It is in Ireland’s interest to see a profitable banking sector returning to full health. There have been some encouraging signs, such as the willingness of private investors to take stakes in Bank of Ireland and the ability of the banks to make a limited return to the debt capital markets. However, a key goal must be sustained profitability for the sector.
The persistence of the demand effect depends on how long it takes for business capital stocks to adjust to higher expected profitability, for consumer durables to adjust to higher wealth and higher projected future income, and for market interest rates to close the gap relative to the higher equilibrium real interest rate.