Rescuing the banks could ultimately cost Irish taxpayers €40 billion, the governor of the Central Bank has said.

Speaking at the Oireachtas banking inquiry, Patrick Honohan said this figure took account of money that might be recovered, such as the Government selling its shares in the banks.

“So the €64 billion [the gross cost of the bailout] whittled down eventually to around €40 billion, but there are so many ifs and buts you could spend the whole morning on them,” he said.

Asked where that €40 billion had gone, Prof Honohan replied that it went “up in smoke” on property that wasn’t worth anything.

“It went on buildings nobody wanted to live in,” he said, and on the wages of those who built them.

He said many of the regulatory people he spoke to for his report The Irish Banking Crisis; Regulatory and Financial Stability Policy 2003-8 were "shattered" by what had happened.

They felt something had gone badly wrong, they weren’t sure why, and not sure what they could have done differently. No one was going around saying “these things happen”, he said.

He also said he found “no evidence of any corrupt transactions”. He had asked those involved if they had been influenced if they knew someone was “politically well-connected”. They had told him they were not.

No ECB contact

Asked by Senator Susan O'Keeffe (Lab) if he had spoken to the European Central Bank for his report, Prof Honohan said no. The ECB was not involved in the guarantee, he said.

He also said he did not believe Jean Claude Trichet had left a message on the voicemail of then minister for finance Brian Lenihan to say he should guarantee the banks. He said he understood the message was that countries were responsible for looking after their own banks.

Asked about the ECB’s refusal to send a representative to the banking inquiry, Prof Honohan said the bank did not want to put itself in a position of being accountable to a national parliament ahead of the European Parliament.

However, the ECB was “not resistant” to sharing its views, and there could be some possibility that “information and understanding” could be communicated.

Credit rules

Inquiry chairman Ciarán Lynch (Lab) asked about what happened to 1995 Central Bank rules that aimed to set credit concentration limits for banks.

Prof Honohan replied that he didn’t know. He supposed that when the rules were introduced, the Central Bank “hadn’t realised they would be so far away from what the banks were likely to want to do”.

The rules were “on the books” but were considered “a mistake”, he said.

Asked if the cost to the taxpayer would have been lower had the banks been more prudently regulated, Prof Honohan said yes, but the early 2000s would not have been as good for the “many people” they were good for.

He agreed with Deputy Pearse Doherty (SF) that the government didn’t want to interfere with the banks, and it was not just the government, but the “whole regime”.

He also said the collapse of Lehman’s was a catalyst for, but not the cause of, Ireland’s financial crisis. The development had an effect on others, but Ireland was already in a bind, and one shock or another would eventually have caused the crisis, he said.