Last week’s decision by the Irish government to write a blank cheque covering the deposits and other funding activities of domestically owned financial institutions was the only choice, given the few hours it had to take decisive action.

That the decision was taken with a gun placed to its head by bankers, the same people who got this country into an unprecedented financial mess in the first place, is unpalatable. Outweighing any feelings of disgust that one might have for bailing out bankers is the reality that they run a sector that is the lifeblood of the economy. All economic activity

is fuelled by credit: without it, there is no economy. No mortgages, no car loans, no business loans, no overdrafts. Ensuring the flow of credit is maintained is paramount. So the government had to act decisively and did so.

The taoiseach, whose own policies stoked an already overheated property market, and his finance minister, Brian Lenihan, will take whatever political kudos they can from remaining cool when the stakes became high. There will be no garlands, however, for those charged with keeping control of the Irish banking sector. The performance of both the Central Bank of Ireland and the Financial Regulator must now come under greater scrutiny.

The regulator, Patrick Neary, was hugely unimpressive during a television appearance on Thursday evening, blandly issuing assurances about the health of the Irish banking sector that flew in the face of everything that had emerged in the preceding hours. We should not have been surprised. It is just over two weeks since Neary claimed that Irish banks were resilient and had the capacity to cope with the global economic crisis. On that occasion, Neary claimed Irish banks have only “very limited” exposure to “US sub-prime losses and related structured-credit products”. He seems determined to ignore the reality that it is our banking sector’s exposure to the collapsing Irish property market that spooked international lenders. Neary’s position should be reviewed as a matter of urgency.

Last week’s bank bailout is not the end of the story. With so much of the banking sector’s combined assets tied up in commercial and residential property, there remains the prospect of massive balance sheet write-offs once the auditors get to work. It is still likely that one or two of the six “protected” banks will be subject to such severe write-downs that they will be required to raise fresh capital to remain in business. If those funds are not forthcoming from existing or new shareholders, the state may be forced to intervene again, this time as a shareholder. If it decides against that route, then the emergency legislation passed last week gives the finance minister the power to order mergers and acquisitions. Do not be

surprised to wake up one morning to the news that a shotgun marriage has been arranged in the dead of night.

What of the bankers, the very people who stretched the rules to breaking point in the pursuit of profits that would boost their annual bonuses? The populist argument is that the government should cut them down to size by imposing salary caps. This seems to have found favour with the Central Bank.

We would prefer to see the authorities give their imprimatur to another initiative: a wholesale investigation into the lending practices pursued by the most aggressive banks. If it is found that they were reckless, action must be taken. There should also be an investigation into relationships between banks and their biggest customers, particularly in cases where those in receipt of large loans are also shareholders.

If the Americans consider it appropriate that the FBI should investigate their fallen institutions, there is no reason why the Irish government should feel any reluctance to carry out its own inquiries.

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