大象传媒

Sants v King

• Robert Peston
• 7 Nov 07, 08:30 AM

What I hope also came through in the programme on Northern Rock (which can be heard by clicking here) is the extent of the disagreement between the and the on how banks can be helped using the Bank of England鈥檚 regular money-market auctions.

Or to put it another way, they are not as one about whether could have been rescued in an inconspicuous way, thereby averting a run.

, the chief executive of the Financial Services Authority, said this to me:

鈥淚f you have a single company, i.e. in this case Northern Rock, and it is not able to get funding from the commercial markets, the only other place it can get funding from is the central authorities, i.e. through the Central Bank. And it is also the case here that if smaller amounts of funding could have been given to it earlier, it might not have required large amounts of funding later.

鈥淎nd given our responsibility for supervising Northern Rock, we would have set out those arguments with regards to the specific set of circumstances for Northern Rock for the Bank of England to consider. But it鈥檚 the Bank of England鈥檚 responsibility to then make the decision whether making an individual intervention would have a potential knock-on effect and it can be justified in terms of the long term and wider impact on the economy in the financial markets system as a whole.鈥�

So Sants is saying that the FSA told the Bank of England that the Rock鈥檚 funding difficulties could have been lessened by pumping more liquidity into the banking system and allowing it and other banks to swap mortgages for what鈥檚 known as 鈥渢erm鈥� funding (or loans of longer maturity than just overnight).

This is in stark contrast to what , the Governor of the Bank of England, said to me. He said it was clear to the Bank of England from the outset that the Rock needed far too much money 鈥� 拢30bn in his estimate 鈥� for it to be helped in this way.

King told me that if the Bank of England had used its money market procedures to channel substantial funds to Northern Rock, it would not have taken journalists or bankers very long to work out that something very strange was going on. Northern Rock鈥檚 frailty would have been quickly spotted, thereby sparking a crisis of confidence and a possible run.

This is no trivial debate. It goes to the heart of what central banks do.

And what seems to be at issue is this. The FSA believes that if the Bank of England had given smallish amounts of help to the Rock via market-funding procedures early in the crisis, the markets would not have concluded that the Rock was in trouble but that the reverse was true, that the Bank was providing exactly the kind of liquidity that would ensure the Rock could stay afloat 鈥� such that other financial institutions might in time have regained their confidence in the Rock and might have started to fund it again.

So, in its view, we wouldn鈥檛 be where we are today, where the Bank of England 鈥� backed by the Treasury 鈥� has provided 拢20bn of emergency loans to the Rock and expects to have provided 拢30bn by Christmas.

By contrast, King and the Bank of England saw such a course of action in regard to the Rock鈥檚 plight as na茂ve and dangerous.

And here, it seems to me, is where the 鈥� and any other future enquiry 鈥� must direct most of its attention. It must adjudicate about whether the Bank or FSA is right and whether reforms are needed.

I don鈥檛 wish to overstate this, but the international competitiveness of the City of London depends 鈥� to an extent 鈥� on there being confidence that the central bank will provide the right kind of liquidity at the right time.

Right now, that confidence is not what it ought to be.

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