Bank's King says financial crisis not over yet

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In a speech to bankers which hardly touched on the current economic outlook beyond saying that growth was slowing and inflation rising, King said he wanted to use his second term as governor to put in place a framework for preserving financial stability as robust as that for monetary policy.

He said that the Bank would learn from the experience of its Special Liquidity Scheme launched in April - where banks can exchange hard-to-trade assets for more liquid ones from the central banks at a price - to create a new liquidity facility.

"It will be part of a set of reforms to our Red Book, to be announced later this year," said King.

"Any such facility will need to meet two challenges: it will need the right pricing structure and it will need to overcome the "stigma" problem that has affected access to all central banks during the current crisis."

Many financial institutions have been wary of going cap in hand to the central bank when they face funding problems after news that Northern Rock had sought emergency help from the Bank prompted a run on mortgage lender last year, leading to its eventual nationalisation.

King said the pricing structure of any new facility also had to achieve the right balance, varying according to the type of collateral banks provide and where possible to encourage banks to manage risk more prudently.

The governor, who initially took a lot of heat over not doing more to ease liquidity concerns in markets, said that in the longer run, the key was to think about why financial market crises happened.

"If banks feel they must keep on dancing while the music is playing and that at the end of the party the central bank will make sure everyone gets home safely, then over time the parties will become wilder and wilder," he said.

He argued that requiring financial institutions to hold more capital as shock absorbers may offer a balance between more regulation and excessive risk-taking.