The Bank of England’s auction of £10 billion of short-term loans to ease the liquidity crisis proved a flop yesterday when not a single bank or building society entered a bid.

The no-show was seen as unfortunate for Mervyn King, the Bank Governor, who put his credibility on the line last week by executing a policy U-turn and announcing the auction.

The Bank came under fire last night from Richard Lambert, the CBI chief, who said the run on Northern Rock was the kind of thing one expected to see “in a banana republic”.

That it had happened “in a mature and prosperous country like the UK is almost unimaginable,” he said in a speech to business leaders in Northern Rock’s home town of Newcastle.

“It’s not enough to say, as the Governor did last week, that the main difficulties in fixing the problem had been created by the complexity of today’s company law and by our system of deposit guarantees,” said Mr Lambert, who previously sat alongside Mr King on the Bank’s Monetary Policy Committee. “You don’t wait for the cinema to catch fire before you check out whether the fire precautions are going to work.”

Bankers said that they had shunned the auction of three-month money because cheaper finance was now available in the commercial money markets and because of the stigma.

Three-month Libor, the rate at which the banks borrow from one another was 6.34 per cent yesterday, considerably less than the minimum rate of 6.75 offered by the Bank.

One senior banker said yesterday: “Any bank participating in the auction would be like a turkey voting for Christmas. The stigma risk was high.”

But another view was that the Bank’s announcement of the auction alone had been enough to improve confidence in the interbank market and so make the actual loans unnecessary.

Although borrowers are not named by the Bank, their identities do tend to leak out, as Barclays found to its cost last month.

Jonathan Loynes, of Capital Economics, commented: “It does look a bit embarrassing for the Bank that, having performed a U-turn, no one’s taking them up on their offer. On the other hand it underlines the point that they didn’t want to bail people out.”

Two weeks ago banks were desperate for three-month loans because of paralysis in the interbank market but at that time the Bank believed offering credit would have encouraged reckless lending in future. It changed its mind last week, announcing four auctions of three-month money, and agreed to water down its collateral rules too.

The lack of bids in Threadneedle Street yesterday contrasted with the European Central Bank, which pumped another €50 billion (£35 billion) of three-month loans into the system: 159 banks applied for €85 billion of borrowings.

Philip Richards, co-founder of the hedge fund manager RAB Capital and a 6 per cent shareholder in Northern Rock, criticised the Bank’s handling of the interbank market. “The Federal Reserve and ECB have shown how it should be done,” he said.

A Bank spokesman said: “The action was designed as a safety valve in the light of concerns that arose about potential pressures in the banking system more generally as a result of the problems with Northern Rock.

“Since the announcement there has been a significant fall in the three-month interbank rate, which made the auction look expensive.”

The Bank still plans to repeat the auction every week for the next three weeks. The next sum being offered will be announced on Monday with an auction the following day.

Northern Rock shares were marked 12 per cent higher to 182p as dealers reacted to Tuesday’s announcement that the bank had received several approaches. Banks including Citigroup, National Australia Bank and ING were seen as potential buyers, alongside private equity groups such as Cerberus Capital and JC Flowers.

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