Professor Patrick Honohan:

Those were interesting questions, some of which overlapped. Let us start with the whole question of breaking the link between the sovereign and the banks. When we were discussing and negotiating with the troika in November-December 2010 that was precisely the problem, namely, the international markets felt they did not know how bad the Irish banking situation would get. That is what it thought three years ago. It did not know the scale of the losses. The Irish authorities were trying to pin it down but nobody could be sure. That was the tail risk. We thought we might be at a certain level. That was the picture.

We constantly said to the troika that this was the problem and asked if we could find a mechanism whereby the tail risk would be absorbed by some larger entity that had the capacity to absorb it. We were prepared to pay for that but these were risks which were difficult for us to absorb. The answer was "No, forget about it." The troika said they were simple people and would only give loans. There was no mechanism whereby it could take a direct capital stake in the banks or provide some insurance mechanism. We did argue and take it up at all levels but all we got was "Forget about it, this is not part of the portfolio."

That was the reason we were pleased to hear last summer that the Heads of State landed on the recognition that European funds could be used in that way, not just to lend a block of money to, for example, Spain to allow the Spanish Government to inject capital into its banks but to provide the money directly into Spanish banks as an investment. They get their money back, perhaps, at a higher return but it reduced the indebtedness and the leverage in Spain. The Spanish Government did not decide to follow that route. It did not ask for that. It borrowed money directly as the Spanish Government and used it to recapitalise its banks. It did not go our route because its problem was that, relative to the size of the economy, it was smaller. It could say it did not need to do that and, in any event, there was still an uphill struggle to negotiate that. It was an agreement in principle with the Heads of State that this could be envisaged.

If one wanted the money fast, presumably one would have had to go down the old route. That has not really been activated yet. I admit that in public statements from different parts of Europe there has been push back from other important policymakers who say there is no need to do this in practice. I regret that. It has meant that the Irish Government has, as we are all aware, put a very large sum of money into banks. Some of that is lost forever but some of it is there just to keep the capital of the banks.

When I last looked at it, there was over €20 billion of accounting capital in the banks. The Government had to put that in. I would like to have seen more progress on that. I do not want to argue the other person's side. I tend to look at the other person's position. When one is negotiating, one should know where the other person is coming from. It is clear that strong countries are nervous that they will somehow end up doing something that looks like or can be presented as an investment, but is actually lost money. That is still a work in progress.

Senator Reilly asked about the 2011 PCAR. She wanted to know whether the losses are going to be greater than expected in that review. This is something we are studying now. We are preparing and doing a great deal of background work for our next PCAR, which is scheduled to take place in the latter part of the year. That is still the timetable. We are talking about the timetable. We are considering whether we should do it a little later. It will probably take place at the end of the year. That is what we are going on now. We have not landed on a number. We are trying to do a great deal of detailed background work which would give us a bit more precision than we had the last time. It is very hard to be precise on this.

There are some things that we know have worked out better than was expected in the spring of 2011. For example, banks that decided to sell off assets in order to shrink their size have been able to sell those assets for prices that are better than those envisaged in the stress case. That is a plus. On the other hand, there are minuses. Mortgage arrears have grown more rapidly than we expected or provided for. They are just arrears - they are not losses. We all know about the whole programme of getting the banks and their customers back on track. It involves getting those who can afford to pay back onto their original schedules and designing some kind of sustainable solution for those who cannot afford to pay back. The price of houses was another dimension in the PCAR calculations. Immediately after the PCAR, house prices continued to fall faster than was provided for. At a certain point, they were falling a little faster than was provided for in the stress case. They stopped falling and are now above the stress case. That is a plus.

There are many moving parts in this regard. We have not landed on a number. It is really not going to be a number. I need to point out to people that bank capital needs in Ireland and elsewhere are increasing all the time. This will lead me to another part of the question asked by Senator Leyden. They are increasing because Europe and the world international regulators have decided that banks should hold more capital. In other words, they should be funded more by risk-taking equity investors and less by depositors. There is a target that says the banks will have to have more capital by 2019. One can tell that the Irish banks will need more capital by 2019. That does not necessarily mean we have to start putting money aside for that now. We are hoping, planning and making every effort to get the banks into a situation where there is sufficient confidence on the part of investors that they will want to go and buy equity stakes in Irish banks again.

Last year or the year before last, Bank of Ireland sold equity stakes to US investors at what one might consider to be a pretty cheap price. We want to get to a situation where all of the banks can sell equity stakes - there is sufficient confidence around them because their mortgage situation is under control. To the extent that that works, all of the capital they need will be provided by the private sector. That is the ideal situation. When we announce the results of the PCAR, they will be in terms of a projection of likely further losses because we know there will be further losses, in terms of the period of time over which the additional capital that we know will be required will have to be provided and in terms of how much will be required. We are also working on how that can be achieved.