Bank of England governor Mervyn King has pledged to offer more liquidity help to banks as part of a long-term solution to the credit crisis.
Appearing before the Treasury select committee last week, King denied that the bank is proposing to buy asset-backed securities such as sub-prime mortgage-backed instruments.
He hinted that further base rate cuts are on the way, saying that current market conditions will make the monetary policy committee more likely to lower rates.
He said the BoE will “provide the liquidity assistance the system needs in order to restore confidence” but insisted that this is a short-term solution.
He said: “We are discussing with the banks how a longer-term resolution of the problem might be reached. It is too soon to say where those discussions will lead but two principles would underline any central bank role.
“First, the risk of losses on their lending should remain with banks’ shareholders and, second, a longer-term solution must focus on the overhang of assets and not subsidise issues over new assets.”
King warned banks and building societies to brace themselves for tougher capital requirements which he said regulators are likely to impose in a bid to avoid a repeat crunch.
He said: “The conclusions that come out of this inevitably tend in my view in the direction of saying that financial institutions will have to hold more capital in the longer run.”
King said regulators need to think “very, very deeply about the causes of the crisis and whether the levels of bank capital and the sort of financial system that generated this crisis do not require some action”.