THE Serious Fraud Office (SFO) is investigating allegations that the Bank of England rigged the way that money was ‘auctioned’ to banks during the financial crisis.
The SFO has confirmed that it is ‘investigating material referred to it by the Bank of England concerning liquidity auctions during the financial crisis in 2007 and 2008’.
‘Liquidity auctions’ enabled banks to access extra cash during the credit crunch that followed the collapse of Northern Rock.
As the financial crisis bit in 2007, the Bank launched a new type of ‘liquidity auction’, called long-term repo open market operations, whereby banks were allowed to put up a wider range of assets as collateral against the three-month loans.
These assets included government bonds and mortgage-backed debt securities.
In April 2008, the Bank launched its Special Liquidity Scheme, whereby banks could swap ‘high quality’ mortgage-backed and other securities for UK Treasury bills, a scheme that saw £185bn change hands.
The Bank says the size of these ‘extended collateral’ operations peaked in January 2009, when the Bank closed the Special Liquidity Scheme.
It was the inability of the credit agencies to assess correctly the riskiness of such mortgage-backed securities that contributed to the financial crisis following the collapse of the US property market.
The Bank confirmed in a statement that it had ‘commissioned Lord Grabiner QC to conduct an independent inquiry into liquidity auctions during the financial crisis in 2007 and 2008.
‘Following the conclusion of that initial inquiry, the BoE referred the matter to the SFO on November 20, 2014.
‘Given the SFO investigation is ongoing, it is not appropriate for the Bank to provide any additional comment on the matter at this time.’
The SFO investigation comes after the Bank revealed to MPs on the Treasury select committee on Tuesday that it has handed the Financial Conduct Authority dozens of instances of possible market rigging since bringing in new whistleblowing rules in the wake of the foreign exchange scandal.
Bank Governor Carney told MPs that the central bank had uncovered 50 instances of market manipulation and that 42 of these had been handed to the City watchdog, which is investigating several of them.
Carney agreed that before the forex scandal emerged, the institution’s rules on raising the alarm about possible market rigging had been unclear, but said the Bank had introduced new policies since.