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Posted - 20 September 2007 : 10:41:09
Bank chief defends role in crisis
Bank of England governor Mervyn King is defending his handling of the Northern Rock crisis in a crucial appearance in front of a panel of MPs.
He is facing tough questioning from the House of Commons treasury select committee over the "credit crunch" taking hold of financial markets.
Mr King is under severe pressure over the Bank's performance in recent weeks.
His job could be on the line, with discussions under way on whether to renew his five-year term in June.
He denied that he was "leant on" by the government to make a U-turn on policy after the Northern Rock got into difficulties.
And he called for a major overhall of legislation which protects savers from losing their money if banks go bust.
Restoring confidence
Mr King told the committee that it would have been "irresponsible" for the Bank to have intervened in the markets during August, as it would have unnecessarily undermined confidence in the banking system.
But he said that when the run on the Northern Rock began, the situation changed, and the "pictures on television" of people queuing for their money over the weekend meant that the Bank had to step in and restore confidence.
Mr King said that it was at the weekend - when the bank run had already begun - that he decided that furher intervention was necessary, and discussed his proposals with the government and the Financial Services Authority.
And he said that current legislation made it harder for the Bank of England to act covertly to save the bank and restore confidence before the crisis became public.
Mr King said that the Bank of England only became aware of the problem on the 14 August, when he met the Chancellor and the head of the Financial Services Agency in a regular monthly meeting.
Under attack
We've taken this action because the situation has changed - there has been a run on a bank which has now been stopped... this is an example of decisive action on the right scale at the right time
Bank in policy U-turn
Mr King has been criticised for a policy U-turn in the Bank of England's treatment of commercial banks struggling to deal with the credit crunch.
On Wednesday, the Bank said it would inject £10bn into the money markets in an attempt to bring three-month inter-bank interest rates down.
But as recently as last week, it had said that it was not its job to lower three-month rates.
Crucially, the assets that banks are allowed to use as collateral will be wider than usual and will include their mortgage debt.
BBC business editor Robert Peston says the possibility that the flight of capital from Northern Rock could have been avoided is "seriously embarrassing" for Mr King, one of whose functions is to maintain financial stability.
He added that the group of biggest banks in the UK was "furious" with Mr King over his handling of recent events.
"They felt he did not understand the size of the problem he was grappling with," he added.
Moral hazard
Lending between financial institutions has all but dried up, sending the cost of borrowing even for three months up as banks worry about their counterparts' exposure to the US sub-prime mortgage crisis.
The Bank of England had initially refused to prop up Northern Rock's business after the Newcastle lender found it could no longer access affordable short-term loans in the money markets because of the global credit crisis.
The Bank's view was that a bailout would send wrong signals to the banking sector, encouraging the continuation of risky practices, thus creating a "moral hazard".
However, when the Bank then agreed to give emergency financial support to the Northern Rock, one of the UK's largest mortgage lenders, thousands of panicking savers rushed to withdraw their savings.
Only when the government guaranteed their savings did the rush to withdraw money abate, and Mr King is now being criticised for not having acted sooner.
Source: bbc.co.uk
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