The Bank of England's deputy governor, Paul Tucker, strongly denied suggestions on Monday that government ministers had pressured him to encourage banks to manipulate interest rates in a scandal gripping Britain's financial sector.
A row over how much top officials knew about interest rate rigging intensified as Tucker appeared before a parliamentary committee as part of its investigation into Barclays and other banks suspected of manipulating a key interbank lending rate.
"Absolutely not," Tucker, tipped to be the next Bank of England governor, said when asked by lawmakers if any government officials or ministers had encouraged him to "lean on Barclays" or any other bank to lower their Libor submissions.
The scandal - complete with emails showing bankers boasting of manipulating interest rates and congratulating each other with offers of champagne - has triggered fierce criticism about the financial industry in general and Barclays in particular.
Barclays has been fined more that $450 million for its part in manipulating the London Interbank Offered Rate, or Libor, the interest rate that is the global benchmark for transactions worth billions of dollars.
Barclays chief executive Bob Diamond was forced to resign last week, paying the price of a scandal that is expected to drag in other international banks.
The suggestion that members of the British government were involved in attempts to massage down banks' borrowing costs at the height of the financial crisis four years ago has added a political dimension to the affair.
Speculation about the possible involvement of politicians and top officials has been rife since last week when Barclays released notes suggesting authorities might have prompted it to lower estimates of the rate it pays other banks to borrow at the height of the financial crisis in 2008.
That email drew Tucker into the scandal, showing that in October 2008 Tucker told Diamond, then Barclays investment bank boss, that officials questioned why Barclays rates were so high.
Barclays had said Diamond's deputy, Jerry del Missier, had understood Tucker's comments as a green light to manipulate rates downwards, although Diamond himself has said he believed Tucker was merely passing on the view of officials and did nothing improper.
"It was not remotely in my mind during this conversation that I could be misinterpreted by Bob Diamond or anybody else," Tucker told the inquiry.
Asked specifically if it was wrong for Barclays to misinterpret his comments, Tucker said: "I think it was. As I understand he didn't intend to take it that way ... I don't think Bob Diamond did misunderstand."
Diamond has said that he did not interpret Tucker's comments as an encouragement to understate borrowing costs, while del Missier has not commented.
Barclays is among more than a dozen global banks under investigation by authorities in North America, Europe and Japan and the only one so far to admit wrongdoing. Libor is an interbank lending rate that underpins trillions of dollars of contracts around the globe.
As Diamond quit last week after the row erupted, Prime Minister David Cameron announced a parliamentary inquiry into banks in an attempt to quell public outrage with the industry.
The bank was fined a record $450 million this month by U.S. and UK regulators for conspiring to rig Libor rates between 2005 and 2009, plunging it into crisis and triggering a brawl between politicians over who was to blame.
Raising the stakes, the European Union stepped up its involvement in the investigation this week, saying it would propose new rules to criminalise the manipulation of indexes such as Libor.
"We need to draw lessons from the Libor case," said a spokesman for Michel Barnier, the EU Commissioner in charge of financial regulation. "We intend to close the regulatory gap in our proposed market abuse legislation by including the direct manipulation of market indexes such as Libor."
Barclays says some of its traders tried to manipulate Libor for profit as far back as 2005, and also says it wrongly lowered estimates of the interest it paid other banks at the height of the financial crisis in 2008, to make its financial position appear better.
The suggestion that authorities may have known about or even condoned the 2008 manipulation has turned the case into a political issue.
According to emails released on Monday, Tucker remarked on the high level of the price of a bond in an email to Diamond.
"Struck that your govt gnteed (government guaranteed) bond was issued at around 140 (basis points) over gilts," said the subject line of one email sent by Tucker to Diamond on October 26, 2008.
"That's a lot," the body of the text said. Tucker received four replies from Diamond, including one on Oct. 30 saying the bond issue was "quite a positive development actually that you and the government should feel pretty good about".
The emails also showed Tucker had discussed the issue with Jeremy Heywood, now head of Britain's civil service and a close adviser to both Cameron and his predecessor Gordon Brown, in power until 2010. Heywood has not so far commented.
The furore could affect who is the next Bank of England governor.
"It's very sensitive for Paul Tucker ... it's clear he's a front runner" to succeed Mervyn King as BoE chief, said lawmaker and Treasury Select Committee member George Mudie.
"But there's a cloud over him at this point in time ..., before we even asked him," he told Reuters.
Britain's Finance Minister George Osborne has said people close to Brown in the previous government were implicated, an accusation that led to heated exchanges last week on the floor of the House of Commons.
In a speech in London, Labour leader Ed Miliband called for Britain's big five banks to be forced to sell hundreds of branches to create at least two major competitors by 2015 and for regulators to make it easier for new retail banks to emerge.
He also proposed that a specialist banking crime unit be set up within the state Serious Fraud Office with the remit of investigating serious financial services fraud such as the rigging of the London Interbank Offered Rate (Libor).
"The revelations of the last two weeks have shown precisely what has gone wrong with our economy in the last decades. And the test of whether we can change things now starts with our banks," he said.
Libor, or the London interbank offered rate, is compiled from estimates by large international banks of how much they believe they have to pay to borrow from each other. It is used for $550 trillion of interest rate derivatives contracts and influences rates on mortgages, student loans and credit cards.
The rates submitted by banks are compiled by Thomson Reuters , parent company of Reuters, on behalf of the British Bankers' Association.
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