As part of the recapitalisation of the banking system last week an additional form of capital was introduced to the system, called promissory notes. Such notes are not a new invention, but to my knowledge this is the first time they have been put to use as bank capital.

A promissory note is, in simple terms, a form of post-dated cheque. The issuer of the note makes a promise to make a payment to the holder, under specific terms. This is very similar to writing a cheque when you buy something.

In the case of Irish Nationwide, Anglo Irish Bank and potentially EBS, the government is injecting significant amounts of capital into each of these institutions in the form of promissory notes in order to recapitalise them after they have reflected the necessary losses on the loans they are transferring into Nama.

The notes allow the exchequer to drip capital into the banks over a lengthy period. Under the terms of the notes, the government will release the value of the notes not all at once, but over 10 to 15 years. The Financial Regulator will allow these notes to be included in the core tier 1 capital of these banks. The state can then increase both banks' capital levels to more internationally expected levels, without having to borrow the full amount by issuing more government debt.

This leads us to the question of what is bank capital, and what is it used for? Banks borrow money from depositors, from other banks and from institutional investors, so that they can grant loans to borrowers and thereby make profits. To give confidence to investors to lend to the banks, they must hold capital as "rainy day money". This, in simple terms, allows the bank to repay the depositor in the event the loan their money was used for fails to repay.

In Irish banking, the weather has been extremely wet over the past year-and-a-half and capital levels have been severely depleted. This gives rise to significant new capital being needed by the banks.

For Anglo, EBS and Irish Nationwide, the government is looking to provide capital to both banks over several years to offset loan losses, thereby allowing depositors to be repaid. This is an important point for Anglo more so than Irish Nationwide and EBS, as Anglo is still reliant on €11.5bn of funding from the Central Bank, making the Central Bank one of its largest depositors. So the state is providing capital to Anglo through promissory notes, to help repay liabilities such as the state's own money.

So are promissory notes any use for capital? In standard capital injections, the investment is made in cash, in return for a stake in future profits or losses. In this case, promissory notes result in cash injections (when the provider of the note, in this case the government, is called on to do so) over a period of 10 years-plus, instead of one up-front payment.

Therefore, institutional investors will accept promissory notes as a capital injection once they are happy with the financial position of the state. If they believe the state will be in a position to pay the amounts due each year on the promissory notes, they will accept them as capital in EBS, Irish Nationwide and Anglo.

The impact for Ireland is that such notes will increase the national debt. Currently we estimate the national debt will peak at 84% of GDP in 2012 excluding Nama bonds and promissory notes. Including Nama bonds, this jumps to 112% of GDP and the €22bn of promissory notes adds another 12% to this figure.

When put in those stark terms, the recapitalisation of these three banks potentially adds significantly to the national debt. In real terms, the €22bn of promissory notes would equal 29 children's hospitals based on the €750m estimated cost of the new national children's hospital.

Will the issue of promissory notes cause problems for Ireland in continuing to fund its national debt? I don't believe so. The debt will have to be raised anyway; the notes merely defer the need to raise it in the financial markets immediately. And a general word of comfort about our debt levels in general: compared to Greece, at peak Irish national debt will remain below the 130% level that Greece's debt-to-GDP ratio will hit this year.

In the past week the problems facing the banking system have been laid bare with the government taking action to solve them. The use of promissory notes is an innovative way to recapitalise the banks in a cash-efficient way. And while it remains to be seen whether international investors will accept them, it's hard to argue that they could be any less acceptable than issued government debt itself.

The recapitalisation has put a significant burden on the Irish taxpayer for many years and this should not be ignored, but at least the measures have brought capital levels in the main Irish banks to internationally accepted norms. The next step for the economy now is for the banking system to operate as it should, by providing credit.

Oliver Gilvarry is head of research at Dolmen