Banks in the Republic enjoy euro-zone security, writes Simon Carswell, Finance Correspondent
A cash crisis, similar to the one at the beleaguered British-licensed bank, Northern Rock, is unlikely to affect an Irish bank because financial institutions in the Republic enjoy greater security within the euro zone.
Irish financial institutions can borrow money from the European Central Bank (ECB) by using the large amount of mortgage business they have underwritten as collateral.
British banks cannot do this, however, according to Bank of England rules. This is in part what led to the crisis at Northern Rock, which forced it to seek emergency funding from the Bank of England, its own banking regulator, last week.
Northern Rock's problems have emerged due to financial difficulties in the so-called inter-bank market in which banks lend money to other banks.
Prompted by the crisis in the US subprime market, in which high-risk customers defaulted on homeloans, banks have grown wary of the debt they are taking on. They have become more reluctant to lend to each other and are charging higher rates.
For some financial institutions that rely heavily on the wholesale lending market, cash has dried up. This is what forced Northern Rock to turn to the Bank of England as the "lender of last resort".
The mainstream Irish banks do not rely as heavily on the wholesale lending market; they instead rely on their assets, particularly their mortgage and deposit bases.
In an unprecedented move on Monday, British chancellor Alistair Darling gave a guarantee that the British government would cover deposits, not just at Northern Rock, but at any lender affected by the current turmoil in the credit markets.
It is unusual for a Minister for Finance to rely on a guarantee from a British chancellor to protect Irish depositors. But this is exactly what Brian Cowen did.
Yesterday, he said the British government's guarantee covered Northern Rock's Irish depositors and hoped this provided "more assurance to people who are concerned and anxious about their situation".
Irish depositors will also be assured by the fact that the ECB has at any one time a cash pool of more than €400 billion - considerably more than in Britain - that Irish financial institutions can draw on for borrowings to fund their operations.
Banks can borrow money from this pool in two ways: through the main refinancing operation that allows ECB-governed banks to draw money on a weekly basis; and through the longer-term refinancing operation, which covers borrowings for a three-month period. Given the high cost of short-term borrowing in recent weeks, the size of the longer-term refinancing operation has increased, standing at €265 billion, compared to €155 billion owing by European banks through the shorter-term operation.
The ECB has also injected billions into the banking system, in effect creasing the wheels of European banking. It has pumped more than €130 billion into the system over the past six weeks.
Given the size of the banking operations governed by the ECB, Irish financial institutions can take comfort from having access to a much larger pool.
All of this is positive for the general flow of cash and availability of credit for Irish banks. However, it will not alleviate the growing cost of borrowing between banks. If the credit crisis continues and interbank rates continue to rise, Irish banks may have to pass on the higher cost to their customers, in what Bank of Ireland chief executive Brian Goggin has called "an unofficial interest rate increase".
Most homeowners would normally delight in the ECB holding its interest rates, but the bank's activities could soon carry less significance. As the cost of running a bank increases, bankers will be keen to protect their spectacular profit margins. The Irish bank customer could yet lose out.
