Former Central Bank governor John Hurley has told the Oireachtas banking inquiry if the bank guarantee was not put in place the banking system would have become unstable.
He said there could have been a run on the banks and the implications of that would have been devastating for the country.
He claimed there would have been an unraveling of the economic and financial life of the country and the cost of that would have been horrific.
Speaking in the final minutes of today's session, Mr Hurley said said he hoped he conveyed the extraordinary situation the country was in back in 2008.
Mr Hurley also said the option of excluding Anglo Irish Bank from the bank guarantee by taking it into government control was considered but was ruled out as too risky for the country.
Mr Hurley was head of the Central Bank from 2002 to 2009 when the country’s banks collapsed.
He said that on the night of the guarantee, nationalising Anglo and issuing a guarantee for the remaining banks was considered.
However, he said it was decided that this could be more negative than positive and could raise market concerns about the systemic weakness of all banks.
Mr Hurley said the issue on the night of the guarantee was not the risk of an Anglo default. He said that that was dealt with and arrangements were in place.
He said the issue was the risk of contagion and the collapse of the system. Mr Hurley said that it would have taken decades to recover if no guarantee was in place.
He said that while he was initially against the idea of a guarantee he did support it in these circumstances.
"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 also said that as a result of contacts with the ECB the likelihood of a European-wide solution was remote and the government was expected to stand behind its banks and avoid a Lehmans situation.
He said he had opposed the split in the Central Bank in 2003 which transferred bank supervision and regulation to the Financial Regulator.
He said warnings through the Central Bank's Financial Stability reports were not adequate and he fully accepted this role in underestimating risks.
Mr Hurley said he now agreed they should have taken stronger action at the end of 2005 and they should have escalated and reinforced their warnings.
Socialist Party TD Joe Higgins asked Mr Hurley if he was blaming the Financial Regulator and taking no responsibility.
Mr Hurley said that was not true and he hoped he did not give that impression.
Under questioning from Sinn Féin finance spokesperson Pearse Doherty, Mr Hurley said that looking back, the risks were much higher than they thought, they made their assessments in good faith but it changed in a short period of time.
Mr Hurley stood over the bank's Financial Stability reports, but said the risk profile changed.
He said they did have meetings with banks but would not have interfered with the Financial Regulator.
The Central Bank and the Financial Regulator have been subject to sustained criticism at the banking inquiry for regulatory failures.
Mr Hurley was replaced by Patrick Honohan at the end of 2009.
Following Mr Hurley's departure the Central Bank has been completely restructured.
It has introduced more intrusive regulation of banks and has become more independent of Government.
Less than 50 people regulating banks in 2008
The inquiry was told 48 people were involved in directly regulating the banks in 2008 out of staff of more than 1,000, Mr Hurley said.
Mr Hurley said analysis of the Financial Stability Reports, which said banks were sound, were the "best assessment at the time".
He said many commentators took the same view as the Central Bank.
Mr Hurley said it was "unfortunate" that the functions within the bank were split between the Central Bank and Financial Regulator just as the bubble was building. He said he did not "favour or support" splitting the roles.
Mr Hurley added when the roles were split the turf war was over.
He said the regulatory system was using "state of the art" methods to stress test banks. However, Mr Hurley said no test was perfect.
He said the banks were well capitalised and no banking system was assessed against the shock which had occurred in Ireland.
The assessment in the Central Bank's financial stability reports underestimated the world wide shock.
He added "it is quite clear we got it wrong".
"We were the leading guardian of financial stability ... we have to accept a large share of responsibility."
However, he said the Central Bank was not responsible for setting interest rates or prudential regulation.
Mr Hurley conceded the Central Bank should have issued new guidelines to Financial Regulator as it was empowered to do under legislation.
Mr Hurley said: "We did not see the crisis coming ... we should have escalated our warnings at the time".
He said he did suggest to the Government that fiscal policy could be more prudent but he never warned about a banking collapse.
He said he told the Government: "There is a lot of heat in the property market ... we should do something about it."
Fianna Fáil's Marc Mac Sharry asked Mr Hurley whether he thought, in hindsight, he was qualified enough to do the job Central Bank governor.
Mr Hurley, who had been the secretary general of three government departments before taking up his role in the Central Bank, said that if one looks at the press coverage during his tenure, he was praised for being at loggerheads with the government on occasions.
Mr Hurley also told the inquiry that the minister for finance was never told there would be a collapse in the banking sector, because no one expected it.
Mr Hurley said the minister was warned though about the over heating in the property market.
When the liquidity issues arose, talks were held with larger banks on how they could help smaller ones but Mr Hurley said they were "non-committal" although there was an understanding of the problem.
There were three staff in the Financial Regulator's office to work on the two biggest banks, AIB and BoI.
Mr Hurley said he did not know anything about staffing.
He said the European Central Bank would have known about the liquidity problems of Irish banks and about the difficulties of one Irish bank in particular.
Brian Lenihan asked for his advice in relation to a contact by Anglo chairman Seán FitzPatrick after €1bn was wiped off the bank's market worth in March 2008.
He met Anglo with the Financial Regulator and he thought the market issue which emerged was a more regulatory one and it was taken on by the regulator.
Mr Hurley told the inquiry he concluded there was very little option on the night other than to issue a broad guarantee.
He said he had initially opposed the guarantee when it was discussed on 18 September, due to the scale of it and the risk to the sovereign.
However, things changed, it was a dire situation and banks were hemorrhaging liquidity. There was very little option other than to go with the broad guarantee.
He said allowing a bank to fail was not considered on the night and he would not have advised the government to take such a risk.
Legislation to nationalise a bank taking it into government control was ready on the night of the guarantee but he said this could have had a bigger contagion effect.
There was no overruling by the Taoiseach of Mr Lenihan in his presence. There was an ordered discussion and minister Lenihan may have raised nationalisation.
Corporate governance issues in Anglo emerged on the night and the Minister was very concerned.
He arrived at Government Buildings at 7pm. Meetings were held to discuss the various options.
He told them they had very good information on the banks, one was illiquid, the risk of contagion was very serious and evolving on an hourly basis.
AIB spoke about a broad guarantee for four institutions, including subordinated debt.
He said they had to present a coherent solution and the markets were volatile.
The amount of subordinated debt was not a big issue in the overall contact although not on its own.
At the end, the conclusion was reached which all parties agreed to.
Asked how some banks formed a different view, he said the Taoiseach was extremely clear.
He said he was very aware of Anglo's liquidity position and knew on the Monday of the potential default the next day.
However, he denied he had said there was no plan to deal with it.
He said there were arrangements and there would be no default. He said he could not talk to other banks about the liquidity position of one institution but it didn't mean he didn't know.
He was asked about a Cabinet note from 28 September which said "the Governor of the Central Bank has been in touch with the ECB. As of 9AM, the Governor has not heard from Trichet." Not was underlined.
He said there would have been contact with the ECB.
There was a general view, an understanding from the ECB and others that Europe could not have a Lehmans and each country must stand behind its banks.
