Page last updated at 12:52 GMT, Tuesday, 6 November 2007

UK 'faces more financial shocks'

Alistair Darling
Mr Darling decided the government could not help to fund takeovers

The governor of the Bank of England, Mervyn King, has warned that the US sub-prime mortgages crisis poses more risks for the UK's financial system.

He also revealed that it was Chancellor Alistair Darling who decided not to support a Northern Rock takeover bid.

Mr King told the BBC he had advised the chancellor that governments should not provide financial help to one company so that it could take over another.

Lloyds TSB had asked for a 30bn Bank of England loan to finance the deal.

Speaking to BBC Radio's File on 4, Mr King said the bank had wanted a two-year loan at competitive rates.

MERVYN KING INTERVIEW

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"I said to the chancellor: 'This is not something which a central bank can do.'

"'They don't normally finance takeovers by one company for another, let alone to the tune of 30bn, which is rather a large amount of money'."

When the Lloyds TSB bid collapsed in September, Northern Rock had to go to the Bank of England and ask for emergency funding.

Northern Rock's need for emergency cash sparked the first run on a UK bank for almost 150 years.

Crisis not over

Mr King said it was likely to be several months before banks returned to normal after the crisis, because it would take that long for banks to disclose all the losses from financial instruments linked to US sub-prime mortgages.

Mervyn King
So far, no retail depositor in this country has lost a penny in this episode
Mervyn King, Governor of the Bank of England

"I think most people expect that we have several more months to get through before the banks have revealed all the losses that have occurred, and have taken measures to finance their obligations that result from that, but we're going in the right direction," he said.

"There is always, in a period like this, the possibility that a shock from outside the UK, one from the world economy, might create further fragilities, but to some extent there are always risks, there are always fragilities.

"What I would say is that the situation now is, in my view, different from that in August, though it's not without risk."

30bn rescue bid

Mr King said that in the first few days of the crisis that engulfed Northern Rock, it would have been dishonest to reassure customers that their money was safe.

He said it was evident from the start that Northern Rock would need 30bn of support, which it was not possible to provide.

BBC business editor Robert Peston
The delay by the chancellor in guaranteeing all Rock savings was momentous
Robert Peston
BBC Business Editor

"In the absence of a government guarantee, it was actually rational to queue up and take your money and it would have been dishonest for us to have pretended otherwise," he said.

"I thought the chancellor was extraordinarily successful in giving what reassurance he could give. At that point, he didn't know how far he could go in giving a government guarantee."

There has been criticism that the Bank of England did not intervene earlier, by either making it easier for Northern Rock to swap its mortgages for loans or by making more money available to the banking system as a whole.

But Mr King is adamant that his approach was the right one.

"I think we did feel strongly that it would not be right to bail out imprudent banks - we didn't do that - and we had to take action to protect not the managers, not the shareholders, but the retail depositors - and so far, no retail depositor in this country has lost a penny in this episode."

Hear the full story on Radio 4: File on 4 Tuesday 6 November at 2000 GMT, on Sunday 11 November at 1700 GMT or online at the File on 4 website


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Bank of England boss on File on Four



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