Bank of England Governor Mervyn King has arrived for a grilling from Parliament’s Treasury Select Committee. Sam Jones is blogging proceedings as they unwind.
After Mervyn’s statement. Chairman John McFall opens the questions:
10:34GMT Why have markets taken recent central bank actions as a sign of weakness rather than strength, asks McFall.
King: “The fact that this was an international action achieved two results: it showed we were working together and it was a clear recognition that central banks were conscious of banks’ concerns.”
“There is a view that this is not just a crisis of liquidity but also of solvency,” says McFall.
King returns: “The reason for the rise in spreads is not due to a shortage of cash, as it was in September,” responds King. “The large banks are now awash with cash. The issue is whether they’re willing to lend. What has become evident is that banks are concerned about the capital positions of other banks.”
In the past few weeks, says King, there has been a “more disturbing development” in the reluctance to lend will lead to a downturn in the US and lead to a further downturn in non-financial areas, says King.
10:45 Next question. Did you perform a U-turn asks McFall.
Guess what – Merv says he didn’t. “Why do you think you have been so misunderstood then” asks the chairman. King says he’s been spending far too much time having to explain to people the “arcane” functioning of money markets, rather than getting on with things. Perhaps a swipe at the FSA, whose job it is.
What central banks give with one hand, we take away with another, says King. He explains that over the same maintenance period that money is pumped into markets, it’s also taken back.
“In net terms, the ECB has rejected hardly any extra liquidity and the Fed has supplied only 5 per cent.” Whereas, explains King – defending himself against the charge of inaction – the BoE had injected a net 37 per cent.
The hearing continues.
Article Series - King in Parliament
- I - The rise in Libor is not due to a shortage of cash
- II - Nationalisation "a very good way of breaking the logjam"
- III - Existing bids for Rock might not pay BoE loan back
- IV - Investors shouldn't be seduced by things they don't understand