Bank of England deputy governor Paul Tucker today told MPs that he “absolutely” refuted claims that he attempted to influence Barclays into manipulating the Libor rate.
Speaking before the Treasury Select Committee, Mr Tucker said that a record of a contentious phonecall he had with former Barclays boss Bob Diamond about lending rates gave the "wrong impression".
The deputy governor found himself in the spotlight after Mr Diamond released the note, in which it has been suggested Mr Tucker was encouraging the bank to submit lower Libor submissions in light of concerns from senior Whitehall figures.
Mr Tucker confirmed one of the Whitehall figures was the then Downing Street chief of staff Sir Jeremy Heywood but denied he had attempted to influence Barclays into rigging rates.
Barclays has been the focal point for a row over banking culture after the bank was fined £290 million by UK and US regulators for manipulating the Libor, which affects mortgages and loans.
Mr Tucker said that the senior Whitehall figures whom he spoke to about Libor included Sir Jeremy, his predecessor as Number 10 chief of staff Tom Scholar, then Downing Street adviser Sir Jon Cunliffe and Treasury permanent secretary Sir Nicholas Macpherson.
But he denied "absolutely" that any Whitehall officials or Government ministers - including Ed Balls and Baroness Vadera - ever encouraged him to "lean on" Barclays or any other bank to lower its Libor submissions.
Mr Tucker said that concerns about Barclays' submissions existed at the time he spoke to Mr Diamond in October 2008 not only in Whitehall but also in the markets.
After the launch of a package of co-ordinated international efforts to shore up the markets early in the month, both officials and markets were monitoring Libor and found that - compared to many other participants which had lowered their submissions - "Barclays continued to pay higher rates in the market, as reflected in their Libor submissions".
Attention was focused on the issue of whether Barclays had taken the right decision in declining the state support which was accepted by rivals RBS and Lloyds.
And there was concern that, by paying higher interest, the bank might be dampening down the overall impact of the rescue package.
Mr Tucker told the committee: "There were two separate and related concerns, not only from Whitehall but from within the bank and within the market.
"One was: 'Is the package working and why isn't it working here as quickly as it appears to be working in the US?'
"The other element was: 'Is Barclays OK? Was the right decision taken when Barclays didn't take capital from the Government?'
"There was a degree of concern about that. There was a degree of anxiety about that."
Mr Tucker said he believed that the rescue package "helped save the world", but added: "At the time, there was anxiety about it working."
Mr Tucker said that in October 2008, when he spoke to Mr Diamond, there was concern that Barclays was "next in line" to collapse and require taxpayer assistance after Royal Bank of Scotland and Lloyds Banking Group.
However, he added: "We were not in the position of thinking Barclays was doomed. Had we thought that, the Bank would have given strong advice to the Government that it was not safe."
Mr Tucker said he contacted Mr Diamond to discuss its high Libor submissions because the economic climate was "fragile" and banks needed to be careful.
Asked how he responded to claims that the Bank was attempting to influence Barclays into submitting lower rates, Mr Tucker said: "I thought I needed to come and see your committee about what's going on."
He added: "Barclays was the next in line. HSBC and Santander were relatively safe. Two banks had been taken under the wing of the government. That left Barclays."
Asked if Mr Diamond and his right-hand man at Barclays Capital, Jerry del Missier, had been "unreasonable" in misinterpreting his phone call, Mr Tucker said it was his understanding that it was not misinterpreted.
He said: "I was plainly talking about their money market activity. The reason to mention Whitehall was to say everyone was talking about it."
He went on: "I wanted him (Mr Diamond) to be sure that the senior management of Barclays was overseeing the day-to-day operations so the money markets did not inadvertently send distress signals. It's important not to come across as desperate.
"It was not remotely in my mind that it could be misinterpreted by Mr Diamond."
He added: "I'm not here to defend Mr Diamond's record.
"I was focused entirely on, is the package (of support for banks) working and is the world going to fall apart nevertheless," he added.
Labour Treasury spokesman Chris Leslie said Mr Tucker's evidence contradicted last week's claims by Chancellor George Osborne that former Labour ministers like Mr Balls were involved in putting pressure on Barclays to understate its Libor submissions.
Mr Leslie called on the Chancellor to issue a public apology.
