The Ft.com is reporting that the Bank of England has done a u-turn on bailing out the banks:

British banks will be able to borrow from the Bank of England for three months using mortgages as collateral, the central bank announced in an extraordinary U-turn.

The humiliating move for Mervyn King, Bank governor was announced on Wednesday morning when the Bank said that next week, it would be willing to swap £10bn of cash for a wider range of commercial bank assets “including mortgage collateral”.

Up to now, Mr King has insisted that such action would be tantamount to bailing out banks that had made risky lending decisions and would sow “the seeds of a future financial crisis” because it provides after the event insurance for risky behaviour.

The Bank always insisted it had the option of such action, but was unwilling to take the plunge because, as Mr King wrote to members of Parliament last week, “central banks cannot sensibly entertain such operations merely to restore the status quo” before the market turmoil began.

He added that the only circumstances in which such action would be warranted would be when failure to act “would lead to economic costs on a scale sufficient to ignore the moral hazard in the future”.

Northern Rock will not doubt be furious that they didn’t make this move last week before the perhaps irreparable damage to Northern Rock’s brand occurred. It’s a worrying sign for the economy as whole too, if the credit crunch continues it’s likely that investment will decrease and economy will stop growing.

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