overcapitalise

The banking sector targets have also been met, with Ireland merging failed lender Anglo Irish Bank with Irish Nationwide in order to wind the new bank down over the next decade, and has just injected a further 24 billion to overcapitalise its remaining banks as agreed under the bailout, ensuring that they pass an EU-wide stress test due to be published on 15 July.

Ireland's central bank wants lenders to 'overcapitalise' as a result of the 85 billion-euro emergency loan package agreed with the IMF and EU late last year, raising its target for their core Tier 1 capital adequacy ratio to 12 per cent from 8 per cent.

Therefore, the firm has little incentive to reduce its costs and has an incentive to overcapitalise, creating productive inefficiencies (Averch and Johnson, 1962).