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Northern Rock’s rescue was stopped by Chancellor, says Bank of England’s King

06 November 2007
During an interview with the BBC’s File On 4, Mervyn King, head of the Bank of England has revealed that it was the Chancellor, Alistair Darling that took the final decsion not to support a move by Lloyds TSB to take over the struggling Northern Rock, saying it was “a matter for government”.

Lloyds TSB offered to rescue the bank before the crisis spiralled out of control, in return for a £30 billion loan from the Bank of England at competitive rates. However, this offer was rejected by Darling on the grounds that the Bank does not usually “finance takeovers by one company for another, let alone to the tune of £30 billion.” King told the Radio 4 programme, due to be aired tonight at 8pm.

When the offer was rejected, Northern Rock was forced to approach the Bank of England for a contingency loan in order to retain liquidity – it owes a total of £23 billion.

Mr King told the BBC that he has now moved some of the blame onto the Chancellor’s shoulders, after telling him that making such a decision was “not something which a central bank can do.” However, he also defends Mr Darling, maintaining that in the days following the outbreak of Northern Rock’s crisis, it would have been irresponsible of him to offer any further reassurances to customers regarding the safety of their investments.

Mr King’s revelation to the BBC about the Chancellor’s personal liability for blocking the attempted rescue implies that Mr Darling was in possession of the financial facts regarding the mortgage lender’s situation at least a week before he took action to protect its savers and borrowers.

Northern Rock has experienced a phenomenal drop in mortgage sales since the extent of its problems emerged in August, doing just 20 per cent of the business it had before the summer’s events. One mortgage provider that sells Northern Rock home loans reported a drop in Northern Rock lending from £500-£700 million to just £250 million a month.

Mr King has been heavily criticised for not intervening sooner to prevent the crisis because it was previously believed that he made the decision not to allow the Lloyds TSB takeover, but now it would seem that Mr King feels some more of the blame can be shifted towards government.

© Fair Investment Company Ltd