Mark Carney told the Treasury Select Committee last March: “We cannot come out of this... with a shadow of doubt about the integrity of the Bank of England.”
The Governor of the Bank of England was referring to the possibility that manipulation of foreign exchange (forex) markets by major banks – which attracted $4bn (£2.6bn) of fines – might have been matched by lax or complacent conduct of forex market mechanisms by Bank of England officials. The next day, he announced a review by a senior lawyer, Lord Grabiner QC, who was later asked to conduct a second review into the way the Bank had conducted “liquidity auctions” during the financial crisis.
Now the findings of the first review have been criticised by select committee member Jesse Norman MP as “seriously incomplete”, and the findings of the second have been referred by the Bank to the Serious Fraud Office (SFO). Nothing has been said about the SFO’s first investigation behind the great walls of Threadneedle Street other than to confirm it is happening, though a source suggested it might relate to a single incident rather than a systemic problem.
The Bank launched it first “liquidity auction” in September 2007, offering to lend three-month money, against collateral, to banks that were having difficulties funding themselves in the market. At first there were no takers, because the minimum rate for emergency cash looked high. But as the crisis deepened during 2008, there were plenty of customers for so-called Extended-Collateral Long-Term Repo operations (ELTRs), which peaked at £180bn of special funding by January 2009, and the parallel Special Liquidity Scheme. It is the ELTR – in which banks named the rate they were willing to pay, the highest bidder being assumed to be most urgently in need – that the SFO is believed to be looking at.
On the no-smoke-without-fire principle, it’s fair to assume that something turned up by the second Grabiner review provoked the referral to fraud officers, but we cannot assume that the suspected fault lies within the Bank rather than among the liquidity schemes’ clients. We can merely observe that this news fits a pattern in which virtually every pricing mechanism used by the City in recent years has been abused by someone – and in some cases, it seems, by several banks at the same time, either in collusion or on the assumption that their rivals were up to the same tricks.
First came the Libor-fixing scandal. Then the long-established daily gold-price fixing by leading bullion dealers came into the spotlight when Barclays was fined for allowing one of its traders to manipulate the fix in 2012. Then state-controlled Lloyds Banking Group was fined £70m for trying to fiddle the Special Liquidity Scheme.
All this has introduced the wider public to the casually amoral dialogue of cheating traders: “Dude, I owe you big time!” Lord Grabiner’s forex review picked out phrases such as “these guys are sharing mainly tickets [deals] that don’t exist” and “some of these banks want to… bully the fix”.
This is a world in which market rules, even those introduced to save banks from perdition, were there to be bullied, or “gamed”, rather than obeyed to the letter. The complexities of the markets offered ever greater possibilities for “gaming”, while the ethical implications meant little to practitioners within a closed milieu – the self-reinforcing “silo mentality” of finance that has caused so much damage over the past decade. It’s no different in spirit from the case of Jonathan Burrows, the City’s artful dodger who “gamed” his commuter rail fare from Sussex to Cannon Street for five years to save himself £43,000.
As for the Bank of England, it would be wrong of commentators to leap to any conclusion of culpability. But the Old Lady has clearly struggled to keep a grip on market practices, and has had to admit that the traditional pragmatism of its refereeing of the City no longer works. Deputy Governor Minouche Shafik spoke recently of “a journey from ‘constructive ambiguity’ toward greater clarity around how we interact with markets”. That may not require greater volumes of regulation, but it does mean what lawyers call “purposive” rules that state their underlying intention as explicitly as their mechanics.
No one wants to see the BoE in the dock. But until this story is satisfactorily cleared up, there is indeed a “shadow of doubt” hanging over the integrity of the institution – and Governor Carney may feel that he has been bitten in the back end by his own assurances to MPs.
Martin Vander Weyer is business editor of 'The Spectator'. 'Any Other Business', a collection of his journalism, is published by Elliott & Thompson
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