King Defends Northern Rock Policies

The Governor of the Bank of England has today backed his decision not to offer troubled bank Northern Rock excess funds at a lower rate during the heat of the liquidity crisis which led to widespread panic withdrawals last month.

Many in the media have cited King’s lack of response to the publicity that led to the run on the Northern Rock as further weakening the position of the bank, with the suggestion that he should have opened the national coffers at an earlier stage to stop the panic withdrawals.

Speaking today King acknowledged that giving money to the bank would have been easy, but it would have establish greater long term problems for the UK banking system as a whole, and would lead to banks being more willing to invest carelessly or over zealously in future transactions.

He defended his stance of allowing the problem to try to resolve itself in the first instance, as a means of ensuring fairness of treatment to all banks operating within the UK system through an elaborate comparison to offering free insurance to those that smoke in bed.

Speaking to the Treasury select committee as part of its ongoing investigation into the crisis that saw the first run on a UK bank for over a century, Mervyn King faced strong questions as to his role in the collapse.

The FSA stress testing review of Northern Rock highlighted potential areas of concern at the bank having run its finances through a series of ‘what if’ scenarios, and executives were questioned back in July about the findings.

However no action was taken to remedy the danger signs, which many have said to be the fault of both the FSA and the Northern Rock management in equal measure.

Hector Sants, chief executive of the FSA refused to take any personal responsibility, suggesting that there were ‘lessons to be learned’ from the situation for all parties involved.

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