Deep restructuring is how Patrick Honohan, the central bank governor, describes what is in store for the Irish banking sector as part of the bail-out terms imposed by the European Union and International Monetary Fund.

Whatever that may mean in practice – whether forced asset sales, mergers or outright sales or closures – it is a phrase that sends shivers through Dublin’s bank boardrooms.

Amid the deepest recession of any industrialised country, all Irish banks have seen margins under pressure.

Conventional mortgage lending is barely profitable as banks have to hold deposit rates high and yet a large proportion of their book would be on tracker rates of interest – linked to the euribor rate – which is well below the cost of funding.

Organisationally the banks have had to assign huge manpower resources – rehiring legal and property experts – to cope with the huge task of preparing the documentation for the transfer of billions of euros of property loans to the National Asset Management Agency.

Irish banking is very much not business as usual, and the perception at least is that institutions are hoarding cash to protect balance sheets, ignoring the political pressures to lend.

There is a moratorium on enforcing housing repossessions on those in default on their mortgage repayments. But in practice the banks are only too ready to agree restructuring mortgage borrowings – to avoid crystallising losses which would add to their woes on the capital adequacy side. The credit crunch for business is nonetheless a concern for the authorities, particularly after the scale of government recapitalisation support.

John Trethowan, former chief executive of National Irish Bank now part of Danske Bank, runs the newly created credit review office, which adjudicates on bank decisions where a business appeals a loan refusal. Mr Trethowan says the problem is very few businesses are using the appeal process.

But Mr Trethowan says the real problem is there are just too few applications being made for loans.

“Most commentary dwells on the supply side. There is little or no research or knowledge of the actual level of borrower demand, which all banks report as subdued,” he says.

He says small businesses are adjusting by improving the way they manage cashflow and deferring investment decisions.

In many instances, however, the banks are actively putting the squeeze on customers, refusing requests for working capital.

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