Bank Of England

The Bank of England Governor Mervyn King warned that he does not expect the turmoil in financial markets to ease until banks reveal the full extent of their sub-prime losses.

Speaking as he gave evidence in front of the Treasury Select Committee for a second time on the Northern Rock fiasco, Mr King said that financial markets would have to have a degree of patience until banks revealed the full extent of their losses related to the sub-prime mortgage market at the end of February and beginning of March.

"It's about revealing these losses and recapitalising the balance sheet. At that point only will we see Libor spreads returning to normal levels," he said.

The Governor's comments come as the Bank of England and the European Central Bank loaned billions at cheap rates to banks in an effort to stimulate lending again.

Mr King said: "The large banks are now awash with cash. It is not whether they have cash, it's whether they are willing to lend. We need to dispel that sense of fear to prevent the US economy from worsening."

Mr King warned that one of the biggest problems was a prevailing ignorance of the complex workings of the money markets, even among those who deal in them, and said it was the partly the Bank's responsibility to keep reminding people of the mistakes made this year, and hope that they will learn the lessons.

He criticised those who dealt with the sub-prime market without understanding it: "The purchasers of those assets should ask themselves if they really understood what they were buying. We have to make people think twice and look at the complexities of what they are dealing with.

"There is a big pressure to focus on short-termism. It is a collective madness, the idea that everyone can always have an above average return."

Mr King denied being the senior Bank