Bank of England Governor Mervyn King defended his handling of the Libor affair, saying that he only knew of wrongdoing two weeks ago and that a memo from Timothy F. Geithner in 2008 didn’t highlight malpractice.
King told Parliament’s Treasury Committee today in London that the e-mail sent by the then president of the Federal Reserve Bank of New York included recommendations rather than allegations at a time when global regulators were expressing concern on the quality of the borrowing benchmark.
“Mr. Geithner was sending that to us as a suggestion for how these rules should be constructed and we agreed with him, but neither of us had evidence of wrongdoing,” King said. “The first I knew of any alleged wrongdoing was when the reports came out two weeks ago.”
King and Financial Services Authority Chairman Adair Turner faced repeated questioning today on Libor and their roles in the resignation of former Barclays Plc Chief Executive Officer Robert Diamond. At risk is the Bank of England’s reputation as the guardian of London’s financial district at time when the government is preparing to put it in charge of regulation.
E-mails released today show that Deputy Governor Paul Tucker encouraged contact between Barclays, HSBC Holdings Plc and Royal Bank of Scotland Group Plc on the subject of Libor during the 2008 banking crisis, when he was markets director.
“Have spoken to HSBC and RBS,” Tucker wrote to Diamond in an e-mail sent on May 28, 2008. “Sense similar across all three of you. I encouraged contact among Mark Dearlove peer group.”
Dearlove was head of Barclays’s money market desk at the time and responsible for the bank’s Libor submissions. Barclays’s top three managers quit after allegations of their bank’s involvement in manipulation of Libor, a benchmark for $500 trillion of financial products, resulted in a 290 million- pound ($453 million) fine in June.
Lawmakers quizzed King and Turner on how explicit they were in demanding Diamond’s resignation. King said he wanted Barclays Chairman Marcus Agius to tell the bank’s board about “the depths of concerns that the regulators had about the executive management of the bank.”
“I did not know what the outcome of that meeting would be,” King said. Diamond resigned afterwards as CEO.
Evening in Frankfurt
Questioned on Geithner’s e-mail, King said he received it one evening while on a visit to Frankfurt, and he forwarded it to Tucker. Geithner, who is now the U.S. Treasury secretary, sent the memo to King on June 1, 2008, after the two discussed Libor at a meeting of central bankers in Basel the previous month. King said today that everyone at that gathering was concerned on Libor.
Geithner’s recommendations included one to “establish and publish best practices for calculating and reporting rates, including procedures designed to prevent accidental or deliberate misreporting.”
Tucker passed the comments to Angela Knight, then the CEO of the British Bankers’ Association, according to correspondence released by the Bank of England last week. The BBA, which is responsible for Libor and was reviewing the benchmark at the time, said it would take the recommendations on board.
The BBA needed encouragement to address Libor concerns, King said.
“They did have to be nudged to get into the right direction, but once they had been nudged they worked very hard,” he said. “I don’t believe the BBA could possibly be held responsible for monitoring whether the rate was 1 basis point too high or too low,” he said.
King told lawmakers today that it was quite understandable for Geithner to show concern on the quality of Libor as a global borrowing benchmark because of the New York Fed’s role as a regulator. The Bank of England didn’t have such responsibilities at the time, he said.
Parliament is currently considering a bill that would expand the Bank of England’s powers beyond monetary policy, including giving it authority over macro-prudential tools and banking supervision to help prevent another financial crisis.
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