MERVYN King warned yesterday that the Bank of England would not ride to the rescue of banks which he held responsible for the crisis gripping the financial system.
The Governor of the Bank told MPs that the central bank will continue to pump liquidity into the markets to promote confidence.
But the Governor of the Bank of England cautioned that this was only a short-term measure and did not amount to a long-
term remedy to the problems precipitated by the credit crunch.
King told the Commons treasury committee that it was important to discuss longer-term solutions with Britain's banks.
He said: "I want to assure you that the Bank will provide the liquidity assistance that the system needs in order to restore confidence."
But he added: "Such lending can be only a temporary measure but it can be a useful bridge to a longer-term solution."
King said he could not predict the outcome of discussions with the banks.
However, he was adamant that the risks of lending should remain with the institutions and their shareholders, and that the state should not be insuring new issues.
King told the committee: "The banks neither need nor want the taxpayer to insure them against these losses.
"One of the lessons of this financial crisis is that providers of mortgage finance had underestimated the risks, and hence the true cost, of the securitisation process."
King revealed that he expected inflation to rise to near 3 per cent in the coming months before falling back near to the official 2 per cent target later this year, and he was positive about the state of Britain's economy.
He said: "This is not an economy which has completely ground to a halt."
He continued: "What is so marked is the difference in sentiment between the people running their businesses and the financial sector – the difference between the real economy and the financial sector."
The full article contains 331 words and appears in The Scotsman newspaper.
