Speaking to the House of Commons treasury select committee, King controversially disclosed that the Bank would have “preferred to have acted covertly as lender as last resort, to have lent to Northern Rock without publishing it”. This was not possible though as it is illegal for the Bank to do so.
King also called BoE’s position as lender of last resort into question, while asserting that his decision to inject at least £10bn into the money markets is the right decision – despite his vehemence earlier in the week that this was not an option.
King said: "The banks have clearly been urging us to do an operation like this for some time.
"We have balanced concerns about moral hazard against the concerns that arose from the beginning of this week about the strains on the banking system more generally.
"I think the real aim of trying to minimise moral hazard is not to provide liquidity at zero costs. We are not doing that."
This could not have come at a worse time for King, whose five-year contract is comes to an end in June 2008 – however the Prime Minister has publicly given King his full backing.
King has also denied that he was "leant on" by the government to make a U-turn on policy after the Northern Rock got into difficulties.
Speaking on the fallout surrounding both the BoE and Northern Rock’s announcements on Friday concerning emergency funding which saw the lender’s phonelines bombarded and tailing queues form, he said that consumers were behaving rationally, saying: “I think the events of the last week and the impact on confidence that people have in the banking system generally could have been shaken by scenes seen on television. I don't think there was any fundamental reason to doubt that."
However he said that the only way left to avoid Northern Rock’s customers draining it of all its retail deposits was for the government to give a 100% guarantee of retail savings deposits.
King said that the Bank had only become aware of the problem when he met the Chancellor and the head of the Financial Services Agency in a regular monthly meeting on 14 August..
Ian Kernohan, economist at RLAM, said: “A creditable performance: he has shifted the blame onto the legislation, especially the Market Abuses Directive, which prevented a covert LOLR operation.
“Mr King doesn’t look like a man about to resign and I think he will come out stronger from all this. He has had no end of a lesson: it will do him no end of good.”
