standards, it was satisfactory. This is quite important because a lot of legal things attach to the question whether the bank is adequately capitalised, that is, whether the capital is above zero or above the 8% weighted risk. One has to rely on something, and all banking regulators rely on the accounting measures for most practical purposes. However, the memo goes on to note there is a huge risk in a stress scenario that it could lose €8 billion, in which event the wholesale markets would stay closed to them and they would be likely to be unviable. The question of viability and the future business model is a separate and more important issue. The question of whether it was well capitalised is essentially a preliminary health check.