That the system faced a solvency problem was not recognised at the time. However, as doubts emerged about the solvency of the banks in light of increased property losses and the ability of the Sovereign to backstop such a large guarantee, the Irish banking system suffered a massive withdrawal of funding.
Such agreements typically permit counterparties to derivatives transactions to demand collateral if their net credit exposure exceeds a negotiated threshold amount. The threshold often varies with the credit rating of the counterparty: The lower a counterparty’s credit rating, the smaller the threshold. If its credit rating falls below investment grade, a counterparty is often required to overcollateralize its counterparties’ exposures.