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Mervyn - we're innocent

• Robert Peston
• 20 Sep 07, 04:20 PM

It is a matter of deep principle for Mervyn King that we all take responsibility for our financial mistakes.

Today he cited the case of a young woman who had borrowed too much.

Her bank told her that it could not write off her debt, because that would encourage other customers to binge on borrowing in an unhealthy way.

A good thing too, Mr King said.

And it’s why, he added, that he has been resistant to the immense pressure from Britain’s banks for the to pump an ocean of money into the banking system.

That, said King, would have been to reward them for their imprudent lending, when they should have been punished.

There can’t be one rule for customers and another for the banks.

Quite right, most of us would think.

Just the sort of thing we would want from a Governor.

So surely he has a view about who was to blame for the grotesque run on – which was swiftly followed by the Treasury writing a blank cheque for the depositors in all British banks, to ensure none of them need fear they could suffer losses in the current market turmoil.

Well when the put this to him today, it turned out that no one was seriously at fault.

It was all due to the unintended consequences of well-meaning financial regulation.

Which, in a nutshell, is why Mr King’s stock is a long way from its all-time high in the City.

It’s all very well to lecture bankers that they need a sound thrashing for their naughtiness. But is Mr King really persuaded no individual at the Bank of England, the Treasury or the has made an important error of judgements since the merde started flying on August 9?

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Fans love King

• Robert Peston
• 20 Sep 07, 09:24 AM

I was really struck yesterday at the torrent of support for Mervyn King from readers of my blog – and those messages are still coming in. If King is Jose Mourinho, the fans certainly don’t want him to quit.

But I now fear that the briefing by the Bank to me last night – to the effect that the decision to offer three-month loans against the security of mortgage-collateral would not have been enough to help Northern Rock – was disingenuous.

The first Bank auction may only be £10bn but future auctions could be bigger or smaller depending on demand and market conditions. Such a facility could have prevented the Rock hitting the rocks. And Northern Rock itself is absolutely persuaded that if these auctions had been available a few weeks ago, there would never have been the liquidity crisis which prompted it to go cap in hand to the bank for emergency help.

The role of King in the collapse of Lloyds TSB’s attempt to mount a rescue takeover of Northern Rock also needs examining.

Lloyds TSB offered £2 a share, which Rock’s board was minded to accept. And according to a senior, well-placed banker, Lloyds TSB believed initially that the Bank of England had signalled it would be prepared to provide some kind of guarantee of funding for Rock’s £113bn assets. Then the Bank changed its mind and said it could not be seen to be subsidising the deal.

The consequence was that the Rock then had to apply for succour from the Bank as lender of last resort. And the rest is the wrong kind of banking history.

So the criticism of the Bank of England is that it jeopardised confidence in the banking system so as not to face the charge that it was insuring Lloyds TSB’s shareholders against the full risks of a takeover – which could have been seen to be tilting the level playing field for takeovers and giving Lloyds the dangerous freedom to take undue risks with the Rock’s balance sheet.

The credibility of the Bank’s governor, Mervyn King, is in the balance. I have spoken to members of its "court" (the equivalent of its board of directors) and they are split on whether he will or should quit.

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