Paul Tucker, the deputy governor at the Bank of England, is set to face a grilling from MPs after Barclays boss Bob Diamond's hotly anticipated appearance before the Treasury Select Committee tomorrow.
MPs are expected to question the under-fire Barclays chief executive on the conversation held between the two men at the height of the financial crisis, which led the bank's staff to believe the central bank wanted them to falsify data submitted to calculate Libor interest rates.
The rates – based on what banks charge each other for borrowing – are at the centre of the scandal that led to Barclays being forced to pay nearly £300m in fines.
Members of the committee, before which Mr Diamond will appear, have been careful to not to reveal too much about their line of questioning. But the conversation has become a key point in the escalating scandal, and what resulted from it could yet be used by former Barclays traders to inform their defences against sanctions from the regulators or even against criminal charges. As such it is almost certain to form part of the MPs' questioning of Mr Diamond.
A spokesman for the committee yesterday would only say that it had not decided on who else to call to give evidence for its investigation into the affair, and that any decisions would only be made after Mr Diamond's appearance. But Mr Tucker, deputy governor for financial stability, is thought to be very much in MPs' thinking and would be on the shortlist.
Even if he is not called to appear during the next few days, he usually attends the Bank of England's scheduled appearances, giving MPs the chance to raise the issue even though it would not technically be part of the agenda.
Barclays traders are known to have escalated their attempts to manipulate Libor after the conversation took place, although watchdogs have said there is no proof that they actually succeeded in distorting the rate. Both Barclays and the Bank of England have been quick to deny any instruction to falsify Libor was given to Mr Diamond as a result of the discussion.
Libor is calculated each day by media and data company Thomson Reuters from data submitted by panels of banks under the auspices of the British Bankers' Association. The highest and lowest figures are discarded and an average collated from what remains. During the financial crisis, the Bank would have been keen to see the rate falling, because that would have sent a message of stability to a market that was panicking over the financial health of banks.
It was the submission of unusually low rates to Libor during this time that prompted investigations into what was going on and whether attempts were being made to fix the rate, off which a wide variety of financial products are priced.
Mr Diamond is expected to be asked how Barclays staff then came to the impression that the Bank of England was endorsing attempts to fix it. MPs will want to understand how the conversation came to be misreported to traders and what was said to them.
Mr Tucker is set to be called to give his side of the story after MPs deliberate on what Mr Diamond has told them during the session.
Libor and Lehman: why the rate mattered By Stephen Foley
The conversation Tucker had with Bob Diamond will be central to the committee's questioning
When Barclays traders were manipulating Libor in 2005 and 2006, they were motivated by greed. When the bank lied in 2008, it was motivated by fear. Let's summon up the atmosphere of terror that gripped the City of London that year. The markets were losing confidence in banks one by one. After Bear Stearns in March, and Lehman Brothers in September, each day was a game of dominoes. Which would be the next to fall?
If traders decided your bank was about to go under, they would pull back their dealings with you, and it would become a self-fulfilling prophecy.
It was particularly terrifying for the elite banks that published their borrowing rates to help with the calculation of Libor, the daily average of short-term interest rates in the inter-bank markets. If lenders think they might not get paid back, they are going to charge you more in interest, so when Barclays started publishing higher borrowing rates than their peers, they started to look like the next domino.
That's when the order went out to lie, to publish a lower rate than was actually true, or – in the parlance of the bank's internal emails – to put their head back "below the parapet".