The bank guarantee was essential to avoid a collapse of the banking system and the economy, a former senior Department of Finance official has said.

David Doyle, who was secretary general between 2006 and 2010, said Anglo Irish Bank "had to be nationalised to stop it collapsing and triggering a wider banking failure".

Mr Doyle criticised the litany of failures by a series of bodies including his own department.

He told the banking inquiry "the Central Bank placed undue reliance on the (Financial) regulator's assessment of the financial reports of the Irish banks. That was a mistake.

“The Regulator took the reports of the banks at face value and did not subject their loan books to any meaningful scrutiny. That was a mistake.

“The Department of Finance was wrong to rely on consensus forecasts for a soft landing. It was also wrong to take at face value the assessment of both the Central Bank and the Regulator of the state of the financial sector. I regret this.”

Mr Doyle said nationalising Anglo Irish Bank and Irish Nationwide was considered on the night of the bank guarantee but was ruled out.

Mr Doyle said there was draft legislation prepared ahead of the meeting to nationalise a bank and to guarantee the banks.

He said there was a strong case but it was overruled because it could lead to an undermining of the banks.

Mr Doyle said “whatever about these contending viewpoints, the simple fact was that if emergency measures were not taken that night to address the problems created by the banks, there was a very real danger of a collapse in the domestic banking industry, not just in Anglo but quickly in the rest of the banks through a widespread loss in confidence.

“The damage to individual depositors, large and small, both personal and business would have been extreme. The potential reputational damage would have undermined consumer business confidence, domestic and international investment - existing and future.”

Speaking about the night in September 2008, Mr Doyle said the view of the European Central Bank was quoted to the meeting by the then Governor of the Irish Central Bank.

“On the night of the guarantee, Anglo was found to be illiquid, the Financial Regulator was still supporting the view of Anglo that it was profitable and solvent. All the banks were suffering from liquidity pressures. But Anglo was facing imminent collapse in the absence of access to liquidity. This was the reality facing the government on the night of September 29th 2008.”

He said the question of emergency liquidity assistance “was considered” for Anglo but that the ability of the system to keep it secret was regarded as “slim to none”.

He said the Financial Regulator had assured the government that all the banks were solvent. “Merrill Lynch in their document of September 29th said ‘it is important to stress that, at present, liquidity concerns aside, all of the Irish banks are profitable and well capitalised.’”

He said that warning came from Jean Cluade-Trichet and it warned no bank failure could be allowed “or words to that effect”.

“The simple fact was that if emergency measures were not taken that night to address the problems created by the banks, there was a very real danger of a collapse in the domestic banking industry, not just in Anglo but quickly in the rest of the banks through a widespread loss in confidence.

“The damage to individual depositors, large and small, at personal and business, i.e. at all levels, would have been extreme. The potential reputational damage would have undermined consumer business confidence, domestic and international existing and future investment.

“A collapse in the banking industry would have led to the sovereign borrowing reputation and capacity being irretrievably damaged. A collapse on this front combined with impacts on revenue would have resulted in government services and investment across the board being summarily cut or suspended. No one was prepared to countenance this.”

Mr Doyle said the then Taoiseach Brian Cowen and Minister for Finance Brian Lenihan left the room for a private political discussion and returned with a decision of a blanket guarantee.

He said Mr Lenihan did not indicate any disagreement with that decision.

Mr Doyle said it was Mr Lenihan’s view at the start of the meeting on September 29th 2008 that Anglo Irish Bank should have been nationalised.

He said when Mr Lenihan listened to the reservations about what nationalising could have for the credibility of the guarantee, he changed his mind.

Mr Doyle also said the banks caused the economic crash but the Financial Regulator and others should have done more.

The former Secretary General said fiscal policy should have been more conservative but claimed the crisis was caused by dramatic escalation in lending by the banks.

He said the Department was wrong to take the assessments without challenge and Mr Doyle said that was wrong.