The UK's banks face a "painful adjustment" in coming months as losses from the summer credit crunch mount, Bank of England Governor Mervyn King has warned.
The gloomy forecast came as the Treasury increased its funding guarantees to stricken mortgage lender Northern Rock, the biggest victim of the financial turmoil so far.
Mr King told MPs on the Treasury Select Committee: "A painful adjustment faces the global banking sector over the next few months as losses are revealed and new capital is raised to repair bank balance sheets."
When quizzed over the possible nationalisation of the Newcastle-based lender - which has borrowed an estimated £25 billion so far - Mr King refused to rule out the option.
Liberal Democrat Treasury spokesman Vince Cable said: "Today's announcement makes it very clear that the Government is effectively nationalising all the liabilities of this bank.
"It is outrageous that the taxpayer should now be carrying all the risk involved in keeping this bank afloat while having no direct control over its affairs.
"The Government is ensuring that if any sale is achieved the benefits will go to speculative investors and not back to the taxpayer.
"The argument I have been advancing for several weeks that the bank should urgently be taken into temporary public ownership has become more compelling than ever."
