King to mount strong defence of Rock handling

The Governor of the Bank of England is preparing a strong response to MPs' questions about the Northern Rock crisis tomorrow when he faces the Treasury Select Committee.

Mr King will insist the Bank's emergency funding of Northern Rock was not a bail-out and that his belief in not rewarding reckless institutions is unshaken by events of the past few days.

The Northern Rock crisis has turned the credit crunch into a hot political issue. Conservative members of the committee have said they will question Mr King on his response and the amount of involvement by the Treasury in decisions.

As Northern Rock's share price collapsed, Baillie Gifford, the fund manager that was its biggest shareholder, sold most of its 6 per cent holding this week, losing almost £200m.

Northern Rock's shares recovered some of their value yesterday after the Chancellor's dramatic intervention on Monday night to guarantee the funds of all savers in the stricken bank. Northern Rock reported small queues outside just four of its 76 branches yesterday and said its call centres were far less busy than on Monday with most callers wanting to put money into the bank.

Northern Rock's shares rose 8.2 per cent as analysts said the Government's backing could bring bidders back to the table after Lloyds TSB pulled out of talks early last week. Alliance & Leicester's shares soared 32 per cent, recovering most of the value lost on Monday when they had plunged on concern it would be the next bank to seek Bank of England funding. Bradford & Bingley rose 6 per cent and Paragon, the buy-to-let lender, rose 5 per cent after a reassuring trading statement.

The money markets eased after the Bank of England made £4.4bn available for banks to borrow ahead of tomorrow, when it is meant to decide on releasing the funds. The injection brought overnight sterling BBA Libor down to 6.14250 per cent from 6.46875. The three-month rate at which banks will lend to each other continued to move down as signs grew of easing in the commercial paper markets.