Bank of England and US regulators approved inadequate Libor rules

The Bank of England was dragged further into the Libor scandal last night as it emerged that it had been closely involved in drafting the clearly inadequate rules on how the lending rate is calculated.

Previously, Bank Governor Sir Mervyn King has given the impression that he merely passed on concerns about the way banks were setting Libor to the British Bankers' Association (BBA), which regulated the measure.

However, a cache of emails and documents released by Threadneedle Street yesterday showed Sir Mervyn describing himself as "broadly content" with a set of rule changes made by the BBA and enacted in December 2008. The Bank also persuaded the BBA to make some amendments.

However, Barclays continued "lowballing" its Libor rate for at least a further five months despite the new rules. The emails also show that US regulator, the New York Federal Reserve, approved the changes even though they were less stringent than it had initially suggested.

The revelations will fuel allegations that the authorities on both sides of the Atlantic were complacent about the integrity of the crucial interest rate, which is used to fix the cost of borrowing on mortgages, loans and derivatives worth more than $450trn (£287.92trn) globally.

Reports yesterday said banks being investigated could agree a joint, multi-billion pound settlement with regulators over the Libor scandal.