Former AIB chief executive Eugene Sheehy has told the Oireachtas Banking Inquiry that there would have been "panic on the streets" and a run on deposits if the Government had not issued the bank guarantee on the night of September 29th, 2008.

He said Anglo Irish Bank would have defaulted with dire knock-on effects for the Irish financial system.

However, Mr Sheehy said AIB and Bank of Ireland had sought a four-bank guarantee and not the blanket guarantee that was actually issued by the State.

“From our perspective a four-institution guarantee was appropriate for a number of reasons,” he said.

“Firstly, an Anglo default was certain to result in immediate rating agency downgrades and worldwide risk aversion for all Irish Banks.

“Secondly, in GB [BRITAIN] with £10 billion in retail deposits we could expect to experience a run on deposits immediately. Thirdly, given the public’s reaction to Northern Rock it was likely that domestic customers would panic and Irish branches would not be able to cope.”

AIB wanted Anglo and Irish Nationwide to be nationalised on the night of the guarantee and had agreed to provide €5 billion in emergency funding to Anglo to get through to the end of that week.

Dismissed from room

Mr Sheehy, group chief executive of AIB from 2005 to 2009, said he spent six hours at Government Buildings on the night of the guarantee but was dismissed from the room on three occasions.

They left the building at 3.30am after being told they were “no longer needed”.

“When we saw the guarantee document for the first time later that morning we could not understand why Anglo and INBS were included,” he said.

“All our discussions that night were based upon the premise that Anglo was to be taken down and as such we did not think they would be part of the guarantee. In fact, we were at that time, in response to a government request risking our own liquidity to expedite Anglo’s liquidation that weekend.”

Mr Sheehy said he did not call anybody to question why Anglo and Irish Nationwide were included.

He said “the government had made a decision. We weren’t going to come out and criticise that” and the AIB had “no choice” but to accept it.

Asked why he was apologising, Mr Sheehy said: “We took too much risk in the sector that turned out to be toxic.

“I was CEO, I could have stepped in. That is what I am apologising for.”

He also disputes a department of finance note on the nature of discussions on the night of the guarantee, adding that he had no discussion with the government about AIB’s solvency.

Mr Sheehy also expressed his “deep personal regret” for his role in the events at AIB.

“I am keenly aware of the damage caused and this fact occupies my thoughts on a daily basis,” he added.

Anglo takeover

Mr Sheehy said AIB was asked by the minister of finance to consider taking over Anglo.

He said when the minister asks you something, you seriously contemplate it but the proposal never made it to the board of AIB.

He told the inquiry there were “no detailed discussions” on the possible takeover.

Mr Sheehy said AIB was solvent on the night of the guarantee. He said he didn’t remember if there was a piece of paper exchanged between officials and the government that night.

He told the inquiry AIB’s message was: “Stabilise the situation immediately. That day globally was unbelievable, it was clear worst things were to come internationally. We said it needed to be stabilised decision now.”

Mr Sheehy, who in 2006 and 2007 earned basic pay of almost €1 million, admitted his income at the bank was “very high” and “not justifiable”.

He said he reinvested his bonuses back into AIB and denied there was a clamour of bank bosses looking for more remuneration.

“There is no way you could tell anyone on the streets these were acceptable levels of pay.”

Mr Sheehy said he “certainly argued bonds should be included” but said AIB had none that would have been enhanced by the guarantee.

“There was no agenda from our point of view in getting something extra.”

Socialist TD Joe Higgins asked Mr Sheehy if he had ever considered giving a contribution of his salary to the taxpayer.

He replied that he had paid tax on everything he earned and took a voluntary reduction in his pension when he left the bank.

Mr Sheehy confirmed he received a €250,000 pension from the bank but refused to disclose how much of a voluntary reduction he took.

He was also asked about evidence given by Nama chairman Frank Daly on the lending practices of banks.

Mr Daly told the committee earlier this month there was no doubt relationship lending between the banks and debtor existed and claimed there was a comfort scene where institutions had a “view of the standing of the debtor”.

Mr Sheehy said he agreed with Mr Daly and said it “wasn’t a business model but it did happen”.

Pressure for consensus

Michael Buckley, former group chief executive of AIB, earlier told the committee the group think that existed across the banks was a big risk.

“That is the pressure for consensus and the suppression of contrarian views within banks,” he said.

“My experience was that people working in banks were prone to a consensus culture and that this had downsides as well as upsides.

“The Allfirst fraud in 2002 and the fx overcharging issues that emerged in 2004 in ROI had common features - both problems had had their origins in the 1990s.

“Reluctance to speak up and express contrarian views was part of the reason why they did not come to notice easier.”

Mr Buckley declined to say what his pension was and said he feels no obligation to do so but he denied the pay of officials was a factor in their failure to assess the risk.

Mr Buckley said he had no evidence of reckless lending during his tenure from 2001-2005.

He said AIB was run to the very best of his ability but that did not mean there were no issues that arose during those years.

Mr Buckley told the inquiry the issues were not on the scale of the ones the committee was investigating.

Outgoing AIB chief executive David Duffy will give evidence to the hearing this afternoon.