The Old Lady of Threadneedle Street has entered some uncharted and dangerous waters. It emerged this week that the Bank of England has become embroiled in a criminal investigation — a sensational and deeply damaging episode for the year-old financial regulator.
Remember [too] that this is the premier banking capital in the world. No charges have so far been presented — and may never be. Yet the Bank is already facing tough questions about its handling of the incident and its commitment to transparency. The fact of the investigation had to be wrestled into the public domain.
That admission prompted the Bank itself to release a statement confirming it had commissioned Lord Grabiner, QC, to conduct an independent inquiry into those auctions. Neither the SFO nor the Bank were willing to elaborate on the nature of the material passed over — or what precisely Lord Grabiner was asked to investigate. The context of that revelation is deeply troubling. A year ago, currency traders under investigation for rate manipulation told Bloomberg they had been informed by Bank officials that it was OK to manipulate markets.
But now it has emerged that the QC was conducting a parallel probe. And the evidence that investigation threw up was clearly sufficiently serious enough to warrant being passed on to the SFO. Did the Bank commission Lord Grabiner for the second probe based on some new tip-off about potential wrongdoing in liquidity operations — like the accusations over forex?
Or did the second probe grow out of the work of the first one? Did Lord Grabiner and his supporting team from the law firm Travis Smith uncover a new area justifying investigation as they trawled through some 66, documents and reviewed around 6, telephone call made by officials at Threadneedle Street?
So who knew about the second or wider Grabiner probe? The Financial Times had reported on its existence last year. But the Bank had repeatedly refused to comment.
The Governor, Mark Carney, was specifically asked about the existence of a second Grabiner investigation as recently as Tuesday, at the Treasury Select Committee. But after the story was finally confirmed on Wednesday, Andrew Tyrie, the head of the committee, revealed he had been informed of the SFO referral back in November. The sooner their findings are published the better.
But the fact that the rest of the TSC was kept in the dark has left at least one member of the committee unhappy. The transparency is palpably lacking. The SFO would not say yesterday when it expects to decide on whether to take the case further. The Bank may find itself fielding challenging questions about its handling of the affair rather sooner than that.
The Bank commissioned Lord Grabiner to investigate possible collusion in forex manipulation. But he was also investigating a quite different matter at roughly the same time. Yet the Bank made no public disclosure of the existence of the second investigation. But the Grabiner forex inquiry could also have resulted in a criminal investigation and that was made fully public. What is the difference? If the Bank of England had been a private bank or any other public limited company it would have been compelled to inform shareholders about the fact that it was involved in a criminal investigation.
But when the Bank keep an internal investigation secret, and also the fact that it is involved in a criminal investigation, that will strike many as falling well short of transparent. But why was the rest of the committee unaware? Was Mr Tyrie instructed by the Bank not to tell them? During the crisis banks feared ruled the entire financial system. Everyone knew there were huge losses hidden on balance sheets as a result of bad loans made over the previous decade.
But no one knew which institution was most exposed. As a result banks would not lend to anyone on normal terms. This was the credit crunch. The Bank of England, like other central banks, was forced to step into the breach with cheap money.
It made short-term financing available to enable financial institutions to meet their liabilities. Private banks would essentially bid for short-term funding from central banks. We do not know what officials at the Bank of England are suspected of doing. But one possibility is that private banks colluded to offer low bids for the liquidity, which could have saved them all money - and that some at the Bank of England turned a blind eye.
Another conjecture is that the loan collateral posted with the Bank by the private lenders was known by officials to be below the quality officially demanded. Another piece of context - which may well be unrelated - was that last year Lloyds Banking Group was fined by the Financial Conduct Authority for manipulating the repo rate, used to calculate the fees paid to the Bank of England for its special liquidity scheme SLS.
Questions the Bank has to answer Q. What does this say about transparency at the central bank? Who was kept in the circle of trust? How the taxpayers may have lost out During the crisis banks feared ruled the entire financial system.More...