The honeymoon appears to be over for Central Bank governor Patrick Honohan.

The respected academic economist took up his role on Dame Street in September 2009 as a new broom to clear up Ireland's banking mess. The former professor of international financial economics at Trinity College had been one of the few to predict accurately the looming crisis facing the economy and his appointment heralded a shake-up of the cosy club in charge of the country's financial affairs.

His outspoken views, which included a hard-hitting report on the causes of the collapse of the banks and the response of officials published in the summer, confirmed his status as the outsider needed to take the helm of the Central Bank. But by last month he was being swept along by events seemingly out of his control.

As a member of the Irish team that negotiated the still-contentious terms of the country's €85bn bailout package – his signature appears alongside that of finance minister Brian Lenihan on the memorandum of understanding signed with the IMF and our European partners last week – Honohan now has questions to answer. Chief among these is how the Central Bank got it so wrong on the scale of cash required to recapitalise the banks, and whether Ireland got the best terms possible from those providing us with loans.

Last March, Honohan and head of financial regulation Matthew Elderfield set new capital levels for the guaranteed banks. The institutions were told they had to hold minimum core capital of 8% by the end of 2010 – twice the previous threshold. This effectively meant nationalisation for the building societies, EBS and Irish Nationwide. More significantly, it put a huge burden on AIB to avoid majority state ownership. The country's biggest bank at the time needed to raise €7.4bn.

Under the conditions of the EU/IMF bailout, however, the banks have to move to at least 12% core capital. The Central Bank is, in fact, requiring even higher levels to absorb expected losses (see panel). This 50% increase over less than a year suggests Honohan and the Central Bank badly underestimated just what the markets needed to be comfortable with Irish banks.

"Investors were told X, Y and Z and then it just got worse," said one fund manager. "There was always a concern that the banks haven't been able to plumb the depths of how bad losses would be."

Honohan's prudential capital assessment review (PCAR) began to unravel in late September when it emerged that the €7.4bn for AIB would not be enough to absorb the bank's escalating Nama haircuts. As billions in deposits fled AIB, Bank of Ireland and Anglo Irish Bank, it was clear the markets feared insolvency in the Irish banks.

The announcement of a new and improved capital minimum of 12% theoretically should soothe investor worries by bringing Irish banks into line with the best-capitalised institutions in the world. But investors have been telling Dublin stockbrokers that they won't reassess Irish banks until all the money is in the door, which means March 2011, when a new PCAR assessment is scheduled.

"I'm dubious about the credit models they're using," said one senior analyst at a Dublin securities firm.

One concern among analysts is what will happen to Irish Life & Permanent – until now unaffected by the balance sheet trauma imposed by Nama on the other banks – if mortgage books are subjected to a severe stress test.

"If IL&P is stressed at 10% they'll have capital problems," one source said. "They've no profitability. They're limping through."

Honohan told RTE radio last week that he preferred to sidestep the whole question of recapitalisation by introducing a loss insurance scheme for the banks that would cover losses as they arose, unlike capital which is upfront money just in case loans go bad. But he lost this argument in the negotiations.

Yet Honohan also said he believes the €10bn in the bailout package designated for bank recapitalisation – in fact, €10bn from the National Pension Reserve Fund – will be enough to convince markets of the future soundness of Irish banks. He said he would be "disappointed" and "surprised" if the €25bn in contingency funds for the banks had to be tapped.

Some commentators, notably on the Irish Economy blog, have begun criticising Honohan for not facing up to the banks' fundamental insolvency and for focusing too much on liquidity. Many observers also blame the Irish negotiating team for caving much too easily into pressure from Brussels and Frankfurt on the terms of the bailout.

The governor has his defenders, though, who point out that, while Honohan has been very public in recent days on the airwaves trying to sell the IMF and European deal to the country, many of the decisions that were taken may have been outside his – and the government's – control.

"You have to realise that what we see in public is a Central Bank governor trying to instill confidence and credibility in the financial stability of the country and unfortunately it comes into conflict with the reality of what is happening because the policies aren't under his control," said an economist at a major institution who asked not to be named.

It would also be difficult for Honohan to argue with the deal at EU level as he also sits on the board of the European Central Bank, which was one of the prime movers in putting the bailout package together and, along with other European bodies, has set itself against imposing losses on bond-holders. The mood among European policy-makers is for deficit reduction, not burden-sharing with investors. That was the line in the sand that Ireland could not get across, a fact acknowledged by Lenihan last week.

"It is difficult to criticise the deal with the IMF because it is difficult to say whether they had very much of an input. The Central Bank has a very limited role to play, at best an advisory role. You can't put much of the blame for the structure of the deal onto the Central Bank itself. The negotiations themselves were conducted from the premise, mistakenly, that the interests of bond-holders overrode the concerns of the Irish economy," said one person who has worked with Honohan in the past. "Once that happened then it was impossible for whoever was on the negotiating team to get a deal that would be better for the Irish economy."