Seán Quinn's exposure to Anglo Irish Bank could have threatened the stability of the entire Irish financial sector, the banking inquiry has heard.

Tony Grimes, the former deputy governor of the Central Bank, was questioned about a meeting of government and financial officials in July 2008 where concerns about Mr Quinn's loans were raised.

Mr Grimes told the committee that the Central Bank did not take action because it was considered an issue for the financial regulator.

“I think the Central Bank regarded it mainly as, you know, a regulatory issue but we would have been interested in the implications it could have, both with the share price of Anglo and any further implications of that, for liquidity to Anglo in the event that market confidence in Anglo were to decline further,” he said.

‘Highly unusual’

Mr Grimes said it had been an indirect concern for the Central Bank because it did not have any direct powers. He told the meeting he found the funding of Mr Quinn’s margin calls to be “highly unusual”.

Asked by Fianna Fáil TD Michael McGrath if it was such a significant issue that it could have affected the stability of the financial system, Mr Grimes replied: "Yes."

He insisted the Quinn family and the potential fallout were not discussed on the night of the guarantee. “At the meetings that I was at, Deputy, it did not emerge at all in substance.”

The inquiry was told how liquidity issues arose in the banks in September 2007, a year before the collapse of the institutions.

Mr Grimes said a possible guarantee was considered at that stage but only as a contingency plan. He said that changed in February 2008 when it became clear assistance would be needed.

“It was into, I think, a realisation that we’d better be prepared in case and that a lot of the discussions around that time had that in mind,” he said.

“So I think we felt it wasn’t a purely academic exercise at that stage and there was a possibility that at some stage we would have to make a call.”

Mr Grimes said there was no basis for government intervention in early 2008 because the institutions were solvent.

He told the committee about a meeting of the domestic steering group on September 26th attended by the then taoiseach, minister for finance and officials from the Central Bank and National Treasury Management Agency.

Two institutions

He said they were told about financial problems in two institutions – one with a €2 billion hole and the other €8.5 billion. They had no idea the banks were insolvent but were struggling.

Socialist Party TD Joe Higgins said Mr Grimes’s evidence proved that everyone in the political and financial leadership knew that two banks were insolvent days before the guarantee.

Mr Grimes insisted this was not the case and said it was clear to him the institutions were “under stress” but were solvent.

The committee was told that €40 billion in emergency liquidity assistance was extended to Irish banks by the end of September 2008, compared to €5 billion one year earlier.

Mr Grimes said the system could not continue on this basis without the banking system imploding.

He insisted that the guarantee was the best option available to the government.

Asked about the warnings from the European Central Bank that the government could not let banks fail, Mr Grimes replied: "There was a strong expectation that member states would stand behind the banks in their jurisdiction.

“My recollection is it was rather late in the day when . . . you know, a few days before the 29th,” he said.