All options will be considered to save embattled bank Northern Rock, British finance minister Alistair Darling said on Monday as fears of a crisis threaten to spoil Prime Minister Gordon Brown's first year in power.
Customers of the mortgage bank have rushed to withdraw savings after it sought emergency lending from the Bank of England on Friday and some analysts worry the banking system could be in danger as confidence in financial markets dives.
Darling sought to soothe nerves again on Monday as Northern Rock's shares tumbled by a third for the second session in a row.
I'll consider every option, Darling told BBC radio. What I would say to people at the moment is that if they want to get their money out of the Northern Rock bank they can do it.
Darling will meet U.S. Treasury Secretary Henry Paulson later on Monday with credit turmoil likely to dominate talks.
Britain has already urged Europe to force better regulation on financial markets to protect against any future lending squeeze and the Group of Seven rich nations have commissioned a report on the cash crunch in time for next month's IMF meeting.
Hank Paulson and I both agree what's necessary is more discipline is needed in the financial system and far more openness, Darling said in a later interview with BBC television.
Pressure is growing on the United States to act swiftly and decisively to help stave off a crisis, especially as the current turbulence stems from risky mortgage lending in the United States.
But Paulson, a former investment banker, warned in Paris against acting too hastily on putting restraints on financial institutions. French Economy Minister Christine Lagarde wants a quick introduction of new rules.
However, he said the market turmoil could go on for a while. The U.S. Federal Reserve is expected to cut borrowing costs this week and other central banks could follow suit.
ROOT OF THE PROBLEM
The root of the problem is in the international markets, in America in particular, Darling said, reiterating that Britain was well placed to survive the crunch even if one of its most recognisable banks had just been bailed out. In the UK our fundamental position is that we have a strong economy, low interest rates, low inflation, which we haven't had in the past and which will stand us in good stead.
Despite rushing in to save Northern Rock, Britain has been adamant it would not rescue financial institutions that got into trouble, insisting responsibility for risk rests with investors.
The Bank of England has come under heavy criticism for its softly-softly approach in dealing with the credit crunch and may also have to cut rates before the year is out.
BoE Governor Mervyn King and other policymakers will be grilled by a parliamentary committee of lawmakers on Thursday.
If the current situation persists or deteriorates further, we could now be looking at official rates beginning to come down in November, said Philip Shaw, an economist at Investec.
Prime Minister Brown, who built his reputation on overseeing a decade of economic prosperity as finance minister, is also feeling the heat after basking in a period of popularity following the departure of out-of-favour Tony Blair in June.
Brown's government has been seen to deal competently with a bomb plot, foot and mouth disease outbreaks and flash flooding but may find a financial crisis a somewhat tougher challenge.
The economy ... has yet to be fully tested against rising economic sea levels, though the events of the last week suggest that it may be very soon, said Liberal Democrat deputy leader Vincent Cable. The water is now pouring through the defences.