The complete and utter insanity of believing a single word that the banks say.

1. OK, to give us a feel for this, total lending by UK banks, primarily to UK borrowers, is about £2,232 (which I worked out here), which is about one-and-a-half times annual GDP.

2. Ireland is pretty similar to the UK in terms of house prices or GDP per capita and so on, its GDP in 2008 was about €200 billion, times current EUR/USD exchange rate of 1.36 gives us a GDP of US$ 272 billion, times by one-and-a-half to give a fair estimate of total Irish domestic lending/borrowing of $400 billion.

3. We then have to add on Irish government debt of another $160 billion or so (60% of GDP excl. bank bail outs), total $560 billion.

4. We'd expect a lot of that to be financing by Irish domestic investors. If the amount of finance from non-Irish sources is as high as in the UK, rounded up to a third, we'd expect total non-Irish lending to Irish borrowers, banks and government to be in the order of $190 billion; of that, half will be from the 'shadow banking system' (i.e. nothing more threatening that pension funds, insurance companies, sovereign wealth funds and rich people generally) and half will be from other banks.

4. So that brings the total amount which non-Irish banks lent to Irish borrowers, banks and government down to something in the region of $95 billion, of which a fifth (allegedly) is from UK banks, i.e. $19 billion, call it £12 billion, in round terms. Even in the case of a 50% Irish house price crash and a partial default on government debt, the losses suffered by UK banks would be less than half that, which is a lot of money to you or me, but only about a quarter of one per cent of total UK bank lending (see point 1) or less than one year's bank bonuses.

5. Well, that's what commonsense says.

6. But the world's banks scented another bail out and hyped those figures up a bit, according to a chart in today's FT (summary on CityWire), UK banks have $149 billion 'exposure' to Ireland, European banks have $509 in total, and total Irish borrowing from abroad is $731 billion in total. So UK bank 'exposure' to Ireland is being wilfully overstated by a factor of six or seven.

7. I'm not going to bore you with the arcane accounting rules that enable them to inflate that $190 billion borrowing (from point 4) into $731 billion borrowing (from point 6), but take it from me, those are arcane accounting rules at work that have little to do with real life, i.e. if you took the difference of $731 billion minus $190 billion, you'd find that Irish banks had invested an equal and opposite amount outside of Ireland, and the chances are that Irish banks have 'invested' that missing $541 in non-Irish banks (quite possibly sub-prime crap from the USA, UK bank bonds etc, who knows?).
------------------------------
UPDATE: From this morning's City AM:

Arturo De Frias of Evolution Securities has crunched the numbers. Under his worst case scenario in Ireland, with unprecedented write-offs, RBS could lose up to £7bn; Santander and BBVA would suffer lesser hits from Portugal (just €4.5bn in the case of Santander under the Armageddon scenario). This wouldn’t be that bad...

That £7 billion for RBS looks 'about right' to me, even the FSA, cheerleaders for the banking system admitted that "The exposure of Royal Bank of Scotland and Lloyds Banking Group to the Irish economy is “not at all worrying”, Financial Services Authority chairman Lord Adair Turner said yesterday... RBS and Lloyds, through its acquisition of Edinburgh-based HBOS are the banks most heavily involved." This is still a bit more than what I pencilled in in point 4, but hey.