Taxpayers must cure the credit crisis, warns bank chief
the Bank of England will publish plans for a permanent facility offering banks short-term funding. Photo: Daniel Berehulak/Getty Images
CENTRAL banks cannot cure the credit crisis and the task will fall to taxpayers and ordinary savers, Bank of England Governor Mervyn King said yesterday.
Mr King told MPs that the bank's planned reforms to make it easier for banks to access badly needed cash was not intended to deal with the underlying crisis which still has lending rates between banks at eight-year highs.
The central bank "will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending", Mr King said.
"It is not the purpose of central bank liquidity insurance to provide a source of long-term funding to the financial system -- indeed it cannot do that. Only private savers or taxpayers via the government can provide such funds," he said.
While he did not repeat earlier opposition to the idea of the government guaranteeing the banks against defaults on mortgages, Mr King did warn of what he saw as the risks in such a scheme.
"Using public funds to guarantee mortgage lending could increase credit availability, but would be a disincentive for banks to sort out their balance sheets and resume lending, and would also leave the taxpayer with credit risk," he warned.
If such a decision were made, "let's be honest and open about it, and make sure it appears in the accounts", he told the Treasury Select Committee.
Plans
Next week, the Bank of England will publish plans for a permanent facility offering banks short-term funding in times of financial stress. It will replace the special scheme the bank put in place in April, where banks can swap high-grade mortgage assets for Treasury bills, which can be used almost like cash.
Chancellor of the Exchequer Alistair Darling is scheduled to make a decision shortly on measures to help the housing market. A Treasury-commissioned report said the government could consider guaranteeing mortgage-backed securities.
Mr King denied that he was giving the chancellor a "public lecture". "It is perfectly reasonable to explain what central banks can and can't do, and that is what I am doing.''
- Brendan Keenan
