King justifies re-capitalisation

Speaking in Leeds on Tuesday, King said that it was difficult to exaggerate the severity and importance of the "extraordinary and almost unimaginable, sequence of events" triggered by the collapse of Lehman Brothers. "Not since the beginning of the First World War has our banking system been so close to collapse," King said, adding that credit to the real economy had almost stopped flowing.

When overnight funding started to dry up on 6 and 7 October, radical action was, King said, "necessary to ensure the survival of the banking system."

Further liquidity injections would, King said, prove insufficient with they were not accompanied by more drastic measures. "Central bank liquidity is sticking plaster, useful and important, but not a substitute for proper treatment," the governor said. "[When banks' share prices fell] markets were sending a clear message to banks around the world: they did not have enough capital."

At the International Monetary Fund's and World Bank's annual meetings officials from Japan, Sweden and Finland - all of whom dealt with systemic banking crises in the 1990s - urged their British counterparts: "Recapitalise and do it now."

Economists widely praised the British plan, announced on 8 October.

Gilles Moec, an economist at Bank of America, told Central Bank News: "The British initiative is one of the most comprehensive efforts so far. It addresses all of the issues - how to get rid of toxic assets, how to recapitalise banks and how to encourage interbank lending."

It has since been followed by authorities across Europe and in the United States.

Lehman

King said that though the collapse of Lehman Brothers triggered the recent intensification of the credit crisis, it would be a mistake to think that if the investment bank had not failed, a crisis would have been averted. "The underlying cause of inadequate capital would eventually have provoked a crisis of one kind or another somewhere else," he said.

Recession

King's comment that "it now seems likely that the UK economy is entering a recession" depressed market sentiment on Wednesday. The FTSE 100 index of leading shares listed in London closed down 4.46% at 4040.89.

Click here to read King's speech