King injects £10bn into banks ahead of grilling by MPs

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The Independent Online

The position of the Governor of the Bank of England looked increasingly fragile yesterday ahead of his grilling by MPs.

The Bank performed a U-turn yesterday in its response to the credit crunch and the crisis at Northern Rock by offering to lend banks £10bn for three months to encourage them to lend to each other. It also said it would lend the money against mortgage assets instead of government bonds.

Mervyn King, the Bank's Governor, is due to appear before the House of Commons Treasury Committee today to explain his response to the crisis. In a letter to the committee last week, Mr King said it was not the Bank's job to help out the three-month market and that to do so would reward banks' risky behaviour.

Mr King's first term as Governor comes to an end in June. The Prime Minister and the Chancellor can announce their decision on his reappointment at any time before then. A senior economist at a UK bank said: "I don't think they have done themselves any good, and Mervyn King will come under the spotlight, particularly with his term up for renewal quite soon."

Mr King has taken a tough stance on supplying funds to open up the money markets, to the irritation of many bankers who have watched central bankers in Europe and the US do just that. Yesterday's move by the Bank is seen as the latest piece of backtracking from its hardline stance as the credit crisis has caused widespread concern about the banking system.

After refusing to lend to banks to unfreeze the key three-month money market, the Bank was forced to give Northern Rock emergency funding last week. News of the panic measure prompted thousands to queue outside the troubled bank's branches and on Monday the Government was forced to step in and guarantee savings at Northern Rock and for the entire banking system

The interest rate on the funds will be at a penalty rate and banks will not get all the assets back that they use as security. The Bank is understood to believe this makes the move consistent with its hardline stance on helping banks.

David Cameron, the Conservative leader, and other opposition politicians have tried to pin the blame for the crisis on Gordon Brown for his stewardship of the economy. Mr Brown appointed Mr King in 2003.

The confused response to the crisis at Northern Rock has exposed flaws in the system of banking regulation introduced by Mr Brown when he became Chancellor in 1997. The Bank of England's powers to supervise banks were given to the Financial Services Authority. "Northern Rock had a risky business model, and someone should have been able to fix that," said Jonathan Said, at the Centre for Economic and Business Research.