LONDON: Love him or loathe him, the British government may have to put up with Bank of England Governor Mervyn King for quite a while longer.
King, who will be 60 next year, has taken a lot of flak in recent months over his handling of the summer’s credit crunch which caused Britain’s first bank run in 140 years when mortgage lender Northern Rock had to seek emergency cash from the BoE.
With his term ending next year, there is a lot of speculation the government might choose to appoint someone else to the top job at the central bank. Deputy governor Rachel Lomax is the clear frontrunner.
But King should not be written off just yet.
Not reappointing him to a second term when his current term ends in June 2008 could be politically damaging for Britain’s Labour government because it could be read as guilt over the Northern Rock crisis.
The immediate crisis over Northern Rock appears to be over as once the government guaranteed all deposits there, the run on the bank stopped and the economy and confidence in UK asset markets seem to have come through unscathed.
Secondly, while many banks have been screaming for King’s head because of his decision not to flood the financial system with cash in order to bring three-month lending rates down, there has been little sign that other central banks’ huge liquidity injections have worked.
The main charge against King, however, is that the squeeze in money markets did cause a run on Northern Rock, which eventually needed government intervention and created the very moral hazard that King had been warning against.
But under Britain’s regulatory framework, supervision of the banks comes under the Financial Services Authority. Ultimately, the Chancellor of the Exchequer is responsible.
Letting King go would imply that the authorities were somehow at fault – that they should have done something sooner – and bring blame on to a system first devised by Prime Minister Gordon Brown.
The governor is reported to have threatened resignation in September only to find immediate strong support from both the Treasury and Brown himself.
No decision is likely this year, the prime minister’s spokesman said on Wednesday.
“This is not something that has to be considered at this moment,” he told a briefing. After all, it would not pay to link the governor’s fortunes with Northern Rock.
King, who has previously expressed irritation with government tardiness over appointments to the Monetary Policy Committee, had expected a decision by the end of the year.
But the BoE appears resigned to no decision being taken until January or February once the dust has settled on the Northern Rock affair.
While there was much talk earlier in the year that King, who got married recently, might not want a second term, it seems more likely that he will not want to go now and be remembered as the governor who allowed a bank run to happen.
While admitting there are certain aspects he might have handled differently such as communication, King stands by his decision not to flood the market with billions of pounds, saying banks’ needs don’t always coincide with that of the country.
“By the time we get to the middle of 2008, people overseas will look back at this and say well we learnt ourselves a lot of lessons about our own banking systems from what happened in the UK,” King said in BBC interview aired on Tuesday. – Reuters