Governor 'flunked test' in handling of Northern Rock crisis

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The Independent Online

A second former member of the Bank of England's Monetary Policy Committee has publicly criticised the Governor Mervyn King's handling of the credit crunch that drove Northern Rock to the brink of collapse.

In a stinging rebuke, DeAnne Julius, a founding member of the MPC, said the BoE "really flunked the test" in its reaction to theworldwide credit crunch this summer. Specifically, she found fault with Mr King's initial refusal to pump money into the debt markets that had ground to a halt, as other central banks had, and suggested he was partly to blame for the fall of Northern Rock.

"If our central bank had been willing to take a bit of preventative action a little sooner the way that the [US Federal Reserve] did and the way that the [European Central Bank] did, then Northern Rock might never have had the problems that it had,"

Ms Julius said in an interview on BBC4 Radio at the weekend. "Our central bank really flunked the test." The Newcastle lender became the first UK bank in more than a century to experience a run on deposits after the BoE's announcement of a major rescue plan caused panic among the Newcastle lender's customers.

Mr King was harshly criticised in the aftermath of Northern Rock, but the attack from Ms Julius, one of the most excoriating yet, will cause further embarrassment.

Her comments echoed those madeby Richard Lambert, head of the CBI, the business lobby group. In a speech last month, Mr Lambert, who also previously sat on the MPC, accused Britain's financial regulators of "failing to deliver the goods" andwarned that the poor handling of the crisis dented London's reputation as a global financial centre.

He also said that the system that divides financial regulation between three organisations – the Bank, the Financial Services Authority and the Treasury – had "just too many conflicts" and that it was illequipped to "tackle a fast-moving crisis".

When debt markets seized up this summer, the Fed and the ECBpumped more than $200bn (£100bn) into the markets in a series of manoeuvres that helped tide banks over until conditions began to ease. Mr King at first refused to follow suit, warning of the "moral hazard" of bailing out financial institutions whose irresponsible practices had led them into trouble in the first place.

When the Northern Rock situation became critical, he reversed tack, announcing a last minute bailout of the Newcastle lender. The eleventh-hour intervention was a complete reversal of policy. Mr King also later announced that the Bank would offer longer-term emergency funding through a series of auctions and that it wouldaccept an increased array of collateral for loans to make it easier for needy banks to access funding.

Mr King's flip-flopping led to speculation that he could resign and sparked a debate about the UK's tripartite financial regulation system.

Ms Julius, who also sits on the boards of Lloyds TSB and BP, suggested that if Mr King had acted decisively sooner, the dramatic rescue of Northern Rock would have been unnecessary.

She said: "Had the Bank of England extended its term in the short-term money markets to allow any bank, including Northern Rock, to borrow for three months instead of overnight, and taken additional collateral, Northern Rock and other banks would have had no problems. Now it has done the about-face and done exactly that."

Asked whether Mr King should resign over his handling of the crisis, she said: "That's entirely up to him."