In a tense Treasury Select Committee hearing, Sir Mervyn denied the Bank put pressure on Barclays to lower its inter-bank lending rate submissions at the height of the financial crisis and rejected suggestions that he ignored warnings over Libor more than four years ago.
In a stinging attack on the Barclays board, the Bank governor said Barclays sailed “close to the wind” too often, but claimed he was unaware of deliberate wrong-doing until weeks ago when the full scale of the Barclays scandal came to light.
MPs on the cross-party committee heard how he felt Barclays was in a “state of denial” over regulatory concerns with the bank following the rate-fixing revelations.
He admitted telling Barclays chairman Marcus Agius that former chief executive Bob Diamond had lost the confidence of regulators – a discussion that prompted Mr Diamond to resign.
There were “genuine and deep” concerns among regulators over governance and a loss of confidence in Barclays’ bosses even before the scandal broke, according to Sir Mervyn.
He said there were signs of a worrying “pattern of behaviour” over regulation at Barclays, but that its directors failed to take on board the seriousness of the concerns.
“Barclays was once a great bank. It has to create a new bank with a new culture,” he added.
It was not just Barclays that came under fire in yesterday’s hearing, as MPs rounded on Sir Mervyn and his deputy Paul Tucker, who was giving evidence to the committee for a second time.
MPs expressed surprise as Sir Mervyn said he was not aware of deliberate rate-rigging until detailed reports were published two weeks ago.
His comments follow news last week that he discussed concerns over Libor – the inter-bank rate at the heart of the scandal – with New York Federal Reserve president Timothy Geithner in 2008, raising questions over why the Bank had not acted sooner to stamp out rate-fixing. Sir Mervyn said he shared worries with Mr Geithner over the governance of Libor – and had solicited recommendations from the Federal Reserve – but claimed there was no evidence at the time of wrong-doing.
In at times combative questioning, MP John Mann asked Sir Mervyn why he was “still in denial” over whether low-balling of the Libor rate “failed to be spotted”.
A defensive Sir Mervyn stressed the Libor market was dysfunctional at the time as a result of the credit crunch.
He said: “There’s a world of difference between people saying they don’t know how to submit Libor because the market is dysfunctional and deliberate misrepresentation.”
The committee turned to Mr Tucker about Mr Geithner’s report in 2008 that flagged “deliberate misreporting” of Libor. Mr Tucker said the report did not “set alarm bells ringing” that dishonesty was taking place but it did raise concerns about credibility.
Sir Mervyn came into the debate and added: “At no stage had the New York Fed raised concerns with the Bank that they had seen wrong-doing.”
MP Andrea Leadsom asked the governor if the Bank had “got to the bottom” of how individual derivative traders fiddled Libor submissions to boost their own profits. He replied: “We’re not an investigative body. It took regulators three years to find out it was being done.”
On governance at Barclays, Sir Mervyn said it was acceptable to “sail close to the wind” once or twice but when it kept recurring “you have to ask questions about the navigational skills of the captain on the bridge”.
Sir Mervyn and Financial Services Authority chairman Lord Turner, who appeared for a second sessio, said they were surprised when Mr Agius resigned rather than Mr Diamond.
Sir Mervyn added later: “No one believed the culture was set by the chairman but by the chief executive.”
MPs accused Mr Diamond of being “less than candid” after he played down the fraught relationship between Barclays and regulators. Mr Diamond is facing calls to reappear before the cross-party committee.
His conversations with Mr Tucker have also been in sharp focus after suggestions that he had leant on Barclays to manipulate Libor, although this was “absolutely” rejected by Mr Tucker in an earlier appearance in front of MPs.
Comment: Page 12.