Mervyn King, the governor of the Bank of England, told a committee of MPs last week that the Bank would provide more liquidity to the financial sector if required.  That commitment is vital if banks and buildings societies are to keep lending.

In evidence to the Treasury Select Committee, Mr King told MPs: "I want to assure you that the bank will provide the liquidity assistance that the system needs in order to restore confidence. Such lending can be only a temporary measure but it can be a useful bridge to a longer-term solution."

At the heart of the credit crises is the inability of banks, including mortgage lenders, to borrow the money they would then pass on as loans and mortgages.  The Banks commitment to lend money to these banks when they can't raise it elsewhere is vital to keep the economy going.

The high street banks lend more than they take in deposits.  These loans, including mortgages, are classed as assets because borrowers will repay the debt and pay interest on top.  The banks can then borrow money on the strength of these assets and so keep lending.  But worries about widespread defaults on mortgages in the USA (the so called sub-prime crisis) means that these loans are no longer seen as valuable and banks can't use them to raise funds.  Result? No more lending.

In fact, UK banks have been much more cautious about lending to homeowners than their American equivalents and most mortgages in the UK are good quality loans that will be repaid as planned.  The Council of Mortgage Lenders says that just 0.23 per cent of loans in 2007 ended up as repossessions, a tiny figure and half the rate experienced in the early 1990s.  But the experience in the USA has spooked the markets and UK banks can no longer raise funds on the back of the value of their mortgage loans.  As Mr King puts it; "These assets cannot now be sold or used to secure funding in the market - they are difficult to finance. That has created uncertainty about the strength of banks' financial positions."

Step in the Bank of England to save the day? The Bank has agreed to accept mortgages as collateral for lending money to UK banks.  In other words, if the City won't lend on the value of mortgages, the Bank will.  Just how much it will lend we don't know yet, but some loans that were due to be repaid recently have been ‘rolled over' so that the banks don't have to repay them just now.

The key to the ‘credit crunch' is not poor quality debt that the banks won't get back - at least not in the UK.  It's the willingness of investors to lend against the value of mortgages and to lend money for mortgages which are now seen as difficult to sell to others. If, as it says it will, the Bank of England steps in to provide the funds the banks need, the credit crunch should work itself out.