The European Central Bank told Ireland it must stand with its failing banks, the banking inquiry heard today. Former Central Bank governor John Hurley told the committee about the lead up to the decision to introduce the blanket bank guarantee on the State's banks in 2008.

Mr Hurley said neither it nor the Government knew the banks were going to “implode” or that the crash would be as severe as it was.

The former governor said on the week leading up to the guarantee the institutions had sufficient liquidity to get through to the following week.

He said :“The liquidity outlook changed quickly on the morning of the 29th September when it became clear that without assistance Anglo would not be able to open for business the following morning.”

The inquiry was told the Bank was warned in discussions with the ECB another Lehmans needed to be avoided at all costs.

He said: “As a result of contacts with the ECB, it was the view at the time that an overall European initiative of which Ireland might be part was remote and that any decisions in relation to Irish banks would fall to be made by the Irish authorities. ”

The Government was expected to stand behind its banks and a Lehman-type situation was to be avoided.”

Mr Hurley told the Oireachtas banking inquiry that the bank did not foresee the dramatic consequences that followed from the economic crash. He said the Central Bank had to accept "a large" share of responsibility. However, he said the Central Bank was not in charge of interest rates, fiscal responsibility or the supervision of banks.

Mr Hurley, who was Central Bank Governor from 2002-2009, said: "The reports from the Nyberg Commission and Regling and Watson suggested that there was a basis for taking some action by about the end of 2005.

“In hindsight I agree with this view and I consider now that the Central Bank should have escalated and reinforced its warnings on risks. However, at the time the Bank considered that its approach in the 2005 Financial Stability Report was the correct one.”

Mr Hurley said the Minister for Finance was never told about the crisis in the banking system because nobody knew it was coming. But he did say Brian Lenihan was told there was "a lot of heat in the property market, a lot of houses were being built and there was a lot of risk associated with that". The Governor said he had a direct responsibility to the Government and to the ECB. He said there is a domestic responsibility here that had to be exercised in a certain way. Mr Hurley said it was his position to make decisions in the interest of Europe as a hole but to always make Ireland's position clear.

Mr Hurley provided a written statement to the inquiry which was amended by the committee’s legal team.

He said he doesn’t believe regulation could have prevented the crash and said international factors played a crucial role.

In saying that, the former Governor said he “accepts the Central Bank’s share of responsibility”.

Mr Hurley said from 2004-2007 the Central Bank assessed that the health of the banking system appeared generally sound.

He said the Bank underestimated the risks and said it had not predicted the scale of the international crisis.

The former Governor said their warnings should have been much stronger and he very much regretted that.

He said: “The subsequent serious problems in the banks reflected the fact that - as with other central banks, international institutions and private sector economists, (both domestic and international) - the Bank expected some international slowdown but it did not expect the worst reversal since the 1930s. Neither did it expect that this would combine with our domestic vulnerabilities, including poor risk management practices, in the way it did to create such a critical situation for Ireland.”

Mr Hurley said he spoke to the Minister for Finance Brian Lenihan on September 15 after the collapse of Lehmans. He had been absent from July 9th due to a serious illness.

The committee was told: “When I returned to the Bank, international financial markets were extremely turbulent and liquidity provision by the ECB was increasing significantly. One bank, Anglo, was very seriously affected while other banks were also experiencing increasing outflows.

“If outflows continued on the scale being experienced it would only be a matter of time before the Irish financial system was threatened.”

He said he did not support a guarantee when it was first raised but was conscious “if matters deteriorated significantly and the Irish banking system faced imminent collapse there would, in the absence of a European initiative, be no choice but to do so”.

Mr Hurley had the message from the European Central Bank had been that Ireland was expected to stand by its banks.

He said: “As a result of contacts with the ECB, it was the view at the time that an overall European initiative of which Ireland might be part was remote and that any decisions in relation to Irish banks would fall to be made by the Irish authorities.

The Government was expected to stand behind its banks and a Lehman-type situation was to be avoided.”

Mr Hurley said emergency liquidity assistance was not sufficient to the systemic problem that had raised.

He said: “The option of nationalising Anglo together with issuing a guarantee for the remaining banks was considered on the night. Overall it was considered that the signal effect of nationalising Anglo would be more negative than positive and could raise market concerns about the systemic weakness of the Irish financial system and, as with ELA, threaten the credibility of the guarantee.”

The former Governor said the government had one chance to get this right and he supported the guarantee.

He said:“There was a strong view on the night that the Government had one opportunity to assuage the markets. If the decisions taken were considered inadequate and failed the consequences for the banking system would be devastating and lead to very serious economic and social fallout for the country as a whole.

I supported the decision taken as being the one most likely to ensure that these consequences for the banking system and the country would be avoided.”

Mr Hurley said the bank underestimated the risks and he apologised for his and the banks role in the crash.

Mr Hurley said the Bank made assessments in good faith at the time but “the world changed”.

He said: “Our belief at the time was based on the data... We conducted our analysis and assessment at the time.” Asked if its assessments were still appropriate knowing what he knows now, Mr Hurley said he did.

Mr Hurley said the Central Bank did not have responsibility for financial regulation. Socialist TD Joe Higgins said the bank did not notice the dangers and should have been able to considering its resources. Mr Hurley said: “We identified the risks which was the basis on which financial regulation was taken. We published the risks.

“We had round table discussions with the banks. We had press conferences outlining this. But we did mot have responsibility for financial regulation.” Mr Hurley said the risks changed and the Central Bank’s assessments did too.