Minister for Finance Brian Lenihan has said he rejected a proposal from the former Anglo Irish Bank chairman Sean FitzPatrick to merge the lender with Irish Nationwide Building Society.
Addressing the Joint Committee on Finance and the Public Service in Dublin today Mr Lenihan also said Irish banks can withstand their losses and have adequate reserves following the Government's recapitalisation plan which see €3.5 billion of capital injected into AIB and Bank of Ireland.
The Government would widen its search for a successor to central bank governor John Hurley to include candidates from the private sector, breaking decades of convention, Mr Lenihan said.
Traditionally Central Bank governors have been appointed from senior civil service personnel.
"The traditional practice whereby it is axiomatic that a senior civil servant should be appointed as governor of the central bank will not be followed by me," Mr Lenihan told the committee.
"I propose to have a clear survey of the field and bring the most suitable candidate forward who will ensure the central bank will perform its role."
Mr Hurley, who is also a member of the European Central Bank's Governing Council, was meant to retire in March but Lenihan asked him in January to stay on "for a period of some months" during the current financial turmoil.
Mr Lenihan did not give a timeframe for an appointment but said that Hurley could not stay on indefinitely. He said he would consider Opposition parties' suggestions on potential candidates.
A new Central Bank governor may well have additional regulatory oversight after Minister Lenihan signalled earlier this month that the current system of a separate Central Bank and Financial Regulator was not working well and needed to be changed.
Currently the Central Bank only had powers of “moral persuasion", not legal powers, to rein in the lending practices of the banks, Mr Lenihan said.
The Government will also introduce a definite cap on pay for bank executives and change its policy of appointing top civil servants as Governor of the Central Bank, Mr Lenihan.
Pay in the banking sector was out of step with corporate remuneration, he said.
Additional reporting Reuters/Bloomberg