The credit crunch dominating the news has taken on a new edge, as people have turned to the question of just how well the situation has been managed and whether the Northern Rock debacle could have been averted. At the centre of the debate is Mervyn King, the governor of the Bank of England.
Facing questions
King has had to face MPs’ questions over his handling of the Northern Rock crisis and his subsequent u-turn to inject £10 billion into the money markets to stabilise three-month funding rates. This latter decision in particular has lead to speculation that he came under pressure from higher political powers to intervene.
Yet, King has defended his actions, saying it would have been ‘irresponsible’ to intervene sooner with Northern Rock. He also denied pressure had been exerted on his decision making, and said: “This operation was designed entirely in the Bank. Of course, I discussed it with the chairman of the Financial Services Authority (FSA) and the Chancellor. In these difficult times, it would have been irresponsible not to do so.”
Next up on the MPs’ chopping block is the FSA, which will face similar questioning on 9 October. In a speech in London on the same day as King’s questioning, Sir Callum McCarthy, chairman of the FSA, acknowledged the previous week had been ‘sobering for all’, and added: “We need to act to prevent repetition of concerns which I recognise and with which I sympathise. Those who queued last weekend will have questions, which must be answered.”
No sign of abating
Yet, the pressure on the Bank shows no sign of abating, as prior to King’s questioning, the central bank of America, the Federal Reserve, took the widely anticipated decision to drop federal fund rates for the first time in four years. The cut from 5.25 per cent to 4.75 per cent has lead to speculation that the Bank of England will follow suit and Ray Boulger, senior technical manager at John Charcol, believes it does make it more likely.
He explains: “The degree of tightening in the market was much greater than the Bank expected to control inflation, so the argument for a greater counterbalancing move to resolve that is there. It’s likely we will see a cut in October or November.”
Eddie Smith, managing director for the Professional Mortgage Packagers Alliance, adds that the Bank has set a ‘brave’ precedent in bailing out Northern Rock. “King is a very forceful and outspoken man and when he talked about not bailing out lenders, he knew exactly who he was talking about. King must have had pressure from somewhere.”
Boulger does not believe King would do something he was uncomfortable with, but adds: “The Bank is only as independent as it suits the government. In situations like this, the government still calls the shots.”
A lack of action
Bill Warren, director of associate members for the Regulatory Alliance of Mortgage Packagers, comments that the perception that Northern Rock has done something wrong is misleading. He says: “Northern Rock decided to access another line of funding; it is perfectly allowed to do that. To be fair, 95 per cent of external factors hit it by lack of action, especially from the government.”
While Warren feels the Bank did not handle the situation particularly well, he questions just how fully King was briefed on the situation. He says: “If he had appreciated the seriousness of the situation to begin with, he might have taken a different stance. I believe Northern Rock briefed the FSA fairly thoroughly, but the question mark is whether the FSA briefed the Bank of England about it.”
Certainly lessons will have to be learned from all of this and the Chancellor Alistair Darling has subsequently stated that changes will be made to ensure stability. As to King’s future as the governor of the Bank of England, Warren says: “We’re seeing a relatively minor crisis that has been resolved. For him to resign over something as minor as this would be an overreaction.”
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