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King interview ruffles feathers as Northern Rock blame game continues

07 November 2007
Bank of England governor Mervyn King raised eyebrows yesterday when in a national radio interview he shifted much of the responsibility for the Northern Rock crisis onto the chancellor, Alistair Darling.

The Treasury has expressed its displeasure over Mr King’s comments on last night’s BBC File On 4 regarding the chancellor’s decision to reject a rescue bid from Lloyds TSB, which experts believe could have prevented the first run on a British bank for nearly 150 years. Ultimately, King said, it was not the job of the Bank to make such a decision, and it was Mr Darling who let the axe fall. He also pointed to the Treasury’s lack of action to reform legislation on banks in time to benefit Northern Rock.

Mr King took the opportunity to soften the Bank’s previously hardened stance on the situation and admitted that it should have offered the public a stronger warning that Northern Rock was experiencing serious liquidity issues.

The governor was quick to evade blame for the run which has led to Northern Rock suffering an 80 per cent decline in lending since the crisis broke at the end of the summer. “I think the way we did our money market operations could not have been changed in a way that would have helped Northern Rock,” he said “and I think that we did feel strongly that it would not be right to bail out imprudent banks.”

However, he also made it clear that apart from acting more rapidly to put effective legislation in place, it was not the place of government any more than it was of the Bank to facilitate the taking over of one bank by another.

Mr King continued: “The role of the Bank of England is not to do what banks ask us to do; it’s to do what is in the best interests of the country. And we took the view that bailing out those banks that have taken the biggest risks will provide no incentive in the future to prevent this happening again.”

He also pointed to Gordon Brown’s role in the crisis as Chancellor, when, in 1997, he laid down guidelines that a decade later prevented the Bank from taking steps which could have saved Northern Rock from reaching crisis point.

Surprisingly, other than Northern Rock’s chairman Adam Applegarth, heads have yet to roll over the run on Northern Rock, unlike in America where Merrill Lynch’s Stan O’Neal and Citigroup’s Charles Prince have both had to bite the bullet and resign from their posts, after admitting huge losses as a result of the credit crisis which has gripped the US economy. Citigroup’s shares experienced a further 2.25 per cent drop yesterday, despite Prince’s replacement with debt troubleshooter Richard Stuckey.

While Mr King has denied that he could have done more to avert the crisis other than to press the Treasury harder to “inject some urgency into the need for new legislation”, there is still speculation that concerns over the fall-out from the Northern Rock debacle will cause the Government to look elsewhere when thinking about reappointing him in the role of governor later this month.

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