Mervyn King TSC
(Photo: TSC)

Bank of England governor Mervyn King used the very words of the Treasury Select Committee to his own advantage in side-stepping key questions over the BoE's role, management and relationship with the embattled bank during the London Interbank Offering Rate (Libor) rigging scandal.

The hearing, originally scheduled before the scandal was revealed, was slated to discuss the BoE's most recent Financial Stability Report. However, King, his Deputy Paul Tucker and Financial Services Authority Chairman Adair Turner found themselves facing stern questions from the panel about their respective roles in the affair - in particular King, who had not yet spoken to ministers about the scandal.

King and his Role Over Diamond's Departure

Treasury Select Committee (TSC) chairman Andrew Tyrie opened the session by asking Turner how and why King was involved with discussions with Barclays - and the ouster of CEO Bob Diamond - when the BoE was not the bank's regulator.

Turner responded that it was "appropriate for the Bank of England to play this kind of role in regulating the City."

"The Governor has always had regular meetings with chairmen at banks," said Turner. "We had decided the appropriate line at the time. I thought it was appropriate [for us to talk and see Marcus] Agius and put a message [across]. I think it is appropriate that we are also going to bring prudential regulation to the banks next year and confidence in the banks is appropriate for the regulatory stance. "

However, by the time the TSC got to King, the tone had already been set and King deftly used Tyrie's opinion to his advantage.

Tyrie asked King whether he had the legal authority for interfering in the management of Barclays.

King just responded that he did not "pull the trigger" on Diamond and that he simply wanted to make sure that Barclays' senior independent director, Sir Michael Rake, very clearly understood the depth of the regulators' concerns over the bank's executive management.

Turner backed up this point by saying that "we had not found anything against Bob Diamond and we [did not] give any direction that he is not fit and proper for this job. We made it clear about whether he [Agius] thought he [Diamond] was capable of leading the substantive change in the bank."

Furthermore, Turner was a pillar of support for King, as he emphasised how King and the BoE were merely trying to help manage the difficult situation and be more communicative.

"If Bob Diamond had stayed and giving the extensiveness of the calls for his resignations and from politicians and press, I strongly expect that would have been to disadvantage of the shareholders as well and there was certainly in shareholder attitude as the issues and debates developed over the week," said Turner. "[After discussing the situation] with Andrew Bailey (FSA) I would [have been] very surprised that if the net effect was not Diamond resigning."

King Hits Back Over BoE's Libor Rigging Knowledge

As TSC MPs installed a very hard line over the BoE not being a regulator very early on in the hearing, King was able to use this to bypass knowledge, responsibility and management of period where Barclays was found guilty of manipulating Libor.

MPs were quick to ask about the level and length of time King had knowledge on questionable or falsified Libor levels, referring specifically to the key piece of evidence: a letter from Timothy Geithner, who was the head of the New York Federal Reserve Bank at the time.

Geithner sent a private email to King recommending six ways to enhance the credibility of Libor.

The June 1, 2008, email, included a two-page memo dated May 27 of that year that suggested establishing best practices for calculating Libor, "including procedures designed to prevent accidental or deliberate misreporting."

King was adamant that the message was solicited by him and that he asked Geithner to send over his concerns in writing, after learning of them at a conversation in Basel between central bank governors around the world.

"At the Basel meeting, everyone was concerned over the behaviour of Libor. [Everyone] was particularly concerned over dollar Libor," said King. "Libor was like the health of a patient and because it was moving up and down [rapidly] we were all thinking about how to put policies in place to stabilise this."

King repeatedly also said that "when you have a system that relies on self-reporting [Libor submissions], you have to have the controls in place to show this reporting. [Letters like this from the New York Fed] doesn't mean that there is instantly an implication of wrongdoing."

In fact, during the course of questioning, King managed to place the BoE is a much more favourable light, by using MPs statements the BoE is not a regulator and to illustrate how King and his colleagues had gone above and beyond their call of duty to stabilise the financial markets.

"We are not responsible for the regulation of markets, prudential supervision and enforcement and compliance," said King. "The New York Fed is a regulatory body and BoE is not. All we could have done with [any] regulatory documents from New York is to pass it on. All we did was to tell the New York Fed to how best to interact with the British Bankers Association [BBA]. We were concerned that everyone had doubts about Libor but there was no evidence of wrong-doing. Paul Tucker had several meetings with BBA's Angela Knight about this."