Watch Mervyn King at the Treasury Select Committee

The Governor of the Bank of England will fight to salvage his reputation today after a £10 billion U-turn in his handling of the money markets crisis and growing questions about his role in the Northern Rock affair.

Mervyn King will appear before a cross-party committee of MPs with his credibility on the line after an abrupt reversal of his strategy to quell market turmoil. The change of tactics, which left much of the City open-mouthed, led to angry attacks on his management in the Square Mile and at Westminster.

He was being criticised privately in Whitehall for staying silent as the Northern Rock affair unfolded last weekend, for apparently obstructing a potential rescue of the bank by Lloyds TSB, and for taking an excessively hard line with banks caught in the squeeze.

Some ministers were suggesting that he might not be reappointed for a second five-year term as governor when the present one runs out next year. In the City there were calls for his head as he adopted a policy of intervention that until recently he had resisted.

Today’s hearing at the Treasury Select Committee will prove testing for Mr King, who will be asked why he abandoned his previous forceful rejection of emergency moves to ease a cash crunch with specific emergency measures to inject extra funds. Yesterday, the Governor ordered that banks would now be able to borrow billions in capital from the Bank of England over longer-than-normal three-month periods. He also conceded that the Bank would accept mortgages and mortgage-backed securities for these loans as collateral.

Until now, Mr King had insisted that this action – taken weeks ago in the US by its central bank, the Federal Reserve – would amount to bailing out institutions that had made risky or reckless lending decisions. He gave warning that doing this “sows the seeds of a future financial crisis”.

But in a dramatic retreat from this thinking, Mr King announced that he would take just the steps he had so vigorously opposed.

Privately ministers were angry that the Bank’s governor, having agreed to throw a credit lifeline to Northern Rock, did not take to the airwaves to explain his decision and reassure savers that the banking system generally was in good order.

There were tensions between the Bank of England, the Financial Services Authority (FSA) and the Treasury, amid revelations that the FSA had repeatedly asked the Bank to intervene. Asked whether the Governor should have engaged more publicly with the crisis, a senior Whitehall source said: “Mervyn was very difficult.” Another said: “Mervyn is an academic first, a banker second and a politician third.”

The grounds for his change of heart were coming under scrutiny last night. In a letter last week to the Treasury Committee, he wrote: “Central banks cannot sensibly entertain such operations merely to restore the status quo”, and that he would do so only if there were strong grounds for believing that such action was vital to avoid severe economic damage. In the City there was speculation that either he had been forced to take stronger action by the Chancellor, or that the Bank feared other institutions were in trouble and wanted to forestall another Northern-Rock style collapse.

Economists said, however, that Mr King may have simply decided that persistently high interest rates in the money markets for banks to borrow from each other for three-month periods now posed a greater threat than before. The Bank itself said that it was acting “to alleviate the strains” in three-month loan markets.

It can also claim that the new funding it is to offer will be at a penalty interest rate more than 1 per cent above base rate, and that it will insist on assets as collateral that are worth more than the loans it makes.

The former Conservative chancellor Kenneth Clarke questioned why – and whether – Mr King had changed his mind so suddebly. “Any suspicions that Mervyn has not changed his mind and that the political people involved are just panicking and have insisted he does something . . . would be very worrying indeed.”

The Treasury and Bank denied that Mr King had been forced to make the U-turn. The Bank said: “There’s no truth in this and the Governor will refute it very publicly tomorrow.”

Critics were unmoved. One very senior banker said: “I think Alistair Darling should resign and the Governor should go with him. It’s a fiasco.

“At the end of the day, the Bank’s only role is to prop up the banking system and give us confidence. But in the last week they’ve proved that they don’t understand the situation at all.”

Criticism increased as sources close to Northern Rock said that if the Bank had taken yesterday’s action several weeks ago – when the US did – the events that led to last week’s run need not have taken place. Northern Rock could have continued to operate and fund its obligations, the sources said.

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