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Sean Farrell: Time may be running out for the Governor

Wednesday 19 September 2007 19:00 EDT
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Mervyn King's tough stance on the credit crunch has been gradually eroded to the point where his credibility is now on the line.

The Governor of the Bank of England will have to put up a forceful defence in front of the House of Commons Treasury Committee this morning to show he is in control of the situation.

Most Labour members will probably give him an easier ride after David Cameron, the Conservative leader, used the crisis to attack Gordon Brown for turning Britain into a nation of debtors. But Conservative members are determined to call him to account and pin the blame on the Treasury.

Critics say Mr King, a former economics lecturer, has taken an overly academic approach to the credit crisis by insisting banks should sort out their own problems if they have taken on too much risk. Banking sources say injecting funding and confidence into the money markets is not the same as rewarding risky behaviour. "The provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises," Mr King wrote to the Treasury Committee last Wednesday in a briefing ahead of today's session. Only if the economy was threatened would the Bank depart from this course, he said.

But by Friday there were unprecedented scenes as thousands queued outside Northern Rock in the first run on a British retail bank in modern times. Savers' panic was caused by Northern Rock asking the Bank of England for emergency funding because it could not get finance in the money markets.

Mr King has the sympathy of some in the banking world because the events of the past week are without precedent.

But, after four days of mayhem, the Chancellor, Alistair Darling, was forced on Monday to make his extraordinary commitment that he would guarantee savings at Northern Rock and at other British banks.

The authorities acted just in time to reassure savers, but time could be running out for Mr King.

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