The Bank of England has opened a formal investigation into whether its officials knew of – and even facilitated – the possible manipulation of auctions designed to inject money into the credit markets to alleviate the financial crisis.
The probe, which started in the summer, has been revealed just a week after the UK central bank published a report that criticized its own response to the foreign exchange rigging scandal.
The US Federal Reserve Board and its New York district bank are separately facing pressure over their record in regulating Wall Street. The New York Fed was accused in a Senate hearing on Friday of being "asleep at the switch" amid criticism it was too soft on the banks it regulated.
Lord Grabiner QC, a senior British advocate who led the separate forex inquiry, has been asked by the BoE to head the new investigation. He is to probe whether a series of money-market auctions held by the central bank in late 2007 and early 2008 were rigged, and whether officials were party to any manipulation, according to people familiar with the issue.
The investigation is focused on the firefighting era at the start of the financial crisis when the BoE ran a series of auctions as a way of keeping interbank lending markets functioning. It lent money for various time periods against low and even negative interest rates in exchange for a wide range of collateral such as asset-backed securities.
The Bank declined to comment on specifics. "If the bank were conducting an investigation or review of any of its activities, as it does from time to time, it would be wholly inappropriate to provide a running commentary via the press," said a spokesman. "No actions have been taken or are currently being contemplated against any employee of the Bank."
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Possible rigging of the auctions, which were designed to calm liquidity concerns before the BoE implemented full quantitative easing in 2009, is the latest controversy to hit the City. It comes a week after six banks – including two with headquarters in the UK – paid a total of $4.3bn to US, UK and Swiss regulators to settle allegations they attempted to rig the $5.3tn-a-day forex market.
An earlier and unfinished probe into Libor-rigging by banks and interdealer brokers has already seen 19 individuals charged by US and UK prosecutors.
Lord Grabiner published his findings on his forex probe for the BoE on the same day as the fines last week. He found "no evidence to suggest a Bank official was involved in any unlawful or improper behavior in the FX market". But in an embarrassment for the Bank, it revealed on the same day that its former chief forex dealer, Martin Mallett, had lost his job. Lord Grabiner cleared him of "improper conduct" connected to the forex scandal.
In his latest probe, Lord Grabiner has interviewed about 10 Bank staff, who have been provided with defence lawyers at the expense of the central bank, according to people familiar with the investigation. If he finds evidence of wrongdoing, he is likely to have to pass it on to regulatory or even criminal authorities, they added.
"Grabiner is very thorough and he's not inexpensive," said one person close to the probe. "The fact it's been judged worth paying for is a fair proxy for how important it is." His hourly rate is reportedly as high as £3,000.
Sir Paul Tucker, the former BoE deputy governor, was head of the relevant unit, the markets division, in the early phase of the crisis. He was drawn into the Libor rate-rigging scandal when Bob Diamond, the sacked former chief executive of Barclays, disclosed details of a private email exchange about Libor rates. Lord King was governor at the time.
Andrew Tyrie, who chairs the UK parliament's Treasury select committee, asked why the Bank did not disclose the investigation sooner. The committee would make sure an allegation "of this seriousness is fully and, if necessary, independently investigated". It would be particularly important, he added, that the appropriate action was taken at the end of the investigation, "given that this concerns a regulator".
Mark Carney, the BoE governor, who took over in July 2013, has pledged a tougher approach against errant bankers through tighter controls of their pay and bonuses, and wants increased accountability at the very top of banks.
He was asked in a recent press conference if he could guarantee there were no other market-misconduct investigations within the Bank. He replied: "We actively review activities across a range of markets, as you would expect us to do, because [. . .] we have very high standards."
On the other side of the Atlantic, central bankers were also facing heated criticism. William Dudley, president of the New York Fed, defended the regulator in testy exchanges. It was not a cop on the beat, he said, but more like a "fire warden" who made sure "the institution is run well so it doesn't catch on fire and burns down".
While not forming part of Lord Grabiner's current inquiry, there is already evidence that traders took advantage of the BoE's attempts to tackle the financial crisis.
Lloyds Banking Group's £218m fine paid to US and UK regulators in July over Libor-rigging was partly because the bank's traders had tried to manipulate a benchmark used to calculate the fees on a Bank lending program.
Separately, the UK financial watchdog banned and fined a former Credit Suisse bond trader £663,000 in March for allegedly manipulating the gilt market in 2011 during the Bank's program of QE.