King questioned over Northern Rock debacle
The governor of the Bank of England (BoE) was questioned by an influential group of MPs today following the decision to flood the money markets with £10 billion to increase liquidity.
Mervyn King – who has been the Bank’s governor since summer 2003 – was questioned by the Treasury Select Committee over why the decision to rescue the markets was not taken earlier.
Mr King said there was “no threat to the stability of the banking system”, and it would have been “irresponsible” to have acted sooner.
The chair of the committee, John McFall, likened the BoE’s actions over Northern Rock to shouting fire in a crowded cinema.
Mr King explained this had been due to “the interaction between four apparently unconnected pieces of legislation” that prevented the bank from “acting covertly as lender of last resort”.
He said he would have preferred a swift Northern Rock takeover ahead of the public announcement. Had this happened, Mr King argued customers “would have woken up on Monday morning to find themselves depositors of a larger and safer bank.”
Current legislation – which involves lengthy timetabling of takeovers of quoted companies – had restrained the Bank back from doing this.
Referring to the credit crunch in August – brought on by the sub-prime mortgage crisis in the US – Mr King said there had been no reason at that point for serious concern.
Chairman John McFall contested this answer, however, insisting there was something “fundamentally wrong” with the tripartite structure of the FSA, the Treasury and the BoE.
Mr McFall also turned his criticism towards BoE deputy governor John Gieve, asking: “Were you having a sleep at the back of the shop while the mugging was taking place at the front?”
He concluded: “Someone should have seen the risks that Northern Rock were taking, and it doesn’t seem to me that anyone took any concern over it.”