"The game is up for George Osborne," said Mr Leslie. "This is now the final nail in the coffin of the Tory smear campaign the Chancellor led last week. It is now crystal clear that the allegations he threw around were completely wrong and without foundation.
"The deputy governor of the Bank of England has made it 100% clear that neither ministers nor officials leaned on the Bank of England to ask Barclays to fix Libor rates. In addition Bob Diamond has also said that he did not believe he was being asked by ministers or officials to fiddle Libor rates.
"The last Labour government was rightly concerned with legitimate policy changes to reduce inter-bank lending costs during the global financial crisis. The Conservatives at the time even said they did not go far enough to reduce Libor. But that is completely different from the deliberate fixing of the Libor rate, which Barclays traders were involved in over several years.
"The Chancellor must have known all this last week, but still made false allegations in the hope of narrow political advantage and to divert attention from his refusal to hold a proper independent inquiry.
"Having failed to do so in the House of Commons last week, George Osborne must now publicly withdraw these false allegations and apologise. The longer he refuses to do so the more damage he does to his own reputation and the office he holds. He then needs to start focusing full-time on his day job, get Britain out of his double-dip recession and properly reform our banks for the future."
Mr Tucker described the setting of the Libor rate as "a cesspit" and called for an end to the practice of "self-certification" under which banks submit figures on the basis of their own judgments rather than actual transactions.
He said the review of the operation of Libor being undertaken by the Financial Services Authority's Martin Wheatley should also look at all indices which rely on self-certification.
Mr Tucker told the committee he was not aware of any incident of Libor being manipulated since 2008, and was only aware of manipulation before that date because of the revelations from FSA investigations over the past few weeks.
"We didn't have any knowledge, I didn't have any knowledge of this," he said.
Asked if it was only over the last month or so that the Bank of England became aware, Mr Tucker completed the question: "That this was a cesspit? Yes."
He told the committee: "As part of the review the Government has commissioned from Martin Wheatley, as well as Libor, they should look at every single index that isn't based on real transactions and where participants in the market have to self-certify.
"That plainly does not work. Even if these other markets have been completely clean over that period, self-certification is plainly open to abuse and so it could occur elsewhere.
"I think the governor made that fairly clear in the press conference last week."
Mr Tucker said the Bank of England preferred Libor to be based on real transactions, rather than banks' assessments of the rates at which they believed they could borrow.
But he stressed the BoE was not responsible for operating Libor and had no regulatory responsibilities over it.
At certain points in 2007 and 2008, he said, there was virtually no inter-bank lending going on, and submissions were based on notional figures.
"Markets had dried up," said Mr Tucker. "For months there had been periods where sometimes this was based on judgments of where they would be able to borrow, rather than actual transactions."
But he said the Bank of England has no power to prevent the use of self-certified figures: "We would much prefer it to be based on actual transactions. But we don't require anything. We are not responsible for Libor in that sense.
"We didn't see ourselves as being responsible for its effectiveness whatsoever. We used it as an indicator.
"We don't have a manual on the processes for Libor submissions. We are not part of the Libor panel. We don't oversee the BBA (British Bankers' Association). We were not a regulatory authority."
Mr Tucker said it would normally be the practice within the Bank of England to take contemporaneous notes of conversations such as his phone call with Mr Diamond.
But he said that this was not possible during the financial crisis as so many phone calls and meetings were taking place.
"There isn't a rule that people must write notes of everything," he said. "It is a policy that you should if it is interesting and material.
"That didn't happen during this period. There were too many conversations, too many things going on. The system was creaking."
Asked whether he was confident that no rigging of Libor was taking place now, Mr Tucker responded: "I can't be confident of anything after learning of this cesspit."
He said that the Bank of England had been urging the BBA, during its review of Libor, to move to a system where the index is based on actual transactions, even though he acknowledged that this would give rise to "massive transitional issues".
But he added: "We didn't realise that every shred of its credibility was going to be torn up."
Mr Tucker was asked if he was surprised that Mr Diamond appeared not to know about the manipulation of Libor going on at Barclays.
He replied: "What I am surprised by is that the compliance people and supervisors on the dealing floors didn't identify this and elevate it upwards.
"I have heard a suggestion - and this may be wrong - that people did elevate it and it didn't reach him."