King: Darling blocked Northern Rock rescue plan
The chancellor resisted a £30 billion rescue fund for the troubled bank Northern Rock, the head of the Bank of England (BoE) has revealed.
Mervyn King, governor of the BoE, has moved to shift responsibility for the run on Northern Rock to the Treasury.
Speaking to BBC Radio’s File on 4 programme, Mr King said Alistair Darling had failed to approve a rescue fund for Northern Rock after the BoE said it would have to be an issue for central government.
It had previously been thought the BoE was responsible for blocking moves by Lloyds TSB to take over Northern Rock.
Lloyds TSB had requested a £30 billion loan from the BoE at a competitive deal to take over the troubled bank.
Mr King said it was a “matter for government” and had referred to secret moves to the chancellor.
The governor said: “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 along to the tune of £30bn, which is rather a large amount of money’.”
The information suggests Mr Darling was aware of the burgeoning crisis at the bank before he guaranteed all savings with Northern Rock and authorised an emergency loan from the BoE.
Mr King insisted it would have been “dishonest” to tell customers their money was safe in the first few days of the run and before Mr Darling intervened to guarantee funds.
He said: “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.
“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.”
The governor predicted it would take several months for banks to recover fully from the uncertainty of this autumn.
He continued: “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.”
Mr King also warned of the possibility that a shock in the world economy would create further fragilities.
The Conservatives argued the current level of uncertainty in financial markers increases the need for the Treasury to ensure international economic competitiveness.
Shadow chief secretary to the Treasury Phillip Hammond said: “What we need from the chancellor is fewer soothing words and more decisive action to enhance Britain’s competitiveness as a place to do business.
“That is the practical way to ensure that the economy weathers the turmoil in the financial markets.”
