The recapitalisation of the Irish banks will only take place if it acts as a form of "economic stimulus" for the entire economy and the banks commit themselves not to hoard the cash or use it in overseas markets, senior government sources have said.

The government is concerned a large-scale capitalisation, most likely using the National Pension Reserve Fund, would boost bank balance sheets but have little impact on the wider economy. Instead the government wants the billions channelled towards the banks to have a wider national economic impact, with lending going towards the most needy sectors of the economy.

Meanwhile, it has emerged that the government insisted it be allowed to access capital markets before the Irish banks during negotiations on the recent state guarantee scheme. On 4 November the government raised €4bn in the bond market. A senior bank source told the Sunday Tribune: "It was agreed the government would go first. There was no point in the Irish banks trading on the Irish state's good name before the government itself had its own chance to access funding."

Pressure has been building on the Irish banks to beef up their capital reserves to support the many customers – especially small business owners – who have been finding it extremely difficult to borrow money.

Both opposition politicians and government backbenchers have complained that the banks' reluctance to lend is damaging the economy, forcing the Tánaiste Mary Coughlan to state in the Dáil last week that the matter was "under constant review".

The message seems to have gotten through to the banks, as executives have been affirming their intention to focus on directing available funds to Irish businesses and personal borrowers while winding down non-core
foreign operations.