Former financial regulator Patrick Neary argued for a blanket bank guarantee on the night of September 29th, 2008, as it would provide more certainty to the markets the following day.
The alternative plan had been to nationalise Anglo Irish Bank while guaranteeing the other institutions, he said.
In evidence to the Oireachtas banking inquiry on Thursday, Mr Neary said it was his view on that night that all of the domestic banks were solvent.
“All banks were in compliance with their required capital ratios, were in a position to meet their obligations on a going-concern basis, but liquidity was becoming a critical issue for them, especially Anglo,” he said.
Mr Neary told the government it could be “very confusing” for the markets if a distinction was being made between nationalised banks and guaranteed banks.
“This would neither encourage the inflow of liquidity that would be expected to occur, nor would it stem outflows of deposits,” he added.
Phone calls at 3am
Mr Neary returned to his office on Dame Street at about 3am and made phone calls to representatives of Irish Life & Permanent, EBS and Irish Nationwide Building Society to advise them of the government decision.
“I tried but was unable to make contact with representatives of Anglo Irish Bank,” he said.
Bank of Ireland and AIB had both been present in Government Buildings on the night of the guarantee.
Mr Neary said the effect of the guarantee was evident immediately. "The daily liquidity reports being submitted by the banks to the Central Bank showed inflows of both market and retail resources and an end to the pattern of outflows which had been occurring prior to the guarantee," he said.
Replying to a question from Sinn Féin's Pearse Doherty, Mr Neary said the financial troubles experienced at an earlier stage by the UK's Northern Rock bank sent a "chill down everybody's spine at that stage".
Mr Neary said it “triggered heightened awareness” of potential problems in the Irish financial system but he couldn’t recall any root-and-branch inspection of Irish banks on foot of what happened at Northern Rock, which resulted in depositors queuing at branches to withdraw their funds.
On October 2nd, 2008, Mr Neary went on RTÉ's Prime Time current-affairs television programme and said all of the Irish banks were well capitalised.
Mr Doherty asked him why he made that statement given the detailed information he had on the institutions at the time and the fact that the bank guarantee had been issued only days earlier.
“On the night, given the information at my disposal, I fully believed in the statement I made,” he said. “That was my belief and it was stated honestly as my belief.”
In relation to his departure from the Irish Financial Services Regulatory Authority in late December 2008, he said that given the events of previous months he felt his position in the authority “was going to be difficult” and that it “might have been better” to retire.
Mr Neary is reported to have received a payoff at the time of €630,000 and a pension of €114,000. He said his salary and pension were in line with Civil Service guidelines.
Asked by Fine Gael's John Paul Phelan if he felt vilified by media commentary around his stewardship of Ifsra, he said: "It was a difficult period for my family and myself."
He was also asked if he could understand the anger felt by taxpayers and shareholders about the collapse of the banking sector and the cost to the State.
“I most certainly can and I regret that very much,” he replied.