Mark Carney said this week the Bank of England’s reputation has taken a knock from its failure to spot the rigging of global currency markets.
A day later, that became a double blow when the U.K. fraud watchdog began investigating the 300-year-old institution’s efforts to help banks during the depths of the financial crisis.
The Serious Fraud Office investigation threatens to undermine the BOE two years after it won back the power to police the U.K.’s scandal-prone financial industry. The probe alone opens Carney and colleagues to fresh attacks from politicians already unhappy with their efforts to clean up the City of London, as the financial district is known.
“It’s a massive problem for the bank’s reputation along with all the other the scandals that have gone on in the City,” said Andrew Clare, a professor at Cass Business School in London and former BOE official. “It leaves them with the job of trying to restore their reputation and that has to be done soon.”
The SFO opened a full investigation in December after the central bank referred the initial findings of its own inquiry into its emergency cash auctions in 2007 and 2008 at the height of the financial crisis that were aimed at aiding banks as liquidity dried up.
Both the BOE and the SFO declined to comment further as the investigation is ongoing. At question is whether the transactions were rigged for financial advantage and if so by whom. It isn’t clear whether the 27-year-old fraud prosecutor is probing individuals at the BOE or at banks.
“If there’s been wrongdoing at the Bank of England or at any bank -- the manipulation of rates -- let them be brought to book,” Panmure Gordon & Co. market commentator David Buik, who has worked in the City of London for 53 years, said in a telephone interview. “The Bank of England is looking to be seen as whiter than the driven snow.”
This is not the first time the spotlight has fallen on the vulnerability of the BOE’s multiple aid program’s extended to struggling U.K. banks during the crisis.
Lloyds Banking Group Plc paid the central bank 7.8 million pounds ($11.9 million) in July after its traders were found to have rigged the sterling repo rate to reduce the fees it and other banks paid to the BOE in return for aid during the financial crisis.
The BOE’s special liquidity scheme allowed U.K. banks to swap illiquid assets, such as mortgage-backed securities, for government bonds. These could then be traded for cash.
The fee for using the facility was based on the difference between three-month sterling London interbank offered rate and the repo rate, which was set by 12 banks in a poll conducted by the British Bankers’ Association. Lloyds traders inflated the firm’s repo submissions on the days the SLS fees were calculated to narrow the spread, thus reducing the cost.
“Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved,” Carney said in a July 15 letter to Lloyds Chairman Norman Blackwell. Officials at the London-based lender declined to comment.
For the central bank, the risk posed by the SFO probe is that one or some of its officials broke the law, meaning that not only did it fail to detect or manage scandals, but it missed wrongdoing within its own ranks. That would prove a low mark for the so-called Old Lady of Threadneedle Street, which has spent eight years trying to bring the financial sector to heel following the 2007 run on Northern Rock Plc and 2008 bailouts of lenders such as Royal Bank of Scotland Group Plc.
The BOE has already been criticized for its role in the U.K.’s “light touch” regulatory system which allowed the benchmark interest rate for global finance, known as Libor, to be manipulated.
The fallout from that episode was one reason for the 2013 appointment of Carney from the Bank of Canada as the government looked beyond internal candidates viewed as too close to the bank executives they were supposed to oversee.
Paul Tucker, then deputy governor of the BOE, was forced to deny accusations in 2012 that he pressed Barclays Plc to lower its Libor submissions, and defend himself against criticism he ignored warnings from other regulators on flaws in the benchmark interest rate. Barclays paid a record 290 million-pound fine in 2009 for manipulating the London interbank offered rate.
With the government seeking to unite oversight of banks in the wake of the financial crisis, that’s put Carney in charge of the most powerful central bank in the world, home to regulators overseeing all deposit-taking institutions, insurers, investment banks and clearing houses.
Just months after taking control, the BOE was nevertheless buffeted by revelations of potential manipulation of the $5.3 trillion a day foreign exchange market.
Authorities on three continents are reviewing allegations that traders leaked confidential client information to counterparts at other firms and colluded to rig currency benchmarks used by money managers. An initial round of settlements in November yielded $4.3 billion in penalties against six banks.
Following an internal probe into what BOE staff knew about the currency rigging, Carney has put a new escalation policy in place in the event of officials having concerns about market behavior. He also asked staff to report past instances when “they were aware of the possibility of market abuse.”
The central bank also ended up firing its chief currency dealer, Martin Mallett, who was faulted for failing to alert his superiors about concerns that traders were improperly sharing information about client orders. The shock waves were still being felt this week when Carney gave lawmakers fresh details the actions that led to Mallet’s ouster.
“Our reputation has certainly taken a knock,” Carney told a parliamentary hearing on Tuesday. “This hasn’t been a pleasant experience.”
The bank said just last week it is overhauling how it interacts with market participants by strengthening oversight of how information is gathered, used and shared with a new division to manage the work.
“Governors’ eyebrows and fireside chats are no match for a clearly communicated framework,” Minouche Shafik, deputy governor for markets and banking, said last week. “The Bank of England is not just open for business, we are also open about our business.”
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