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Banks poised for yet more fines

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Banks are potentially facing big fines after the Serious Fraud Office (SFO) launched an investigation into whether the Bank of England (BoE) bailout scheme was abused.

The SFO inquiry will concentrate on auctions held in 2007/8, in which the BoE offered banks government bonds in return for bundles of long-term mortgage loans. The bonds were more secure than long-term mortgage loans, and could be used by banks to access vital liquidity at a time when financial institutions either would not or could not lend to each other.

Under the auction scheme, banks submitted the rates of interest they were prepared to offer in return for the funds, and the highest bidders were awarded the cash. However, it is thought that banks may have colluded in advance, making each other aware of the bids that would be submitted to reduce the mandatory fees paid for the bonds. Minutes from a meeting of the BoE’s top-level management board at the time of the auctions show surprise expressed by executives at how little banks appeared to be paying.

While BoE’s head of markets, Paul Tucker, has claimed that low-bidding and non-bidding banks simply did not need to rely on the Bank of England’s emergency lending, the minutes could indicate that banks conspired in advance. As billions in emergency relief was offered in these auctions, even minor reductions in fees would have saved a bank millions.

A BoE spokesperson has said no former or current staff were facing an internal disciplinary probe in relation to the auctions, it is possible that the BoE itself could be investigated by the SFO if any staff are suspected of having been aware of, or complicit in, the rigging. BoE governor Mark Carney will be questioned by a House of Lords committee later this week.

It is unclear which banks will be investigated by the SFO, as the auctions were closed to the public – however, once the inquiry concludes, offenders could face penalties from both the SFO and the Financial Conduct Authority (FCA). The FCA will conduct its own inquiry, but not until the SFO’s concludes; it is likely to consider whether the actions of major financial institutions who received assistance from the bailout scheme constituted “good conduct”.

The Bank of England declined to comment.

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