IRISH BANK shares have comes back down to earth with a bump. This week saw the most precipitous declines, with AIB and Bank of Ireland down 26 per cent and 35 per cent respectively before yesterday. The trend, though, has been evident for several weeks, with both banks down almost 50 per cent from their recent highs.

No one reason explains the reversal but there is a consensus that banks shares are now back at a level more properly reflective of their difficulties and those of the wider economy.

The run-up in Irish bank shares post the announcement last March of the creation of the National Asset Management Agency (Nama) was at odds with the fundamental uncertainties over how Nama would work in practice and when operations would get under way.

The wavering attitude of the Government when it comes to attacking the hole in the exchequer finances also seemed to be ignored by investors.

The rally also had a self-fulfilling aspect. The higher bank shares rose, the less potentially diluting would be the impact of the recapitalisations associated with Nama on the existing shareholders.

Both banks will require fresh capital in order to absorb the losses on the loans being sold to Nama, but their buoyant share prices held out the prospect that the money might come from sources other than the Government.

Something similar is now working in reverse.