If you want to get some idea of just how bad the bad debt problem is at Irish banks, look no further than the third-quarter forecast for Danske Bank, the owner of National Irish Bank. In a conference call to analysts last Monday, Danske executives revealed that roughly a third of the bank's expected credit losses for this quarter – about €80m – would come from its Irish operations. On an annualised basis, NIB is looking at €320m in loan losses. That amounts to a very substantial 318 basis-point – or nearly 3.2% – charge against its relatively modest €10bn loan book.

Considering NIB's write-off for the first half of 2008 was just a little more than €25m, the amount is truly staggering. Bad debts of this magnitude have the potential not only to wipe out profits but to eat into precious capital as well. Now, to appreciate just how serious the situation is, recall that NIB booked an underlying profit of €28m in 2007 yet only €2m in the first half of this year as bad debts accumulated. Do you see where this is going? The curve is straight down.

NIB's numbers are important because ever since the government announced its bank guarantee scheme, the question mark over Irish bank shares has just been getting bigger and bigger.

The bail-out appears to have done little to address the problem it was supposedly devised to solve. Irish banks still cannot raise wholesale funding in the credit markets. (In fairness, nobody can.) Even a sovereign AAA rating cannot relieve the liquidity crisis afflicting the Irish financial sector.

Yes, this is a global problem. Yet the general issue became locally acute for a reason: the inter-bank lenders and debt investors simply did not believe Irish banks would remain solvent long enough to pay them back. At the critical moment, they didn't believe Irish bank solvency was good even for a mere 24 hours. Why? Because Irish banks are harbouring billions in likely losses from bad loans. They just haven't fully admitted it yet.

But NIB's numbers are the first to confirm it. And if NIB is looking at 3.2% of loans going rotten, you can bet the other banks are in or around that number. NIB has lent 37% to homeowners, 27% to commercial property, 9% to developers and nearly 8% to building and construction firms. So the bank's exposures are pretty much in line with the big two full-service banks, AIB and Bank of Ireland. Only the other Irish banks so far have not owned up to losses at anywhere near the level of their Danish-owned competitor.

This disparity cannot be explained by vast differences in lending criteria or business models. Instead, it must be assumed that the Irish banks as a whole are facing much higher losses than they've so far predicted. In their latest market statements, both AIB and BoI have given guidance for 2009 loan losses in the 60-90 basis-point range – or roughly a quarter what NIB has already copped for 2008. Given an opportunity to revise this outlook at an investor presentation hosted by Merrill Lynch in London last week, AIB chief executive Eugene Sheehy reiterated the bank's most recent guidance. Perhaps more incredibly he also stuck to the bank's "progressive" dividend policy and pronounced the capital ratio to be "strong". This is the man who went cap in hand to the government with his BoI counterpart Brian Goggin to secure a rescue package for the ailing sector.

Two weeks is a long time in a banking crisis, though. The conversation has moved on from bank runs and liquidity to asset values, solvency and – crucially – consolidation and recapitalisation. Arguably this is where there conversation should have been in the first place.

Stock analysts no longer seem to be taking the bankers at their word. Both Merrion and NCB last week put out reports looking ahead to capital raising and probable nationalisation. NCB's worst-case scenario put bad debts at the four Irish-listed banks at 350 basis points, which would require a new capital infusion of an incredible €14bn, or more than the total market capitalisation of the institutions at current depressed share prices. And this "worst case" says nothing about the prospect of savage asset writedowns whenever banks have to mark their loans to market.

What makes this situation so terrifying is that the usual sources of capital have dried up. Eventually the government will have to face the fact that it is the lender of last resort. The British decision to recapitalise the bank's at the public expense is instructive. Banks simply need a bigger capital cushion nowadays because the scale of losses on the way are bigger than they have allowed themselves to admit.