Ireland made “an insane decision” in providing the bank guarantee in 2008, a US expert on the industry has told the banking inquiry.

Professor William Black a former director of the Institute for Fraud Prevention the United States said bankers believed “not much of anything happens” by way of consequence for their actions. He said this was unlikely to change “until the next bubble happens”.

Professor Black said the Irish Bank guarantee had been “the worst possible decision that could have been made” and “an attempt to bail out the German banks and that was never going to happen”. It was “the most destructive own goal in history” he said.

He said the Government was essentially bullied into the guarantee on the bailout which was made on September 30 2008. “If the banks are lying to you and the regulators are utterly incapable” and the message is that “tomorrow the world ends unless you take this action, then you take that action”, he told TDs and senators.

The academic from the University of Missouri - Kansas City also said banks should not be allowed to choose their own auditors.

He said banks internationally had engaged in a “dog and pony show” in which audit firms would be brought in to bid for the work. Without being explicit, the auditors would show they were “the right kind” of firm.

The expression in the auditing community when firms were appointed by a big bank, was that they “had caught a whale” he said.

Professor Black said banks had engaged in essentially a “Ponzi system”. They would lend to a high risk applicant, setting a premium on the interest rate.

So if the cost of a bank loan was 4 per cent, it could lend at 9 per cent, allowing the bank to report a profit or “spread” of 5 per cent, which amounted to 500 base points.

The “right” auditing firm would view the spread as a “big, big, positive spread” and give the bank a “clean opinion”. When the borrower ran into difficulty the loan would be “rolled over”, or remortgaged, so starting a new loan.

Professor Black said “if banks could choose” they would choose conservative auditors. But he said the auditors “were chosen by bankers who wanted a clean opinion” and could report large profits even if the loans should have been treated as a bad debt.

The reported large profits would allow the senior executive bankers to “cash out” taking payments in the form of bonuses which were based on the volume of the banks business, rather than the quality of that business.

But he said lower down workers in banks who made the actual deals over mortgages were often paid subsistence rates, with bonuses as little as five hundred dollars per year. When a dealer failed to make loans they were often humiliated by a cabbage being placed on their desks, he said.

He proposed that Government appoint a panel of auditors to which the banks would be directed. The panel members would be regulated like football teams and poor performance would get them relegated, while worse behaviour would get them “kicked out”.

In response to questions from committee chairman Ciarán Lynch Professor Black said “you only get deterrents when you affect the senior executives who make the decisions”. He said his experience in the United Stated had shown “penalties have to include jail sentences for criminality”.