Ex-bank directors could see any legal fees they incur as part of the government's inquiry into the collapse of the banking system picked up by their former employers.

Former directors are still protected by liability insurance, which covers the cost of defending claims against them arising out of the course of carrying out their duties. The policies can still kick in many years after someone leaves their role.

Sources said that banks could claim against their insurance to recoup legal bills associated with the banking inquiry so long as it didn't involve directors' personal dealings.

"It's pretty standard in all contracts otherwise nobody would do the job. These are detailed contracts, so it's hard to know whether something like this could be excluded," a banking source said.

An insurance industry source said the cost of bank directors cover has risen in the last two years to reflect the risk associated with the financial sector.

The Department of Fin­ance on Friday announced that German regulatory expert Klaus Regling will carry out the initial investigation into banking crisis. Regling's report and a separate probe by Central Bank governor Patrick Honohan will provide the terms of reference for a full investigation by a commission of inquiry.