THE MAIN Irish banks would, in all likelihood, have run out of cash within days if Anglo Irish Bank had been allowed to collapse in a disorderly manner in the autumn of 2008, according to Central Bank governor Patrick Honohan.

In his report on the banking crisis, which was considered by the Cabinet last night, Prof Honohan queries the inclusion of subordinated debt, which accounted for just over 3 per cent of the total, in the bank guarantee scheme but says that a guarantee was justified.

A key passage in the Honohan report reads: “Closure of all, or a large part, of the banking system would have entailed a catastrophic immediate and sustained economy-wide disruption involving very significant, albeit extremely difficult to quantify, social costs, reflecting in particular the fundamental function of the payments system in a modern economy.

“These costs would have been broad-based in terms of income, employment and destruction of the value of economic assets and would have been on top of the recessionary downturn which has actually occurred.

“Considering the experience of other countries in such circumstances, the social and economic costs, if they could be quantified, would surely have run into tens of billions of euro. There would also have been spillover effects vis-a-vis other countries.

“So either Anglo’s disorderly bankruptcy had to be avoided, or protective measures taken for the rest of the system, or – as was decided – both. These immediate costs were avoided by the guarantee.”

The report looks at the issue of how important Anglo Irish was to the banking sector.

“Anglo was clearly systemically important in the prevailing conditions at the end of September 2008. There can be little doubt that a disorderly failure of Anglo would, in the absence of any other protective action, have had a devastating effect on the remainder of the Irish banks. Given the other banks’ reliance from day-to-day and week-to-week on the willingness of depositors and other lenders not to withdraw their funds, and the certainty that those lenders would infer from the failure of Anglo that all the other Irish banks might be in a comparable situation, in all likelihood the main banks would have run out of cash within days.”

Prof Honohan is critical of the structure of regulation put in place by the Government. “According to the 2003 Act, the CBFSAI (Central Bank Financial Services Authority of Ireland) was an entity with one legal personality, but with three decision-making bodies.”

On the response of the regulatory authorities he adds: “While it is easy to imagine that senior management or CBFSAI board or authority members might have instinctively and almost unconsciously shielded away from aggressive action to restrain politically connected bankers and developers during a property boom, no evidence has been presented suggesting that this was the case.”