Irish banking crisis home made but ECB made it worse -inquiry

* Banks threatened financial system as regulator stood back

* Central bank underestimated risks, govt policy unsustainable

* ECB put Ireland (Other OTC: IRLD - news) under "undue pressure" to enter bailout

* Regulator says little now in common with past practices

By Padraic Halpin and Conor Humphries

DUBLIN, Jan 27 (Reuters) - Failures in banking, regulation and government policy directly caused Ireland's costly banking crisis and Europe's response made it worse, a parliamentary inquiry into the 2008 crash concluded on Wednesday.

Taxpayers stumped up 64 billion euros ($69.57 billion) - or almost 40 percent of annual economic output - after a property crash left its now mostly state-owned banking sector requiring the biggest state rescue in the euro zone.

The banking crisis pushed Ireland into a three-year sovereign bailout in 2010 when access to market funding dried up, after Greece and before Portugal and Cyprus.

The European Union, lagging behind the United States, is still grappling with cleaning up its financial sector in the aftermath of the 2008 financial crisis. Italy agreed a scheme with the European Commission on Tuesday to deal with non-performing loans of its banks.

"What we found it was no single individual, it was no single institution and it was no single decision. It (Other OTC: ITGL - news) was the compound outcome of many years, it wasn't a conspiracy in a darkened room," inquiry chairman Ciaran Lynch told a news conference.

"And that would be the concern that I would have... of the likelihood of this happening again. That it will happen if you don't actually change the culture."

The report said banks were allowed to breach lending limits without fear of any consequence, threatening the financial system, and regulators adopted a 'light touch', non-intrusive approach that failed to prevent the crash.

The central bank, "the leading guardian of the financial stability of the state", underestimated the risks while the government adopted long-term spending commitments on the back of unsustainable cyclical construction-based revenue, it said.

The "almost universal" theory that the once booming 'Celtic Tiger' economy was bound for a soft landing was never substantially tested by the government or officials and it was also adopted by many international monitoring agencies.

The inquiry found that the EU lacked an overall framework to deal with the crisis and while Ireland's entry into an international bailout was inevitable, the lawmakers sharply criticised the European Central Bank's role in the lead-up.

"The ECB nevertheless put the government under undue pressure to enter a programme, but also insisted that there would be no burden sharing with bondholders," the report said.

The ECB has previously denied applying excessive pressure on Ireland. Jean-Claude Trichet, who was chief of the Frankfurt-based central bank at the time, declined to appear before the inquiry, as did current ECB President Mario Draghi.

A month before the committee began work, the ECB released Trichet's 2010 correspondence with the then Irish finance minister, along with a statement defending his warnings of the limits of emergency funding for Irish banks, and his refusal to allow the bail-in of senior bank bondholders.

It pointed to the risk of "negative spillover effects on the financial stability of Ireland, as well as on other European countries" if they had been forced to take losses.

A spokesman for the ECB said on Wednesday that it has been transparent regarding its role in supporting Ireland during the crisis on many occasions and was confident that this had been a "valuable contribution".

"MATTER OF ETERNAL SHAME"

The inquiry, which took evidence from over 100 witnesses over 10 months, was the first time many of the former bank executives, politicians and officials at the helm when the system imploded had spoken in public since the crisis.

While Dublin has begun recouping some of the billions of euros it sunk into its banks, the banking crisis is still a sore and hotly debated subject and former executives lined up to apologise during the often day-long hearings.

One, former Allied Irish Banks (Berlin: 30544177.BE - news) boss Eugene Sheehy, said his failures were a "matter of eternal shame".

However the main executives of the failed Anglo Irish Bank and Irish Nationwide Building Society were unable to appear because of ongoing legal cases and committee members said the restrictive legislation underpinning inquiries in Ireland prevented more robust lines of questioning.

Regulation in Ireland, which was described as "timid" and "excessively deferential" in an official 2010 report, has since been overhauled and new rules brought in to ensure no repeat. Bank boards have almost entirely been replaced.

Ireland's financial regulator, Cyril Roux, said in a statement that banking regulation and supervision in 2016 have little in common with the previous decade.

The inquiry recommended that banks be obliged to obtain an independent audit of their regulatory returns and that contracts of senior executives should include a provision allowing bonuses to be clawed back linked to medium term performance.

While many expected government lawmakers to use the inquiry to berate the Fianna Fail party, which presided over the crisis, ahead of elections expected next month, the report criticised all parties for their stance in the years before the crisis. ($1 = 0.9200 euros) (Reporting by Padraic Halpin; Editing by Paul Taylor; Editing by Paul Taylor)