Anglo Irish Bank should have been allowed to fail in September 2008, Central Bank governor Patrick Honohan has told the Oireachtas banking inquiry.

Prof Honohan said on Thursday that it should have been clear to the State’s financial authorities that the bank was in significant trouble and in danger of going bust.

Asked by Deputy Michael McGrath (FF) if Anglo should have been allowed to fail in September 2008, Prof Honohan replied “Yes, certainly.”

He said the banks should have been supplied with emergency liquidity assistance until the weekend after September 29th, the night of the bank guarantee, and Anglo should have been allowed to fail on that weekend.

Prof Honohan, who was not Central Bank governor at the time, said it should have been clear then that allowing Anglo to fail was the right move.

“That would have been more clear had they known what the size of the problem was . . . All the investment banks that looked at it saw that Anglo’s business model was not credible in the market,” he said.

“It had run out of cash and there was a big problem with its portfolio, which would have eaten through its capital.”

He said he had “the greatest sympathy for the people in the room on the night of the bank guarantee”. The decision they made, in the context of the advice they were given, was “quite understandable”.

Asked by Deputy Eoghan Murphy (FG) if "a blanket guarantee was what you do when you don't know what you're doing", Prof Honohan said the remark was "facetious".

Natural thing to do

The guarantee was “a very, very natural thing to do”, Prof Honohan stated, and was what advisers Merrill Lynch said the government should do at the time.

He said then minister for finance, Brian Lenihan, agreed with the bank guarantee but thought Anglo and Irish Nationwide Building Society should be nationalised “there and then”.

He said Mr Lenihan told him he argued strongly not to cover the subordinated debt linked to the institutions, but he was overruled.

Asked by Senator Michael D’Arcy (FG) who had the authority to overrule the minister for finance, Mr Honohan replied that Mr Lenihan “was not the senior politician” and it was probably “the weight of advice around him as well”.

He added that he did not want to name names, but the taoiseach and attorney general were the only other political people present.

Mr Lenihan, he said, backed down on the matter and expected the two institutions would be nationalised by the end of that week. But the bank guarantee led to “a miraculous inflow of funds” and nationalisation was “off the table” for some time.

Prof Honohan said the Central Bank and financial regulator appeared to be in the backseat when many of the decisions were taken in 2008.

“They weren’t pushed into the backseat,” he said. “It just seemed de facto to be the situation.”