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Bank governor faces MP grilling Governor defends role in crisis
(about 2 hours later)
Bank of England governor Mervyn King is preparing to defend his handling of the Northern Rock crisis in a crucial appearance in front of a panel of MPs. Bank of England governor Mervyn King has defended his handling of the Northern Rock crisis in a crucial appearance in front of a panel of MPs.
Mr King is under severe pressure over the Bank's performance in recent weeks.Mr King is under severe pressure over the Bank's performance in recent weeks.
Members of the House of Commons treasury select committee will quiz him on Thursday over the "credit crunch" taking hold of financial markets. Members of the House of Commons treasury select committee are quizzing him over the "credit crunch" taking hold of financial markets.
His job could be on the line, with discussions under way on whether to renew his five-year term in June.His job could be on the line, with discussions under way on whether to renew his five-year term in June.
'Seriously embarassing''Seriously embarassing'
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 of England statement after announcing it would inject £10bn into money markets19 September 2007 Bank in policy U-turnWe'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 of England statement after announcing it would inject £10bn into money markets19 September 2007 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.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 will inject £10bn into the money markets in an attempt to bring three-month inter-bank interest rates down.On Wednesday the Bank said it will inject £10bn into the money markets in an attempt to bring three-month inter-bank interest rates down.
But as as recently as last week that it was not its job to lower three-month rates.But as as recently as last week 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.Crucially, the assets that banks are allowed to use as collateral will be wider than usual and will include their mortgage debt.
The provision of such liquidity support undermines the efficient pricing of risk...That encourages excessive risk-taking and sows the seeds of a future financial crisis Mervyn KingLetter to the Treasury Select Committee12 September 2007The provision of such liquidity support undermines the efficient pricing of risk...That encourages excessive risk-taking and sows the seeds of a future financial crisis Mervyn KingLetter to the Treasury Select Committee12 September 2007
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.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 also told BBC News that the group of biggest banks in the UK were "furious" with Mr King over his handling of recent events.He also told BBC News that the group of biggest banks in the UK were "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."They felt he did not understand the size of the problem he was grappling with," he added.
Moral hazardMoral hazard
On Wednesday the Bank agreed to pump £10bn into money markets to cut rates.On Wednesday the Bank agreed to pump £10bn into money markets to cut rates.
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.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 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."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 thousands of panicking savers rushing to withdraw their savings.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 thousands of panicking savers rushing 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.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.
"Tomorrow's Monetary Policy Committee testimony to the Treasury Committee should make for interesting viewing," said Daragh Maher, strategist at Calyon."Tomorrow's Monetary Policy Committee testimony to the Treasury Committee should make for interesting viewing," said Daragh Maher, strategist at Calyon.
And some committee members are already asking questions ahead of the meeting.And some committee members are already asking questions ahead of the meeting.
"We certainly need to understand from him why the Bank of England has changed its mind," said Michael Fallon, a Conservative member of the committee."We certainly need to understand from him why the Bank of England has changed its mind," said Michael Fallon, a Conservative member of the committee.
Refusal to interveneRefusal to intervene
The Bank already moved to prop up overnight markets between banks hit by fears over potential losses on the high-risk US sub-prime mortgages.The Bank already moved to prop up overnight markets between banks hit by fears over potential losses on the high-risk US sub-prime mortgages.
But it then refused to intervene in three-month money markets, saying that banks should face the consequences of risky longer-term lending.But it then refused to intervene in three-month money markets, saying that banks should face the consequences of risky longer-term lending.
That decision was then changed when soaring interest rates hit the money markets.That decision was then changed when soaring interest rates hit the money markets.
However, although Prime Minister Gordon Brown has given Mr King his backing, many bankers have been upset with the Bank's actions over the last month, and many on the Treasury committee will have tough questions to ask.However, although Prime Minister Gordon Brown has given Mr King his backing, many bankers have been upset with the Bank's actions over the last month, and many on the Treasury committee will have tough questions to ask.
BBC News 24 will be running a special day of programming looking at the credit crunch, on Thursday, 20 September.BBC News 24 will be running a special day of programming looking at the credit crunch, on Thursday, 20 September.