Bank of England governor Mervyn King has defended his handling of the Northern Rock crisis in a crucial appearance in front of a panel of MPs.
He faced tough questioning from the House of Commons treasury select committee over the "credit crunch" taking hold of financial markets.
Mr King told them it would have been "irresponsible" to have intervened earlier to save the Northern Rock bank.
But he admitted that he might have got the balance wrong when the run started.
Bank under pressure
Towards the end of the hearings, John McFall, the chairman of the Treasury Select Committee, said the Bank had not tackled the matter urgently enough in the weeks leading up to the crisis.
And he announced that his committee would hold a major inquiry into the turmoil in credit markets.
He accused the Bank's deputy governor John Gieve - who admitted to having taken two weeks holiday during the crisis - of "not doing his job" and said he had failed to convince the committee that he was alert to the dangers facing Northern Rock.
Mr King has been under severe pressure over the Bank's performance in recent weeks, especially in relation to his handling of the rescue of Northern Rock.
His job could be on the line, with discussions under way on whether to renew his five-year term, which ends next June.
'No lasting damage'
Downing Street has insisted that Mr King has the "full confidence" of Prime Minister Gordon Brown, and said reports the government was sharpening its knife for the governor were wide of the mark.
Mervyn King said worried customers were not being illogical
Mr King denied that he was "leant on" by the government to make a U-turn on monetary policy after Northern Rock got into difficulties.
He asserted "there was no lasting damage to the British banking system" from the crisis.
But he called for a major overhaul of legislation that protects savers from losing their money if a bank goes bust.
Mr King told the committee that it would have been "irresponsible" for the Bank to intervene in the markets during August, as it would have unnecessarily undermined confidence in the banking system.
But he said that when the run on the Northern Rock began, the situation changed, and the "pictures on television" of people queuing for their money meant the Bank had to step in and restore confidence.
He said it was clear that, by that stage, only a 100% government guarantee for retail savings deposits could prevent a further run on the bank.
Mr King said people withdrawing their savings were acting rationally, given the weakness of current legislation protecting savers.
The governor said that he would have preferred to give covert aid to Northern Rock, without the public being aware of the Bank's intervention, but that would have been illegal.
He blamed the EU "market abuses" directive, which would have required the directors of Northern Rock to disclose any support they received from the Bank, as being part of the problem.
However, EU experts counter that the Market Abuse Directive has specific provisions that would have allowed the Bank of England to support Northern Rock and delay making this intervention public.
"There is no obligation for central banks to disclose its activity under the market abuse directive," said a source at the European Commission.
Mr King argued that he didn't take action earlier as "there was no point in blowing up the train before it hit the buffers".
He said it was a "difficult balance" to strike between the need to secure the integrity of the banking system, and avoiding "moral hazard" - where banks believe they can behave irresponsibly because they will always be bailed out.
Mr King admitted that in retrospect, he might have got the balance wrong.
Mr King has been criticised for a policy U-turn in the Bank of England's treatment of commercial banks struggling to deal with the credit crunch.
On Wednesday, the Bank said it would inject £10bn into the money markets in an attempt to bring three-month inter-bank interest rates down.
But as recently as last week, Mr King had argued that it was not the Bank's job to lower three-month rates.
Crucially, the assets that banks are allowed to use as collateral will be wider than usual and will include their mortgage debt.
BBC business editor Robert Peston says the possibility that the flight of capital from Northern Rock could have been avoided is "seriously embarrassing" for Mr King, one of whose functions is to maintain financial stability.
He added that the group of biggest banks in the UK was "furious" with Mr King over his handling of recent events.
"They felt he did not understand the size of the problem he was grappling with," he added.