IRISH banks will pay an annual levy of €500m and accept restrictions on executive bonuses as well as closer scrutiny of their lending practices in return for the unlimited state guarantee that prevented their collapse last week.

The bankers will also have to pay the increase in the cost of government borrowing, because international lenders now regard Ireland as a much greater credit risk following last week’s €400 billion bailout.

The structure of the levy is one of the main issues being considered over the weekend by an expert committee reporting to Brian Lenihan, the finance minister, which is considering what terms and conditions should attach to the state guarantee. This will be discussed at cabinet on Tuesday. The committee includes representatives from accountants Pricen Waterhouse Coopers, solicitors Arthur Cox and American bankers Merrill Lynch.

The committee is also expected to make recommendations on reform of senior bankers’ pay and bonuses in the six institutions benefiting from the guarantee.

The earnings of executive directors and chairmen in the financial institutions bailed out last week has amounted to €135m over the past five years.

John Hurley, the governor of the Central Bank of Ireland, conceded last week that the way in which senior bank executives are paid would have to form part of a review of the sector’s operation.

Yesterday Sean FitzPatrick, the chairman of Anglo Irish Bank, admitted that bankers’ pay is now on the agenda.

“The boardrooms of Irish banks will have to take account the views of taxpayers like never before,” he told RTE Radio. “[They have to] ensure people are paid appropriately and not excessively.”

In his last year as chief executive of Anglo Irish Bank, FitzPatrick was the highest-paid bank executive in the country, earning €2.7m.

Senior banking sources said yesterday that €1 billion over two years is the maximum that the six institutions covered by the guarantee want to pay in return for the backing secured in emergency legislation passed last Thursday. Government sources have indicated their preference for a €2 billion payment over two years. Banks will argue that if they have to make substantial write-downs on bad property loans, €2 billion would be unsustainable. Yesterday FitzPatrick said: “It would be terrible if the cure killed the banks.”

The value of the state guarantee will rise to €460 billion if, as expected, Ulster Bank secures agreement to have its operations in the republic of Ireland included. Other banks who have asked to join the scheme include Halifax Bank of Scotland, IIB, ACC, National Irish Bank and Postbank.

The six currently covered are AIB, Bank of Ireland, Irish Life & Permanent, Anglo Irish Bank, Irish Nationwide and EBS. They disagree as to how a levy should be shared out. AIB and Bank of Ireland want it based on the risk profile of the lending by each institution. Anglo Irish Bank, in particular, wants a levy based on the deposits in each institution.

The terms and conditions will also address the deterioration in the government’s credit rating caused by its open-ended commitment. The perceived risk of Ireland defaulting on its debts doubled after the announcement of the state’s bank guarantee scheme.

Sebastian Meyer, a senior analyst at London-based CMA DataVision, said that while Ireland’s risk of defaulting on a loan was doubling, Irish banks halved their risk perception. Based on CMA’s data, the cost of borrowing €11.5 billion to meet the current budget shortfall will have risen by €31m due to the bank guarantee scheme. This premium will be recouped from Irish banks.

Meyer said: “The risk premium has a direct effect on the cost of borrowing.” By comparison, America and Britain can borrow half the rate of interest on a five-year loan, based on CMA’s data.

Anglo Irish Bank, under the most pressure when depositors withdrew about €10 billion in funds last week, provided the catalyst for the emergency action. Most of that money has returned to the bank since the guarantee was announced.

FitzPatrick told RTE: “This [crisis] was not caused by any one bank or issue . . . [but] by the global crises. The government was the only place we could turn to . . . we could have ended up with no banking sector under Irish control. That could not be a good situation . . . and all of us saw that.”

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