T here is a growing and nagging sense that the government's recent guarantee scheme for the banks is leaving the 11 institutions involved relatively unscathed, while piling considerable risk onto the Irish taxpayer and denting Ireland's long-term creditworthiness.

The release of the precise terms of the guarantee scheme last Wednesday did little to dissipate this nagging sense that the government has allowed itself to be panicked by the scale of the current financial crisis and not imposed sufficiently strong conditions on the banks in return for taking on a contingent liability, which amounts to a staggering €480bn.

Don't take this writer's word for it. Instead, consider the headlines from stockbrokers last week after they finished reading the precise terms. "The financial cost is bearable,'' said one. Another said the scheme was likely to end up creating a set of "national champions'' able to take on the world when the current turmoil seeps away. Unsurprisingly, the Irish Banker's Federation welcomed the terms and said they showed the government realised the importance of the financial services industry.

Talk about letting the cat out of the bag – the banks were meant to be wearing sack cloth and ashes, remember.

On a whole range of key areas, the government has taken the softer option, rather than opting for the more uncompromising policy response preferred by UK Chancellor Alistair Darling and the Danish authorities, for instance.

If taking the softer approach meant the end of the problems for Irish banks, it might be understandable, even excusable, but when it may actually end up prolonging their problems, one is forced to wonder about the choices the government has made in the last week.

Take the financial costs first. While the headlines of last week made liberal use of the forbidding figure of €1bn as the cost of the guarantee scheme over two years, this is what its likely to break down into for each institution in one year: Allied Irish Bank (€150m), Bank of Ireland (€150m), Anglo Irish Bank (€85m) and Irish Life & Permament (€37m).

This amounts to 6% of 2009 fiscal year profit forecasts for Allied Irish Banks, 8% for Bank of Ireland, 5% for Anglo Irish Bank and 7% for Irish Life &Permanent. When put in that context, it hardly appears ruinous, and one is left wondering was this "bearable'' cost imposed, because the government is expecting the banks to be swamped by much higher bad debt provisions next year.

Even the method used to calculate the €1bn charge was, from an Irish bank perspective, a relatively benign one. The Irish government is levying the charge on the basis that its borrowing costs are going to rise from 0.15% to 0.3% when it next issues bonds. That is how it arrives at the €1bn figure.

Amazingly, the government is not going to publish the precise charge each bank is paying because of reasons of commercial sensitivity. This seems very curious, and one presumes it will be made available in bank profit and loss accounts anyhow.

How the calculation is being made for each institution is also rather kind to the Irish banks. It will be based on their credit ratings, rather than the more unforgiving indicator of a credit default swap (instruments used to insure bonds), which have not been too kind to Irish banks recently, most notably Anglo Irish.

Crucially, unlike the UK's hardline stance on dividends, the Irish government's stance is rather weak-kneed. It says banks can pay dividends if they adhere in future to certain "liquidity, solvency and capital ratios''. None of these is spelled out. In the UK, it looks like no dividends will be allowed for the next five years, although the banks there are seriously miffed at this idea and claim it will hold back private investment.

With regard to remuneration, the government has also not quite ticked all the boxes. Yes, there will be a new Remuneration Oversight Committee (known as CIROC) to "oversee'' pay of senior executives. Finance minister Brian Lenihan thinks a salary of €500,000 is perfectly adequate in future, but there is nothing in the terms that would specifically prevent an executive getting paid several multiples of this. As long as individual banks can show they are reducing "excessive risk'' and "encouraging the long-term sustainability'' of their institutions it seems remuneration is, ultimately, a matter for their boards after that. Yes, lots of reports will be flying between the CIROC and the banks and CIROC and the minister, but that's about it. The UK scheme seems a little clearer here, talking about "no'' cash bonuses of any kind.

If further proof were needed that Irish banks were treated relatively benignly last week, just look at other developments in the UK.

There bankers describe the arrangements their government has hit them with as "onerous". The three banks getting re-capitalised, Royal Bank of Scotland, Lloyds TSB and HBOS, are having to issue the government with preference shares which carry a fixed interest rate of 12% over five years. Such is the severity of this rate that the bankers there are demanding changes, particularly a rule that no dividends can be paid to ordinary shareholders until the government's preference shares are redeemed.

Here, none of the Irish banks has raised even the mildest concern at the arrangements entered into by Lenihan. This tells you one of two things: Either the banks want to keep their heads below the public parapet at this sensitive time or they realise the deal offered by Lenihan is on the whole a reasonable outcome from their perspective.

Put simply, nothing in the terms requires a change of personnel at the top of the Irish banking industry. Nothing in the terms specifically prevents Irish banks from recklessly paying out dividends at a time when they should be conserving capital. Nothing in the terms specifically prevents the banks from awarding their present levels of remuneration. Nothing in the terms specifically triggers consolidation in the Irish banking industry.

Maybe that's the way it should be. For example, what ordinary investor is going to stump up money in a rights issue for an Irish bank if it isn't going to get a dividend for the next five years?

But still, the gnawing sense remains that the government has missed a trick here. This sense deepens when one considers that nothing in the terms even touches on the far wider problem that Irish banks need fresh capital soon. Not only are they under-capitalised compared with most of their UK competitors, but even former sub-prime outcasts such as Citigroup – which have suffered appalling asset write-downs – now have better capital cushions than Irish banks.

Nothing in last weeks government initiative even touches on this wider concern.