The bank guarantee scheme hasn't satisfied the market or solved the funding crisis, writes Simon Carswell

A LOT done, much more to do. And no one is exactly sure how much more needs to be done.

This is the general view of the Irish bank guarantee scheme one month after it was unveiled.

The €440 billion guarantee flooded the six Irish-owned financial institutions with deposits after it was announced on the last day of September, though it appears the banks mostly recovered what they had lost in the preceding weeks.

It helped to stop further leakage of deposits and gave much-needed short-term liquidity to the cash-starved Irish banks. However, it has not solved the long-term funding issue or encouraged bloodied debt investors and asset managers to place large lump sums with Irish banks.

Other countries went a step further, guaranteeing the banks in full, not just their deposits and debts as the Government here did. In some cases they injected capital, bullet-proofing their banks against rising bad debts amid the crisis.

Belgian-owned IIB Bank (now KBC Bank Ireland) and UK-owned Halifax-Bank of Scotland (Ireland) have opted out of the Irish scheme because of massive state investments in their parent banks based in countries whose bank rescues have trumped the Irish guarantee.

HBOS Ireland's decision to stay outside the scheme speaks volumes about how quickly things have changed over the last month. The bank aggressively lobbied to be included in the guarantee shortly after it was announced.

On Tuesday, its chief executive Mark Duffy said the £13 billion state investment in its parent bank, HBOS, left it "rock solid". He criticised the Irish scheme, describing it as "discriminatory" and "a disproportionate solution" that would blunt his bank's competitive edge and its ability to offer attractive products to customers - one of the reasons it entered the Irish market.

Many banks are also concerned about the confusion over a clause in the scheme, which suggested that all guaranteed banks would have to cover the State's costs if it had to bail out one failed bank.

The Government has rowed back on this, but some bankers feel further clarification is needed.

Another pressing question is whether the banks have to raise additional capital to absorb their rising bad debts. The stock market says yes; the banks, the Irish Financial Services Regulatory Authority and the Government say no, though most acknowledge the rules are changing fast.

Stock market investors clearly believe that the Irish bank guarantee has not gone far enough. The share prices of the four public banks are between 13 per cent (Anglo Irish Bank) and 50 per cent (Bank of Ireland) lower than their closing levels on September 29th, when the worst share falls in a quarter of a century forced the Government to react strongly.

Analyst Sebastian Orsi at stockbrokers Merrion says investors are "holding back", believing that banks will have to raise more capital.

Fresh capital injections in RBS, owner of Ulster Bank and First Active in Ireland, and HBOS have brought their core tier one capital ratios - a key buffer against losses and a measure of financial strength - well above 8 per cent.

AIB, Bank of Ireland and Anglo Irish are hovering around 6 per cent and would need to raise between €8.7 billion and €12 billion to bring their capital ratios up to match those of the UK banks.

"The big question is, do the Irish banks need to follow the UK?" asked Scott Rankin at Davy stockbrokers. "The banks are saying they don't. Investors believe they do. There is a bit of a standoff."

Investors are also pricing heavy losses on bad loans over the three banks' exposure to builders and developers in the first instance and then on commercial property.

The decision by Danish-owned National Irish Bank to write off €69 million on bad loans to developers in one quarter - eclipsing a €25 million charge in the first six months of the year - will put pressure on the Irish banks to take a long hard look at their loan books.

"With the level of bank capital increasing across Europe, this is likely to put pressure on the Irish banks to raise more capital," said Ross Abercromby, banking analyst at credit rating agency, Moody's. "How much will depend on the risk profile of each bank."

Anglo Irish has more than 80 per cent of its loan book secured on commercial property and development finance, compared with about 37 per cent at AIB and 25 per cent at Bank of Ireland.

AIB chief executive Eugene Sheehy told a gathering of private investors last week that the bank would "rather die than raise equity" and that it had "options for self help" other than raising fresh equity. The bank could sell its interests in the US and Poland.

Anglo appears to have taken steps to attract new capital. The bank has reportedly hired Morgan Stanley to speak to private equity groups to raise capital. The banks could also raise equity by issuing preferential shares.

As concerns about capital persist, international asset managers and big ticket debt investors, who have been badly burnt by the global banking crisis, are holding tightly on to their purse strings before they decide to place long-term money with Irish banks.

One treasury executive in an Irish bank said debt investors had to wait until last week for the Government's market notice on the scheme and to see the terms of the guarantee for each bank before they could assess the scheme.

They must now also wait for regulator-approved prospectus documents before committing long-term lump sums to Irish banks.

"The guarantee is hugely helpful, but it hasn't really been road-tested," said a senior banker who stressed that debt investors were still fearful of all banks, not just Irish financial institutions.

Mr Abercromby, analyst at Moody's, said: "Debt investors want to know if they're going to get paid on the day if there is a default by a bank. To replace the credit of a bank with the credit of Ireland, we have to be sure that the guarantee is water-tight."

The cost of Irish State debt has also been rising in recent weeks. Irish Government bonds have been priced higher to account for the added risk of covering the Irish banks, although the deteriorating economy has also played a part.

The Irish 10-year bond's spread over the benchmark German bond has risen from 0.52 per cent (52 basis points) the day before the guarantee was unveiled to 0.89 per cent yesterday.

That means it has risen above the cost that the Government had expected to shoulder, which was used to set the guarantee charge to the banks.

The State may yet be forced into further action to strengthen its rescue of the Irish banking system.