The European Central Bank (ECB) told the Republic it must stand with its failing banks, the banking inquiry heard.

Former Central Bank governor John Hurley told the inquiry that the banks had sufficient liquidity in the week leading up to the guarantee.

Mr Hurley said everything changed on the morning of September 29th, 2008, when it became clear that Anglo Irish Bank would default.

He said that the Central Bank was warned in discussions with the ECB that another Lehmans Brothers 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.”

This is in contrast to what former ECB president Jean-Claude Trichet told the committee.

Mr Hurley, who was governor from 2002-2009, said the government at the time had one chance to get things right and that 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.”

He told the inquiry the Central Bank did not foresee the crash or the dramatic fall out.

He said that it had to accept a large share of responsibility for what happened, but insisted the institution only had powers of guidance.

Financial Regulator

The former governor said it was the Financial Regulator who oversaw fiscal responsibility.

Mr Hurley said: “The powers available to the governor of the Central Bank and the Central Bank at the time were a general power of guidance. The detailed powers were actually with the Financial Regulator.”

Mr Hurley said the decision to split the functions between the two was a “mistake”.

He said it meant the Central Bank could not regulate the banks and that it did not interfere with the Financial Regulator’s responsibilities.

The inquiry also heard that 48 people were involved in directly regulating the banks in 2008, out of more than 1,000 staff.

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

He said the institution underestimated the risks and had not predicted the scale of the international crisis. He said that their warnings should have been much stronger and he very much regretted that.

Mr Hurley said the Central 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.”

He said he doesn’t believe regulation could have prevented the crash and said international factors played a crucial role, although the former governor said he “accepts the Central Bank’s share of responsibility”.

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 not have responsibility for financial regulation.”

Statement amended

The written statement of John Hurley was amended by the banking inquiry’s legal team.

The former Central Bank governor had provided a written address to the committee, but its legal advisors changed and deleted a section of it.

It said: "This statement has been proofed by the Oireachtas legal team in accordance with section 33AK Central Bank Act 1942 [as inserted by section 26 of the Central Bank and Financial Services Authority of Ireland Act 2003 and as amended by section 1 of the Central Bank (Amendment) Act 2015].

“Where necessary parts of the statement have been deleted or a summary or aggregate of those parts has been created and inserted in compliance with the Act.”