The liquidity crisis in the wholesale money markets may not yet be over, the former governor of the Bank of England has warned.
Lord Eddie George said there could still be further shocks to come as a result of the credit crunch as banks reported their full-year results.
He said: "It is too soon to say that the liquidity crisis is over. We may yet see further shocks as year-end accounts are published. We are already seeing a renewed tightening in wholesale money markets."
Speaking at the National Association of Pension Funds' Investment Conference, he said he had failed to anticipate the consequences that "abnormally low interest rates", which saw the Bank of England base rates drop to just 3.5%, would have on increasing investors' appetites for marketable debt.
He said this appetite had led to a pronounced narrowing in spreads between high and low risks, resulting in what could now be seen as a "serious mis-pricing of risk".
He added that there was also a "real transparency problem" in the way risk was sold on. He said: "Many regulators were worrying about this before last summer, worrying about the mis-pricing of risk and where it was all going to lead, but no-one ever suggested it might trigger the dramatic events we have now seen."
Lord George said: "It has been a really harrowing time since last summer for everyone involved in the financial services industry across most of the industrial world."
But he said the financial markets were now in "better shape in terms of the system as a whole" than they were in the second part of last year.
He added that while many financial institutions had taken large hits, Northern Rock, which he described as an "extreme case" of over-dependence on wholesale money markets, had been the only real casualty.
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He said some people had claimed City watchdog the Financial Services Authority should have seen the problems coming. But he said: "Frankly I don't think anyone could have seen the problem coming in the way it did. I do not see how the regulator could have seen what was coming when the management did not."
