Bank of England governor Mervyn King said British and European Union laws complicated his efforts to rescue Northern Rock Plc. and prevented the central bank from acting covertly to prevent a panic.
“We’re hemmed in by four pieces of legislation,” King told a parliamentary committee in London on Thursday. “The interaction between different pieces of unconnected legislation made it almost impossible for us to act as a lender of last resort in the way that I would prefer.”
King’s credibility is in question because he refused to help out cash-strapped banks during the first month of the credit market slump, which intensified on 9 August. That made it harder for banks to raise money and forced mortgage lender Northern Rock last week to ask the Bank of England for emergency funding.
His comments on Thursday spread the blame for the collapse of Northern Rock to prime minister Gordon Brown, whose government designed the UK’s current financial regulatory framework and approved the rules governing banks.
“There is clearly a regulatory failure, not just in the UK but around the world as well,” said Williem Buiter, a former Bank of England policy maker, who now teaches at the London School of Economics. “The fact that banks have such needs at the moment is because the banks have played the field with such reckless abandon in the past few years. The chickens are coming home to roost.”
King said the UK’s company takeover rules make it impossible for regulators to organize the quick sale of a failing bank. He said an EU banking law passed in 2005 prevented covert lending to support Northern Rock, requiring authorities to announce when a loan has been made.
“The bank would have preferred to have acted covertly as lender of last resort, to have lent to Northern Rock without publishing it,” King said. “As a result of the market abuses directive (of 2005), we were unable to carry that out.”
Northern Rock, whose roots date to 1850s, is the UK’s third biggest lender by gross mortgages, with loans worth £17.4 billion ($35 billion) as of 30 June.
“The real problem facing Northern Rock was that the asset side of the balance sheet suddenly became highly illiquid,” King said. “In one form or another, Northern Rock required as a backstop a lender of last resort. The natural place to look was the central bank.”
Earlier on Thursday, the Bank of England said it will offer additional funds to the financial system and widen the reserves that banks can draw from this month.
The central bank will lend £4.4 billion ($8.8 billion) of extra funds in London as part of a weekly money-market operation, it said in a statement on Thursday. The bank also will pay interest on deposits within 60% of lenders’ target reserves, compared with a previous range of 37.5%.