King: 'I was right on Northern Rock'

The Bank of England Governor Mervyn King has defended his handling of the crisis at Northern Rock.

He faced questions by the Treasury Select Committee less than a week after the Bank agreed emergency funding for the Newcastle-based lender.

The decision sparked a run on the UK's fifth-biggest mortgage lender and has jolted confidence in the wider financial system.

But Mr King said the move to bail out Northern Rock was "carefully designed and judged".

This is in stark contrast to his position earlier in the week, when Mr King resisted bailing out institutions which had made risky or reckless lending decisions because it would "sow the seeds of a future financial crisis".

And he also rejected the view that he should have stepped in earlier, as the European Central Bank (ECB) and the US Federal Reserve had.

Mr King told MPs: "After the events of August, which essentially closed the markets in asset-backed securities, Northern Rock was then a company with a highly illiquid set of assets."

"The asset side of its balance sheet suddenly became highly illiquid. At that point it was clear that, in one form or another, Northern Rock required as a backstop a lender of last resort."

Committee chairman and Labour MP John McFall said the actions taken to rescue the bank were "the equivalent of screaming fire in a crowded cinema.

"Everybody rushes for the door and there is sheer and absolute panic, all as a result of one company maybe having a bad business model."

The BoE boss said there now needs to be a "serious reform" of the existing system, including the insurance to depositors in the event of a bank failure.

On Thursday, Northern Rock shares slid further over fears that a takeover may not materialise. The stock dropped 21 per cent to 202.75p, valuing the bank at £850 million. It had been worth £2.7 billion prior to the crisis.

But the Government was forced to give cast-iron guarantees over all the deposits of Northern Rock's savers before the queues of anxious customers subsided.

Mr King, who has been in the Bank's hotseat since 2003, had the "full confidence" of Prime Minister Gordon Brown, Downing Street insisted as the crisis unfolded.

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