This result is analogous to the excessive foreign borrowing undertaken by private sector borrowers and banks in East Asian countries in the 1990s when exchange rates were seen as relatively fixed, and hence their risk perceptions were low, and hence risk was under priced.
It may also reflect the market structure: banks with a large market share will partly internalise, and take account of, the systemic damage caused by widespread unresolved debt distress and excessive repossessions. The current crisis, though, is on a scale that has challenged the Irish banks’ capacity to respond. Their reluctance to provide deep or lasting loan modifications has protected them from adverse selection.