Who did the banks borrow from.
In a simple model, when banks write loans they have three sources of finance:
- deposits (this is how the get the cash to pay deposit interest)
- borrowings through issuing bonds and similar instruments (on which they pay interest)
- lenders of last resort such as the ECB in cases of an immediate liquidity need
Apart from fees, one of the ways banks make money is to lend it at a higher interest rate than what they borrowed it at.
The other side is that without lending banks would not be able to pay deposit interest and without the bonds pension funds, charities, local government etc would struggle to find save investments for the money they hold in trust. Indeed at one point during the Clinton presidency the federal government had to start issuing bonds not because they needed the money, but because of a shortage of safe investments for these organizations.
That is why in modern times letting a major bank go is not an option as it would hammer every household:
- devaluation of their major asset, the house
- savings on deposit wiped out
- pension savings wiped out
- loans, mortgages and overdrafts crystalised
Continuing the simple model, the basic problem with Irish trackers is that there is no direct relationship between the interest rate charged and the interest rate paid on the borrowings. The ECB is called a lender of last resort for a reason! And using it as the base rate was a really dump idea, even at the time. But the bankers did pay, the real bankers - the shareholders! They were responsible for the appointment of the board of management and they saw their holdings wiped out.
The only winners, if their were winners were the salaried employees at the banks, commission agents etc.