In the 1995–2006 Celtic Tiger period of growth, development capital was raised in the interbank market, typically on a three-month basis, but with repayment not expected until two or three years later.[1] Inadequate and/or lax supervision of the Irish banking system had allowed excessive borrowing by the Irish Banks on the corporate and international money markets.[2] Much of the capital invested in Irish banks was from abroad with 80% from the UK, 13% from the US, 5% from off-shore funding and only 2% of the total Irish bank funding came from the eurozone in 2008.
German banks are often claimed as the source of Irish bank funding, and in 2010, for example, the Bank for International Settlements recorded between US$186.4 Billion[3] and $208.3 Billion in total exposure to Ireland with $57.8 billion in exposure to Irish banks[4][5] These figures for the exposure of German banks to "Irish" banks, however, relate almost in their entirety to their exposure to their own large subsidiaries in Dublin's International Financial Services Centre, and are irrelevant to Ireland's domestic banks and banking crisis.
The heavy borrowing abroad by Irish banks reflected the enormous increase in their lending into the Irish property market, a lending area which since 1996 seemed to be able to provide an endless flow of profitable lending opportunities as the Irish public relentlessly bought and sold property from each other in Ireland (and eventually in many other countries). This, in turn, led to a massive increase in the price of Irish property assets.[6] The freezing-up of the world's interbank market during the financial crisis of 2007–2008 caused two problems for Irish Banks. Firstly, with no new money available to borrow, withdrawal of deposits caused a liquidity problem. In other words, there was no cash available to honour withdrawal requests. A liquidity problem on its own is usually manageable through Central Bank funding. However, the second problem was solvency and this was much more serious. The lack of new money meant no new loans which meant no new property deals. No new property purchases both exposed fragile cash-flows of developers and highlighted the stratospheric valuations. With the value of most of their assets (loans) declining in line with the property market, the liabilities (deposits) of the six Irish domestic banks were now considerably greater than their assets. Insolvency loomed and Irish Banks would need a major cash injections (recapitalisation) to stay open.