The shocking news in the government statement released at the crack of dawn last Thursday wasn't that the ultimate cost of cleaning up the Anglo mess could rise to €34bn, but that AIB was being effectively nationalised.

AIB, the country's biggest bank and once Ireland's biggest company with a value of more than €20bn at the height of the boom, requires another €3bn of capital to offset the mounting losses on toxic property loans destined for Nama. This brings its total capital requirement to a massive €10.4bn. Chairman Dan O'Connor and managing director Colm Doherty, whose appointment less than a year ago was controversial, have been pushed out.

While AIB will attempt to raise some of the extra €3bn from investors, taxpayers (through the National Pension Reserve Fund) will end up footing the bill and may eventually control as much as 90% of the bank after a rights issue and more asset disposals.

AIB had appeared to be gathering some momentum in the battle to avoid the state ending up with a majority stake when it successfully off-loaded its valuable 70% stake in Poland's Bank Zachodni to Spain's Santander for €3.1bn last month. The deal netted a €2.5bn capital boost for AIB, or a third of the €7.4bn the Financial Regulator originally said it had to raise by the end of the year. There was some cause for optimism that Doherty just might escape with his bank and his job intact.

Even with such a good result, though, analysts quickly expressed concern that there was little interest in AIB's other international assets that were up for sale – a 22.5% stake in New York's M&T Bank and its British division – apart from Santander. Both Goldman Sachs and Credit Suisse issued reports questioning Santander's capacity to do more deals with AIB, as the Spanish bank had been on a buying spree recently.

Last week it emerged that talks had broken down between Santander and M&T over who would ultimately have control in a proposed merger between M&T and Santander's existing US unit, Sovereign. Instead of selling its M&T shares at a premium, AIB will now have to place them on the open market at a discount. Optimistic analyst estimates suggest this could net the bank about €1bn towards its capital needs. That leaves the bank about €1.5bn short on the disposal part of its capital plan, while needing €5.4bn from a rights issue.

As the prospects for Doherty's asset disposals and overall capital regeneration scheme collapsed in the past two weeks, the share price went down with it, bumping along just above 50c – now the fixed rights issue price. A year ago the bank was trading at more than €3, but investors steadily abandoned ship as news flow about the bank got worse and its ability to evade the state's grasp ebbed away.

"I bought AIB in 2009 at 90c on average thinking they were undervalued at that time," one retail investor told the Sunday Tribune. "I sold half at €3 then got out of it altogether about three weeks ago, because AIB is a dog. Their management is slow to react and don't seem to have a handle on their business. With a rights issue pending or worse, it just didn't make sense to stay in the trade."

The evaporation of shareholder confidence coincided with a negative revision of AIB's projected Nama haircut, foisting even bigger losses onto an already creaking balance sheet. These two factors effectively sealed the bank's fate.

"The share price needed to be better to get the rights issue away," said an AIB source. "Once the haircut went to 60%, that was an extra €3bn. The plan was credible at €7.4bn, but €10.4bn was not doable."

The current plan still depends on some improbable outcomes. The new amount from asset disposals has gone up €1bn to €5bn. Analysts are expecting a maximum of €3.5bn, as the sale of AIB UK will be capital-neutral. That leaves the NPRF to pick up the slack by converting the €1.8bn remainder of its preference shares left over after underwriting the equity issue.

The regulator has extended the deadline for disposals to 31 March 2011, but some commentators are saying other losses may begin to appear only after the property fog has lifted.

Peter Mathews is an independent banking consultant who told an Oireachtas committee earlier in the year that AIB would need to be recapitalised with at least €10bn, rather than the €7.4bn put forward by the regulator. He believes AIB's other portfolios harbour some ugly surprises.

"AIB got into the gallop only in the last years of the bubble, meaning losses will be higher," said Mathews. "The [Nama] losses don't even address mortgages, small business loans and corporate lending."

The shock of the fresh AIB revelations and the continued uncertainty over its losses is already having a spillover effect on the rest of the banking clean-up, particularly as other institutions are struggling to access funding and as debt matures as a result of the ending of the blanket guarantee introduced two years ago.

The acceleration of Nama transfers and a tougher, more expedient, stance on loan valuations has raised uncomfortable questions for those involved in bidding for EBS, which is understood to be facing a near-60% haircut on the rest of the loans it is transferring to the asset agency. This means whoever ends up buying the nationalised building society will be on the hook for a bigger capital deficit than expected when bids were submitted last month.

For private equity buyers, it means returns will be tougher to extract; for Irish Life & Permanent, it could mean going back to the regulator for a more stringent capital assessment of its own. Sources said IL&P needs to get a fundraising prospectus out within two weeks to raise the capital needed to absorb EBS. In the current climate, that could be too tall an order.

In an interview with financial news agency Bloomberg, finance minister Brian Lenihan said the Irish banking system was at "rock bottom". Given the surge in how much taxpayers have had to fork out to save Anglo, AIB and other institutions, it won't come as too much of a surprise if the eventual figure rises higher.