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• the Takeover Code

• the Market Abuse Directive debt help

• the UK’s system of deposit insurance, and

• the lack of special legislation in the UK for failing banks.

The next few paragraphs will show that, for the first two of these four alleged culprits, the European dimension was critical.

First, the Takeover Code was introduced in 1968 to set out a framework for the orderly and honest conduct of takeover activity in the City of London. For most of the subsequent period it has been a voluntary code respected by participants in financial markets, rather like the rules of chivalry in medieval warfare. Until recently it had no legislative force, and was readily set aside in both the secondary investment propertybanking crisis of the mid-1970s and the mini-crisis of the early 1990s. It became statutory only in 2006, as a by-product of EU legislation as the member states tried to reach an accord on the conduct of takeover activity across the whole of the Union. Whether the Takeover Code was in fact an obstacle to an inter-bank rescue operation in the summer of 2007 seems moot, to say the least. The important point for present purposes is that King thought that it was a valid justification for the Bank’s reluctance to organize such an operation. Before 2006 he could have acted pragmatically and sensibly, as had his predecessors in similar circumstances, because the Takeover Code was not law.

Secondly, King believed that the appropriate method of dealing with Northern Rock’s funding problem was ‘covert’ lending, but – in his opinion stock market, after taking legal advice – ‘covert support is ruled out because of [the EU’s] Market Abuse Directive’. The Market Abuse Directive describes how publicly-quoted companies must reveal inside information that may affect the stock market’s valuation of their businesses. The obvious counter-argument is that the Bank of England had been involved in commercially sensitive negotiations, of one sort or another, with publicly-quoted companies for many decades before 2007. No one had thought that a EU directive on insider trading should intrude into such negotiations or somehow stop them taking place.

King’s reference to the Market Abuse Directive may have been misjudged. According to Professor Willem Buiter of the London School of Economics in a report in Financial News on 4 February 2008, ‘There is nothing in the Market Abuses Directive to prevent covert support to banks in trouble. On the day the Governor of the Bank of England said it, the statement was contradicted by a spokesman for the European Commission.’ Three months after King’s initial evidence to the Treasury Committee term life insurance, the Tripartite Authorities submitted a further memorandum on the meaning of the directive. This included a lengthy but inconclusive disquisition on whether an announcement about certain types of commercial negotiations might be delayed and still comply with the Market Abuse Directive, because the announcement would itself materially affect the outcome of the negotiations! As King himself noted, the wording of the directive was ‘ambiguous’.