A failure by the Government to take action on the night of the bank guarantee in late September 2008 would have had "major negative consequences for Ireland", the former treasurer of Irish Life & Permanent told the Oireachtas Banking Inquiry.

David Gantly, who was IL&P's group treasurer from 2000 to February 2009, said capital markets were entirely dysfunctional by late 2008.

“During September the markets were awash with rumours of banks having serious liquidity problems,” he said.

“Problems in the market had dragged on for over a year and it was apparent that the Irish banking market was facing a severe liquidity position.

“It was therefore inevitable that some action was required to keep the banking system functioning,” Mr Gantly said, adding that he had no knowledge of the discussions that took place between the various parties in the run up to the night of the guarantee.

While aware of these difficulties, Mr Gantly told Senator Susan O’Keeffe that he never thought IL&P was “going to go under”.

Mr Gantly said IL&P’s funding strategy before the crash was “balanced and robust”, adding that it was “virtually impossible” to plan or anticipate a one-in-100-year event.

“Conventional wisdom had it that a liquidity event would be short lived and this thinking proved to be incorrect when faced with an enormous systemic shock,” he said.

Mr Gantly noted that at the end of 2007, the bank’s liquidity portfolio amounted to €4.2 billion.

“The portfolio was rated 73 per cent AAA, 20 per cent AA and 7 per cent single A,” he said. “The principal holding comprised Euro government bonds, highly-rated bank floating-rate notes, and prime euro denominated residential mortgage-backed securities.”

He said the composition of the liquid assets was “prudent and of high quality”, which ensured that the portfolio could be liquidated with relative ease, which is a requirement of an effective liquidity portfolio.

However, the composition of IL&P’s liquidity changed significantly between 2007 and September 2008, driven by market developments, he said.

“By late 2007 a significant amount of our short-term funding sources had either dried up or were severely restricted.

“In a presentation to the risk committee, on December 7th, 2007, I pointed out that most short-term funding sources were by then effectively closed.

“In addition, I pointed out that commercial deposits were very restricted and conventional securitisation was effectively closed.”

Scarce resources

Mr Gantly told the committee that IL&P’s business model of the previous five to 10 years was seriously threatened and that funding and capital were scarce resources with substantially higher associated costs.

“While I pointed out that credit spreads were likely to rise I did not envisage that would widen to the extent they did,” he said.

Mr Gantly said remuneration arrangements within the bank’s treasury unit were determined at group level and included fixed and variable components.

“Within Treasury I am satisfied that the remuneration arrangements in place were conducive to the promotion of an appropriate risk environment that facilitated sound risk governance,” he explained.

Mr Gantly said IL&P’s assets were primarily made up of residential mortgages, which qualified as a liquid asset for regulatory reporting.

“In late 2007, in response to my concerns regarding funding in the wholesale markets, I initiated a programme, whereby we created liquid pools of mortgage assets.”

“This is exactly what we would have done if we were to prepare a portion of the mortgage portfolio for a conventional securitisation.

“The market appetite for securitised assets had at this stage disappeared but we were able to use these pools as security against drawings from the ECB.”

On October 9th, 2008, IL&P had an exposure of €92.4 million to Icelandic banks.

Mr Gantly told Fianna Fáil TD Michael McGrath that money was “written off” in full once Iceland defaulted on its debts.