In addition, Irish financial institutions will now face lower borrowing costs than would otherwise have been the case, owing to the fact that their debts are State‐backed. These financial benefits should be passed on to the State in the form of a charge. Moreover, in a scenario where an Irish bank becomes insolvent, the Government would have to make good on its guarantees and assume the bank's liabilities. A key question is whether under this scenario the Government would also take control of the assets. In other countries, governments have chosen to nationalise troubled banks rather than guarantee liabilities. By nationalising a bank, a government gets both the assets and liabilities. A government guarantee scheme should include provisions that the State is given contingent assets to match the contingent liabilities that it takes on board. Another question raised by the scheme is how it will affect the behaviour of Irish financial institutions over the next two years. Put another way, how will banks and building societies manage their assets now that their liabilities are State‐guaranteed? One concern is that since an important source of market discipline has been removed, financial institutions may show excessive forbearance in dealing with troubled borrowers. The Japanese experience in the 1990s after the property bubble burst there shows that such behaviour can be disastrous for both lenders and the economy. Moreover, will financial institutions be allowed to continue to pay dividends? Will there be limits on executive pay, as in the US plan? There is also a question as to what extent financial institutions will now be able to raise new funds using risky assets such as mortgages or loans to developers as collateral. Backed by the Government guarantee, banks and building societies might now be in a position to unload riskier assets. This may be good for the financial institutions, but would increase the risks to the taxpayer. The Financial Regulator's role in supervising and regulating the Irish financial system has just become a lot more complicated. Alan Ahearne lectures in economics at NUI Galway and is a former senior economist at the Federal Reserve Board in Washington DC