This article is from the source 'bbc' and was first published or seen on . It will not be checked again for changes.

You can find the current article at its original source at http://news.bbc.co.uk/go/rss/-/1/hi/business/7004001.stm

The article has changed 29 times. There is an RSS feed of changes available.

Version 6 Version 7
Bank chief defends role in crisis Bank chief defends role in crisis
(10 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.
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.
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.
He denied that he was "leant on" by the government to make a U-turn on policy after the Northern Rock got into difficulties.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. And he called for a major overhaul of legislation which protects savers from losing their money if banks go bust.
Restoring confidenceRestoring 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.
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.
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. Mr King said that the Bank of England first 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.
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. 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.
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. 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.
Changes in the law
Mr King 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.
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 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.
And he called for urgent, cross-party action to change the law.
Under attackUnder 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 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 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.
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 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 hazardMoral 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 commentsHAVE 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 savings.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.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.