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, the Tripartite Authorities submitted a further memorandum on the meaning of the directive homeowners insurance. 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’.

Arguably, the important point here is not whether King was right or wrong in his original interpretation of the Market Abuse Directive. Rather the point is that the uncertainties of the legal context did affect his perception of the Bank’s own responsibilities. Further, these uncertainties arose – above all – from the difficulty of understanding a law made by the EU. In earlier financial crises the Bank of England had not had to bother about the perplexities and confusions of European law, because there was no European law to bother about. In the summer of 2007 the time and energy absorbed by legal niceties hampered the Northern Rock rescue bankruptcy records.

Third, deposit insurance is relatively new in the UK. Until 1979 bank deposits were not insured at all and, in principle, a bank failure would cause depositors to lose at least part of their money. Academic studies have shown that bank failures are more common in nations with deposit insurance than in those without. Nevertheless, as with takeovers and insider trading, the EU has made attempts to regularise different member state’s arrangements. In 1994 a directive was produced requiring all member states to have a deposit insurance scheme, even though the minimum level of the insured deposit was very low at 20,000 euros. This directive cannot be blamed in any way for the Northern Rock fiasco, but the message seems to be that the UK will in future have to retain a system of deposit insurance whether it likes the idea or not.

In short, King’s remarks on 20 September reflected the Bank of England’s difficulties both in interpreting European law and in responding to Northern Rock’s funding problems given what it took the legal framework to be. Whatever the rights and wrongs of the matter, King and the Bank have subsequently been heavily criticised for their initial handling of the crisis. From the extension of the auto loans government guarantee to all of Northern Rock’s deposits on 17 September, the Bank was sidelined and the Treasury increasingly took control. But the Treasury’s response was also conditioned by a perceived need to respect EU law. Like the Bank, it made a complete hash of the situation.

A central objective of public policy in lender-of-last-resort lending must be to obtain the maximum value from the borrowing banks’ loan assets. But the extraction of the maximum value from a portfolio of bank loans and securities takes time. A commonplace of business life is that, if assets are sold off in a rush under pressure (in a so-called ‘fire sale’), they are worth less than if the seller can choose the time of the transactions and take advantage of favourable market conditions. It follows that – when a central bank extends a lender-of-last-resort loan to a bank with funding problems – the imposition of a deadline for early repayment is, almost invariably, misguided. The correct attitude is flexibility over the timing of repayment, plus the enforcement of a penalty rate of interest scooter insurance.