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Bank of England boss faces tough committee probe

"When Mr King goes before a parliamentary committee today he will face the near impossible task of justifying what the bank has done ... The position of Mr King is now very difficult."

the Financial Times

Bank of England Governor Mervyn King was scheduled to testify to a parliamentary oversight committee yesterday over the recent Northern Rock crisis, with questions being raised over his tenure.

The central bank said on Wednesday that it would inject ?10 billion (US$20 billion) into longer-term money markets amid the ongoing global credit squeeze, despite the fact that King said last week that such a tactic would encourage excessive risk-taking.

Confidence in the banking system has been shaken since Britain's fifth-biggest mortgage lender Northern Rock applied for emergency funds from the Bank of England last week because of the credit crunch.

The lender's share price fell by more than half in two days, and thousands of customers lined up outside its branches to close their accounts until the finance ministry announced on Monday that the government would guarantee the value of all existing deposits at Northern Rock.

AREAS OF INTEREST

King's testimony to the House of Commons Treasury select committee is likely to focus on the central bank's response to the aftermath of the Northern Rock emergency loan, and its decision to inject funds into the money markets.

He said last week that providing short-term liquidity to troubled markets "encourages excessive risk-taking and sows the seeds of a future financial crisis."

King told a the committee yesterday at the beginning of his testimony that the new facility would not have prevented difficulties at Northern Rock.

"When Mr King goes before a parliamentary committee today he will face the near impossible task of justifying what the bank has done," the Financial Times said in its editorial.

"The position of Mr King is now very difficult," it said.

MARKET REACTION

Meanwhile, Shares in Northern Rock plunged by more than 20 percent in early London trading yesterday on speculation that the embattled mortgage lender may not now face a takeover, dealers said.

Shares in the bailed-out bank fell 22.4 percent to 199.5 pence in morning deals. That gave Northern Rock a market value of ?840 million, down from ?2.69 billion pounds last Thursday before the share price began tumbling.

Northern Rock stock had regained 8.22 percent on Tuesday after slumping by 55 percent in value over the course of Friday and Monday.

The market also was disappointed by the Bank of England's offer of ?10 billion in short-term financing.

REDUCED HOLDINGS

The lender said in separate filings on Wednesday that its two biggest shareholders, Lloyds TSB and Scottish asset management company Baillie Gifford, had reduced their holdings.

"The best outcome for Northern Rock -- the brand having been damaged in the way it has -- would be to be acquired," said Richard Hunter, analyst at brokerage Hargreaves Lansdown, on Wednesday.

"Clearly any acquirer is going to get Northern Rock for a fraction of the cost of just a few months ago. Northern Rock peaked this year at about 1,250 pence," he said.
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