New powers 'could stop' Rock collapse

The Northern Rock collapse would have been resolved faster if the bank had been put into a special resolution scheme, the Bank of England's governor Mervyn King told MPs.

Mr King told a Treasury select committee "the reason why Northern Rock dragged on and on and on was the absence of any special resolution regime," adding no-one had the power to implement such a scheme at the time, making nationalisation the only alternative.

"We certainly would have handled it differently," Mr King told the committee.

Mr King also blamed the lack of a 100 per cent deposit guarantee on the bank run on Northern Rock, as hundreds of savers worried about losing their money queued to close their accounts last year.

Making banks pay for a compensation fund in advance would avoid similar problems in the future, Mr King said.

However, the Bank of England could have acted faster to guarantee Northern Rock, Mr King admitted.

New regulations introduced by the government in the wake of the crisis mean the central bank will now have the power to step in quickly if a bank is in trouble.

Mr King said the new powers would make an "enormous difference" to the bank, although he added he could not promise the bank would not make mistakes.

However, he disagreed with part of the new proposals which state that the Bank of England can only recommend the Financial Services Authority (FSA) step in if a bank is struggling.

"It's true that I would have preferred an outcome in which either the Financial Services Authority or the Bank of England could have initiated the trigger. We will not have the right to initiate the trigger.

"We will have the right to make a written recommendation to the FSA so that they pull the trigger. That's clearly not the same thing."

Today, the Treasury launched a new consultation on new special resolution regime powers for regulators to stop another Northern Rock crisis.

Chancellor Alistair Darling said: "No system of regulation can or should prevent the failure of each and every firm, but we must do everything possible to reduce the impact of problems which could pose a wider threat to stability.

"The challenge is to ensure that the authorities can act quickly and decisively to take appropriate steps to resolve failing banks. These proposals for a special resolution regime give the authorities the full range of powers they need."

Sarah Routledge