The Bank of England hit back on Thursday at accusations it was asleep at the wheel when the world's credit markets dried up, while two major German banks joined the ranks of those hurt by the global squeeze.
The British central bank's chief, Mervyn King, defended the decision not to follow the U.S. Federal Reserve and the European Central Bank in pouring tens of billions into money markets when the credit crisis took hold in August.
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Meanwhile Germany's Deutsche Bank, one of the largest players in the global debt market, and Commerzbank followed Wall Street's Morgan Stanley in acknowledging losses from the credit market squeeze would hit their profits.
The crisis broke when defaults on U.S. mortgages triggered a global scare over banks' exposure to high-risk debt which had been extensively repackaged in a long-running credit boom.
When banks around the world became scared to lend to each other, Bank of England governor King initially resisted intervening on the grounds that central banks should not save investors from bad decisions.
He defended that response on Thursday, telling the British parliament's Treasury committee: "Taking the easy option, giving in in the short run without looking to the long-run consequences of those actions is damaging."
However, the bank has already changed tack to offer the market more funds, including longer-term loans, after public confidence was hit by TV images of customers queuing to demand their savings back from troubled lender Northern Rock.
Critics say Northern Rock, which had very little exposure to the high-risk debt that triggered the global squeeze, might not have had to seek emergency funding from the central bank last week if King had acted to calm the money market earlier.
The government had to step in on Monday and guarantee savers' deposits at Northern Rock to stop the bank run turning into a full-blown crisis.
Worries about how deeply the crisis will cut into bank profits pushed down European share prices on Thursday.
Commerzbank said on Thursday it could end up with a bigger loss from investments related to U.S. subprime mortgages than it had first expected, while Deutsche Bank said late on Wednesday the credit squeeze would hurt third-quarter profits.
Deutsche's Chief Executive Joseph Ackermann said he also expected to have to correct over the next nine months the bank's valuations for 29 billion euros ($41 billion) in debt on its books used to finance large acquisitions.
Signs of Credit Pick-up
Britain's biggest mortgage lender HBOS said on Thursday speculation it faced funding problems were "utter nonsense" and it had "exceptionally strong" capital resources.
HBOS shares fell over 7% as dealers said rumours swirled that it faced funding problems or may go to the Bank of England for funding help. Its shares later stabilised and by 0950 GMT they were down 3.6% at 843 pence.
Similar rumours have hit other banks since the Bank of England stepped in to help Northern Rock, whose shares took a further dive on Thursday after the government said its proposed guarantee for the bank's customers would not cover new savings accounts.
However, there were signs credit was starting to flow more normally again, at least for high-quality borrowers, in the European corporate bond market where funding had dried up.
Banks said German utility E.ON would go ahead with a benchmark-sized euro bond after an investor call on Thursday. On Wednesday, German chemicals company BASF sold a 1.0 billion euro bond on more favourable terms for the company than initially expected.