The upcoming stress tests for the banks will be more 'granular, more explicitly transparent, and tougher' than those of 2010, the Central Bank Governor has said.

Speaking at the International Centre for Monetary and Banking Studies, Mr Honohan said: 'This year we are determined to present a stress test that will not only be more convincing to the market, but also be better insulated against surprises by using aggressive stress assumptions and modelling.'

The downsizing of financial institutions is already under way, Professor Honohan told the Geneva-based group.

The first and so far the largest element of this downsizing was the sale last year of development property-related loans to the National Asset Management Agency.

He said the authorities want to avoid fire-sale losses as the country cannot afford them.

As soon as assets can be sold outright, instead of being placed in a 'bad bank', then some of the banks' excessive borrowings from the Central Bank can be reduced, he explained.

He also said that putting the continuing parts of the banking system on a firm footing can best be done with the involvement of new foreign owners, who can bring capital, risk control and other management skills to the sector.

'Provided they bring credible business plans, I look forward to welcoming new owners of Ireland's downsized and cleaned-up banks,' he stated.

Professor Honohan said that the key risks now facing the Irish economy lie in its financial balance sheet.

He said that Ireland has too much debt - both public and private - while there is also a market perception of significant risk to the debt, especially bank-related debt.

It is these two interlinked problems that have led to the market's reluctance to provide continuing funding at reasonable rates of interest, he added.