So far the government has been relatively vague about exactly what problem it was trying to solve when it assumed responsibility for the liabilities of the six indigenous Irish lenders last Tuesday morning after the stock prices of the four listed banks went into freefall on Monday.

The Taoiseach, the Tánaiste, the minister for finance and even the minister for defence have all stated that the entire financial system was under threat of collapse, but none of them has been able to substantiate that claim by saying precisely what would have caused a total breakdown. So were the Irish banks thrown a €400bn liquidity lifeline or was one (or more) of them saved from insolvency?

We know that the Financial Regulator and the Central Bank governor paid a visit to Leinster House last Monday night to urge cabinet to enact emergency measures to avert some form of catastrophe. But what precipitated this move?

The bail-out clearly addresses the liquidity crisis that is troubling banks generally, and Irish banks particularly, at the moment, yet market rumours and whispers out of Leinster House over the past week suggest at least one listed bank was in danger of failure without a government rescue.

Liquidity and solvency are related issues, of course, especially for banks. Ironically, banks don't hold a lot of cash. The assets they hold against liabilities – debt and deposits – tend to be in the form of loans: mortgages, business lending, development financing, etc. From the consumer's point of view, a loan isn't an asset, but because they produce income for a bank they go on the plus side of the balance sheet.

Loans, however, aren't very liquid: they can't easily be converted into their cash value. So a bank has to achieve a delicate balance between efficient earnings from illiquid assets and the demands of depositors and creditors for cash. That's relatively straightforward under normal circumstances, but normal circumstance did not prevail last week. Instead, depositors, including corporate depositors, began yanking money out of Irish institutions, with one allegedly suffering some staggering withdrawals.

What made this incipient bank run even worse was that other lenders on the interbank markets were unwilling to open credit lines into the Irish financial system to stave off failure. Hence the massive government intervention to guarantee all bank debts.

So how does that relate to solvency? Well, solvency is simply the ability to pay debts with available cash. If the cash isn't available and the creditors call in their loans, that's the end of the bank and the assets have to be sold to meet obligations. There's a reason it's called liquidation when a company's assets get turned into cash to pay off creditors and investors.

But has the government rescue really staved off insolvency for the (so far) six institutions covered by the sovereign guarantee? That's harder to tell. While there are some signs in the credit markets of a greater willingness to lend to Irish banks now, long-term solvency is based on the relationship of after-tax profit to total debt obligations.

Banking activity – primarily lending – has declined significantly in 2008, which means income at the banks will fall sharply in the next couple of years. Combined with an expected uptick in losses – some potentially quite large – from accumulating arrears and bad debts, the ratio of profit to debt is only going to get worse.

Liquidity will not be enough unless banks adjust their balance sheets for that stark reality.