Central Bank Governor Patrick Honohan has said the bank guarantee could end up costing €40 billion, even after taking into account amounts recoverable by the Government in selling bank shares.
Professor Honohan told the Banking Inquiry that the original €64 billion cost had been whittled down to €40 billion but there were many "ifs and buts" remaining.
He said the €40 billion could not all have been avoided but it could have been whittled down, adding that civil servants were working very hard on this.
The Professor told the Inquiry that the form of bank guarantee taken by the Government was clearly a mistake, particularly the guaranteeing of subordinated debt.
With the benefit of hindsight, Anglo Irish Bank and Irish Nationwide Building Society should have been put into liquidation on September 29 2008, he said.
Professor Honohan said he stood over the conclusions made into his May 2010 report into the failings of the Central Bank and the Financial Regulator during the financial crisis.
The Professor criticised central bank supervisors for trusting banks and being too deferential, adding that there was deficiencies in skills and resources among staff.
He said the approach should have been more intrusive and assertive and financial stability reports were too reassuring.
He said this amounted to a triumph of hope over reality.
Mr Honohan said if Anglo had been liquidated in 2008, it would have been seen as a European Lehman Brothers and the Government would have been pilloried and become pariahs internationally.
He said Ireland got a bad rap for the bank guarantee but it would have been worse if Anglo was liquidated and Ireland said to hell with bondholders.
He said the financial regulator should have known it was bust.
It should have been wound down but it would have been clearer if they knew the size of the problem, he said.
Mr Honohan had the greatest sympathy for the political people in the room on the night of the guarantee.
In the context of the advice they were given, the decisions were "quite understandable", he told the committee.
Mr Honohan said Anglo Irish Bank was not an important contributor to the Irish economy, however, liquidating it would have caused a systemic risk.
Asked by Fine Gael TD Kieran O'Donnell about the feasibility of an orderly wind down of Anglo, Mr Honohan said the ECB was in no form of mind to permit wind downs that put losses on senior bondholders.
In terms of when the banks became insolvent, he said this was very difficult as it was hard to put a figure on assets.
He said action should have been taken by authorities to stem the risks in 2004, 2005 and 2006, after that was too late.
Mr Honohan said then Finance Minister Brian Lenihan told him he wanted to have Anglo and Nationwide nationalised on the night of the guarantee.
However, Mr Honohan said the Minister was "over-ruled" on the night.
While he did not say who over-ruled Mr Lenihan, Mr Honohan said the Taoiseach and the Attorney General were the only other political people present.
Mr Honohan told the Inquiry that the Irish authorities were approached for aid from a large German bank in the IFSC at the height of the financial crisis.
He said there were approaches from Depfa to the Central Bank for emergency liquidity.
Mr Honohan said the request was rightly turned down.
Sinn Féin's Finance Spokesperson Pearse Doherty asked Mr Honohan if he believed the Government tried to have a "non-intrusive" environment in the IFSC.
Mr Honohan said the whole regime did not want to interfere, but he added big banks did not mind having regulators examine their books.
Asked about the ECB's refusal to attend the inquiry, Mr Honohan said it was not resistant to sharing its views and he indicated it may participate in some form.
He said he had been talking to several people involved and there may be some possibility that the information and the understanding would be communicated in some way as distinct from his own attempts to do so.
He said the difficulty for the ECB was that it viewed its independence as very important and was accountable to the European Parliament rather than national parliaments.
Fianna Fail's Michael McGrath asked about the €52 billion deposits on Anglo's books in September 2008 and what would have happened if the bank was liquidated.
Mr Honohan said it would have been difficult to work out, it was complex and it was not clear what would have happened.
He said there was now a resolution framework in place but there wasn't then.
Mr McGrath also asked about Mr Honohan's estimate that the bank guarantee would cost €40 billion and the difference between that assessment and Mr Noonan's suggestion this week that it would cost between €30-35 billion.
Mr Honohan said the Minister was hoping for improved prices and was making an assumption about future returns.
The Inquiry has been adjourned until next week.
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