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| Version 16 | Version 17 |
|---|---|
| Bank chief defends role in crisis | Bank chief defends role in crisis |
| (20 minutes later) | |
| 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. | 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. | He is facing tough questioning from the House of Commons treasury select committee over the "credit crunch" taking hold of financial markets. |
| Mervyn King told them it would have been "irresponsible" to have intervened earlier to save Northern Rock. | Mervyn King told them it would have been "irresponsible" to have intervened earlier to save Northern Rock. |
| But he admitted that he might have got the balance wrong when the run started. | But he admitted that he might have got the balance wrong when the run started. |
| Train wreck | Train wreck |
| There was no point in blowing up the train before it hit the buffers Mervyn King, Governor, Bank of England King testimony in quotes | There was no point in blowing up the train before it hit the buffers Mervyn King, Governor, Bank of England King testimony in quotes |
| Towards the end of the hearings, John McFall, the chairman of the Treasury Select Committee, said that the Bank had not taken the matter urgently enough in the weeks leading up to the crisis. | |
| He accused Deputy Governor John Gieve - who admitted to have taken two weeks holiday during the crisis - of "not doing his job" and said he had failed to convince the committee that he was alert to the dangers facing Northern Rock. | |
| Mr King has been under severe pressure over the Bank's performance in recent weeks, especially in relation to his handling of the rescue of the Northern Rock, which got into difficulty after it was unable to raise money on 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. |
| Downing Street has insisted that Mr King has the "full confidence" of Prime Minister Gordon Brown, and said that reports the government was sharpening its knife for the governor were wide of the mark. | Downing Street has insisted that Mr King has the "full confidence" of Prime Minister Gordon Brown, and said that reports the government was sharpening its knife for the governor were wide of the mark. |
| Mr King denied that he was "leant on" by the government to make a U-turn on policy after the Northern Rock got into difficulties. | Mr King denied that he was "leant on" by the government to make a U-turn on policy after the Northern Rock got into difficulties. |
| He asserted that "there was no lasting damage to the British banking system" from the crisis. | He asserted that "there was no lasting damage to the British banking system" from the crisis. |
| But he called for a major overhaul of legislation which protects savers from losing their money if banks go bust. | But he called for a major overhaul of legislation which protects savers from losing their money if banks go bust. |
| Restoring confidence | 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. | 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. |
| Once the run started, people were not behaving illogically in joining in and wanting to take out their money Mervyn King, Governor, Bank of England Testimony highlights | Once the run started, people were not behaving illogically in joining in and wanting to take out their money Mervyn King, Governor, Bank of England Testimony highlights |
| 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. | 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. |
| And he said that it was clear that, by that stage, only a 100% guarantee of retail savings deposits by the government could have prevented a further run on the bank which would have drained it of all retail deposits. | And he said that it was clear that, by that stage, only a 100% guarantee of retail savings deposits by the government could have prevented a further run on the bank which would have drained it of all retail deposits. |
| Mr King said that people with savings were acting rationally in withdrawing their money, given the weakness of current legislation that is aimed at protecting savings when banks go bust. | Mr King said that people with savings were acting rationally in withdrawing their money, given the weakness of current legislation that is aimed at protecting savings when banks go bust. |
| Covert action | Covert action |
| The governor said that he would have preferred to act covertly to give aid to Northern Rock without the public being aware of the Bank's intervention, but that would have been illegal. | The governor said that he would have preferred to act covertly to give aid to Northern Rock without the public being aware of the Bank's intervention, but that would have been illegal. |
| "The bank would have preferred to have acted covertly as lender as last resort, to have lent to Northern Rock without publishing it," he said. | "The bank would have preferred to have acted covertly as lender as last resort, to have lent to Northern Rock without publishing it," he said. |
| 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-turn | 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-turn |
| And he blamed the EU "market abuses" directive, which would have required the directors of Northern Rock to disclose any support they received from the Bank, for part of the problem. | And he blamed the EU "market abuses" directive, which would have required the directors of Northern Rock to disclose any support they received from the Bank, for part of the problem. |
| He said that the reason he didn't take action earlier was that "there was no point in blowing up the train before it hit the buffers." | He said that the reason he didn't take action earlier was that "there was no point in blowing up the train before it hit the buffers." |
| He said it was a "difficult balance" to strike between the moral hazard and the need to secure the integrity of the banking system. | He said it was a "difficult balance" to strike between the moral hazard and the need to secure the integrity of the banking system. |
| And he admitted that in retrospect, he might have got the balance wrong. | And he admitted that in retrospect, he might have got the balance wrong. |
| Changing the law | Changing the law |
| Mr King said that urgent changes in the laws regulating banking were needed. | Mr King said that urgent changes in the laws regulating banking were needed. |
| We're hemmed in by four pieces of legislation," he said. | We're hemmed in by four pieces of legislation," he said. |
| "The interaction between different pieces of unconnected legislation made it almost impossible for us to act as a lender of last resort in the way that I would prefer," he added. | "The interaction between different pieces of unconnected legislation made it almost impossible for us to act as a lender of last resort in the way that I would prefer," he added. |
| Mr King wants changes to the law that is intended to protect savers when a bank goes bust, which he says is not strong enough. | Mr King wants changes to the law that is intended to protect savers when a bank goes bust, which he says is not strong enough. |
| Mr King said that the Bank of England first became aware of the problem on 14 August, when he met the Chancellor and the head of the Financial Services Agency in a regular monthly meeting. | Mr King said that the Bank of England first became aware of the problem on 14 August, when he met the Chancellor and the head of the Financial Services Agency in a regular monthly meeting. |
| He added that it was only last weekend - when the bank run had already begun - that he decided that further intervention was necessary, and discussed his proposals with Mr Darling and the Financial Services Authority. | He added that it was only last weekend - when the bank run had already begun - that he decided that further intervention was necessary, and discussed his proposals with Mr Darling and the Financial Services Authority. |
| Under attack | Under attack |
| 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 would inject £10bn into the money markets in an attempt to bring three-month inter-bank interest rates down. | 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. | But as recently as last week, it had said that it was not its job to lower three-month rates. |
| 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 2007 | 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 2007 |
| 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. |
| 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 added that the group of biggest banks in the UK was "furious" with Mr King over his handling of recent events. | 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. | "They felt he did not understand the size of the problem he was grappling with," he added. |
| Moral hazard | 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. | 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. |
| HAVE YOUR SAY Mr King knew what needed to be done and has saved Northern Rock customers' savings and by extension has stabilised the market Paul Sands, Glasgow Send us your comments | HAVE YOUR SAY Mr King knew what needed to be done and has saved Northern Rock customers' savings and by extension has stabilised the market Paul Sands, Glasgow Send us your comments |
| 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". | 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 money. | 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 money. |
| 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. |
| BBC News 24 is running a special day of programming looking at the credit crunch, on Thursday, 20 September. | BBC News 24 is running a special day of programming looking at the credit crunch, on Thursday, 20 September. |
| Do you have any concerns about getting a mortgage? Submit your mortgage queries to our BBC experts using the form below | Do you have any concerns about getting a mortgage? Submit your mortgage queries to our BBC experts using the form below |