King faces grilling on Bank’s ‘u-turn’

Source: Stock Market Digital

Date :20/09/2007 09:04:35

The governor of the Bank of England is preparing to defend his handling of the Northern Rock crisis in a crucial appearance in front of a panel of MPs.

Mervin King is under severe pressure over the Bank's performance in recent weeks.

Mr. King will face an interrogation by MPs today over his stewardship of the financial system during the recent credit crunch and his role in the recent run on the Northern Rock bank.

Discussions are under way on whether to renew Mt. King’s five-year term in June.

Mr. King has been criticised for an apparent policy U-turn in the Bank’s treatment of commercial banks struggling to deal with the credit crunch.

The Bank said yesterday that it will inject £10 billion into the money markets in an attempt to bring three-month inter-bank interest rates down.

The assets that banks are allowed to use as collateral will be wider than usual and will include their mortgage debt.

Last week however it had argued that it was not its job to lower three-month rates.

U-turn

The UK’s largest banks are reportedly furious with Mr. King over his handling of recent events.

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 bail out 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, that led to a rush on the bank.

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.

Mr. King is likely to face some tough questioning from the committee, although Prime Minister Gordon Brown has given him his backing.

September 20 2007

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