By MAX COLCHESTER, JASON DOUGLAS and AINSLEY THOMSON
Paul Tucker, deputy governor of the Bank of England, testifies before a parliamentary committee that is examining how Barclays and other global banks improperly tried to influence interest rates like the London interbank offered rate, or Libor. Watch a clip from Tucker’s testimony. Video: AP.
LONDON—Bank of England Deputy Governor Paul Tucker sought to deflect blame over the interbank-lending-rate scandal Monday, saying that he never encouraged banks to post artificially low rates and was unaware that some lenders had sought to manipulate the benchmark.
Responding to questions by U.K. lawmakers, Mr. Tucker contested the contents of a note, made public by Barclays PLC last week, that raised concern that he had tacitly encouraged the bank to post lower rates in its submissions to the panel that sets the London interbank offered rate, or Libor.
Libor, which is the benchmark for rates on trillions of dollars of loans world-wide, is based on daily submissions from a group of leading banks, which report their estimated costs of borrowing from one another. A widening scandal over attempts to manipulate the rate centers in part on banks understating those costs in order to disguise their mounting distress during the financial crisis. Reporting higher costs could have raised concerns about a bank’s health.
Emails Between Paul Tucker and Robert Diamond
Emails Between Paul Tucker and Jeremy Heywood
The memo, written by Robert Diamond, who later became Barclays’s CEO, said that during an October 2008 phone call, Mr. Tucker relayed concerns from “senior” British government officials about Barclays’ above-average Libor submissions.
“Mr. Tucker stated…that it did not always need to be the case that we appeared as high as we have recently,” Mr. Diamond wrote to two of his colleagues the day after the call.
On Monday, Mr Tucker said the note didn’t completely reflect his conversations with Mr. Diamond.
“The last sentence gives the wrong impression. It should have said something along the lines of: ‘Are you, the senior management of Barclays, ensuring that you are following the day-to-day operations of your money market desk?’” said Mr. Tucker. “Are you ensuring that they don’t march you over the cliff inadvertently by giving signals that you need to pay up for funds?”
He added that he had “absolutely not” encouraged any bank to lower its Libor submissions.
Mr. Tucker, who has long been considered the BOE’s leading internal candidate to replace Gov. Mervyn King when he steps down next year, asked to speak before the panel after the Barclays note was released.
Barclays has reached a roughly $450 million settlement with U.S. and British regulators over its attempts to manipulate interbank lending rates.
Barclays said a top investment-banking executive, Jerry del Missier, had interpreted the conversation as an instruction to understate Barclays’ borrowing costs. Mr. del Missier resigned last week. Mr. Diamond and Chairman Marcus Agius have also stepped down.
Earlier Monday, the Bank of England released a series of emails, written in 2008, that show Mr. Tucker was in regular contact with Jeremy Heywood, a top adviser to then-U.K. Prime Minister Gordon Brown, to discuss U.K. banks’ funding problems. Nowhere in the emails published Monday did the two officials discuss encouraging banks to submit false readings of their borrowing costs to the panel that calculates Libor.
Nevertheless, the central bank has long discussed problems with the Libor rate. Minutes from a meeting of the bank’s sterling money-markets liaison group in November 2007 state that “several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress.”
The meeting was chaired by Mr. Tucker and attended by representatives of nearly all the major banks operating in the U.K at the time.
On Monday, Mr. Tucker said he was aware that the system was flawed.
Paul Tucker, deputy governor of the Bank of England.
“This market was not working—it is sporadically illiquid and dysfunctional,” said Mr. Tucker “However, I was not aware of allegations of dishonesty.”
He added that for months during the height of the crisis, the submissions were based on estimations, as interbank lending dried up completely. As a result, the rate “wasn’t that important” as a policy tool, he said.
In the U.K., regulating the banks that set Libor is the responsibility of the Financial Services Authority, not the central bank. Mr. Tucker said he emphasized the importance of reviewing Libor to the British Bankers’ Association, a trade group that oversees the benchmark.
“We encouraged the BBA not just to consult the bank market but users of the market,” he said.
Asked why he didn’t press the matter further with regulators, he replied: “I would have had a discussion had I suspected foul play, but I didn’t.”
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