King's warning over risky lending

Central banks around the world have pumped in billions in a concerted effort to ease frozen money markets, but Mr King said such moves were only a "useful bridge" to a longer-term solution.

The governor, who held talks with bank chiefs last Thursday, told MPs on the Treasury select committee that a permanent answer would see the risk of losses remaining with banks' shareholders.

"The banks neither need nor want the taxpayer to insure them against these losses," he said.

Any central bank help would also tackle the "overhang" of the mortgage-backed bonds at the centre of the crunch, rather than be used to create more of the complex investments.

"A stock of assets has been created but the way to deal with that is not by creating more paper," Mr King added.

Speculation has grown that central banks may step in to buy risky assets from financial institutions which are refusing to lend to each other for fear of losses. The governor said it was "too soon to say" where discussions with major banks would lead.

Mr King pumped an extra £10 billion into money markets last week and pledged to keep providing the short-term funding to restore confidence in the system.

But he told MPs that the credit crunch had entered into a "new and different phase" as the banks struggle to sell or borrow against assets now distrusted by the market, "creating uncertainty about the strength of banks' financial positions".

Halifax Bank of Scotland, the UK's biggest lender, was at the centre of such speculation last week after rogue traders spread false rumours about its funding position. Mr King added: "These are the sort of circumstances I described in my statement to you in September as those in which central bank action is necessary to prevent a major shock to the system as a whole."