Libor and the Old Lady: Lloyds has exposed the Bank of England’s negligence

It is still possible to be shocked at the banking industry’s depravity even after a seemingly unending parade of scandals. That, at least, is the first conclusion to draw from the attempt by Lloyds Banking Group to deprive the Bank of England of fees it was due for loans that rescued the bank during the financial crisis.

However, the questions about this squalid affair go beyond Lloyds and the disgraceful behaviour of some of its staff and managers. The Special Liquidity Scheme (SLS) that its traders sought to cheat was designed and run by the Bank of England. That its design was fundamentally flawed is now all too clear. Fees were linked to a benchmark interest rate that was susceptible to manipulation by the banks using the SLS, were they to submit false data to the rate’s compilers (as was the case).

The Bank’s defenders could well argue that the SLS was set up in haste in the midst of a financial shock the likes of which this country has not experienced since the 1930s. However, that does not entirely absolve it of blame. Having set up the scheme, and with so much taxpayer money at stake, it should at least have kept a close watch on how it was operating. It is not as if it was unaware of the potential for problems with such benchmarks. Barclays had flagged concerns about Libor as far back as 2007.

Given such concerns about flaws in the system, the Bank could at the very least have flagged the issue to the chief executives of banks using the SLS to ensure that their submitters played fair.

Beyond the foul play of bankers, what this affair highlights is the disturbing complacency of regulators. While not strictly a regulator at the time, this complacency appears to have extended to the Bank’s Threadneedle Street headquarters.

Mark Carney, the Governor, fulminated at Lloyds in public in the wake of the scandal, publishing a terse exchange of letters between himself and Lloyds’ chairman. He should now turn his attention to his own staff. They can no longer afford to be caught sleeping at the wheel.