Ireland's once booming banking sector is to be shrunk by €73.6bn (£65bn) into two "pillar" banks by the country's new government as it seeks to find a way out of the three-year financial crisis that has crippled the economy.

Under a €24bn restructuring plan announced after the markets had closed, the government is taking majority control of all existing players on the Irish high street. The "pillar one" bank will be built around Bank of Ireland, already 36%-owned by the state and now under instruction to find €5.2bn of capital. It will shed €30bn of assets but retain its link with the UK Post Office. The "pillar two" bank will be created out of the troubled Allied Irish Banks (AIB) – which needs €13bn of fresh capital – and the building society EBS.

A third bank, Irish Life & Permanent, until now able to survive without a direct injection of taxpayer funds, needs €4bn. It is in the process of selling its pensions and investment businesses in two stock market flotations. Its retail bank, Permanent TSB, is expected to be folded into one of the two pillar banks.

Irish finance minister Michael Noonan added that overseas banks operating in Ireland, including Ulster Bank's operation of Royal Bank of Scotland, "will help maintain the competitive fabric of the market" as Ireland's banks were restructured.

The total bill for repairing the hole in the banking sector caused by the bursting of the Irish property bubble has reached €70bn after a new round of stress tests demanded by the EU and International Monetary Fund as a condition of the bailout of the Irish economy. Last year, all Ireland's banks had been given a clean bill of health under European-wide stress tests announced in July – only to need emergency funding from the IMF and the EU four months later.

Central Bank of Ireland figures showed how precarious Irish banking remains, despite the government having guaranteed the system since September 2008.

Noonan blamed the crisis on the then Fianna Fáil government's decision in September 2008 to guarantee the banking sector, and particularly Anglo Irish Bank, during the international banking crisis. Anglo – which has reported a record €16bn loss – and Irish Nationwide were not part of the latest stress tests and there is no "immediate need" for extra capital there.

Outflows took place during 2009 and 2010, reaching a dramatic €45bn in September 2010. Even after the bailout by the international authorities, the withdrawal of funds from the system continued, albeit at a slower pace.

London-based analysts said that pumping more capital into the banks may still not solve this problem and had hoped for information from the European Central Bank about how it might provide liquidity to the system as Ireland's banks faced losses from the assets they would be forced to sell to reduce their balance sheets. But eurozone sources told Reuters that internal disagreements within its governing council over the facility meant that plans to announce the new funding arrangement had been postponed.

"There has been no discussion of what the Irish banks are supposed to do about their falling deposits – which declined by another €10bn in February and almost €100bn in the last six months – and the borrowing from the ECB and the Central Bank of Ireland they are forced to do to compensate," said analysts at Jefferies International.

"Equivalent to around 15% of Irish GDP, the amount that the stress tests revealed the Irish banks need to pass an adverse economic scenario is significant. Nevertheless, our initial impression is that the question of whether this is enough will continue to linger."

The scale of the capital required by the banks compared to their stock market value means they are likely to have little option but to take government funds. AIB has a market value of £0.3bn but needs €13bn, Bank of Ireland has a stock market value of €1.2bn and needs €5bn, while Irish Life & Permanent is valued at €100m yet needs to find €4bn, according to the central bank.

The central bank asked risk advisers BlackRock to consider "adverse economic scenarios" from 2011 to 2013 under which Irish GDP shrinks by 1.6% this year then grows by 0.3% in 2012 and 1.4% in 2013. Unemployment rises to 14.9% this year and 15.8% in 2012, while house prices fall a further 17.4% in 2011 and 18.8% next year. Commercial property prices are assumed to fall 22% this year and then stabilise.

The banks are required to have 10.5% core tier one in the base scenario and 6% in the stressed scenario. Under the government's plan they could eventually be capitalised at more than 20%.

The government did not spell out the need for private holders of bank debt to take any losses – known as haircuts – under its plans but many analysts believe that this position is untenable.

Ben May, European economist at Capital Economcs, estiamted that government debt could eventually exceed 130% of GDP from 100% now: "Public debt of this size does not mean that a default is inevitable, but there remains a risk that if Ireland is forced to turn to the European Stability Mechanism in 2013 or beyond for funds, as seems likely, it may be forced to restructure its debts if it deemed insolvent."