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‘Four pieces of legislation led to fiasco’

Bank of England governor Mervyn King called for major changes to banking regulation during a fierce grilling from the Treasury select committee.

King told MPs at the meeting last week that four pieces of legislation had created a landscape that led to the Northern Rock episode and called for urgent changes to UK and European legislation.

King said he had wanted to act covertly in offering the lender of last resort facility to Northern Rock but was informed by lawyers that the market abuses directive meant this action had to be made public.

He also claimed UK takeover rules made it very difficult for regulators to organise a quick sale of a bank.

King then attacked the processes in place when a bank goes into administration, suggesting the fact that assets are frozen rather than transferred immediately to another institution and that consumers are guaranteed less than 100 per cent of their savings contributed to the panic that spread across the country.

He said: “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 denied he was leant on by the Government to offer a full guarantee to Northern Rock customers, saying the decision was made after discussions with the FSA and Treasury.

He also denied reports that the actions of the Bank of England had impeded a suitor taking over Northern Rock. He said the FSA had asked him if the lender of last resort facility would be rolled over in the case of a takeover and he confirmed that it would be.

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