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Barclays Pushed Limits of U.K. Watchdog Tolerance, FSA Says

FSA Chairman Adair Turner
U.K. Financial Services Authority (FSA) Chairman Adair Turner arrives at Portcullis House to give evidence in the Libor enquiry to the Parliamentary Treasury Select Committee in London on Monday. Photographer: Jason Alden /Bloomberg

Barclays Plc, the U.K.’s second-largest bank, “had a cultural tendency to be always pushing the limit” of what was allowed under banking rules, Financial Services Authority Chairman Adair Turner told lawmakers today.

Turner and Andrew Bailey, the regulator’s head of banking supervision, testifying at hearings in the wake of the Libor scandal, said the cultural issues at Barclays came from the “tone at the top,” including former Chief Executive Officer Robert Diamond. “There was a problem with this institution,” Bailey told Parliament’s Treasury Select Committee in London.

The U.K. has come under fire for failing to address Libor years before the record 290 million-pound ($453 million) fine against Barclays last month. Timothy F. Geithner, then the New York Federal Reserve President, in June 2008 warned the Bank of England that the method used to set the London interbank offered rate was open to abuse.

The regulator is investigating seven other banks in connection with attempted manipulation of Libor, said Tracey McDermott, acting head of enforcement at the FSA.

Turner said he wasn’t aware of the issues relating to the potential manipulation of Libor until November 2009, when he was briefed by Hector Sants, then the FSA’s chief executive officer.

“You should’ve known in 2008, you knew in 2009 and now it’s 2012,” Labour lawmaker George Mudie told Turner. “This was under-regulated. You were warned about it and warned about it.”

Followed Up

The FSA is carrying out an internal audit to review all of the contact “between Barclays and us and whether we should have followed up” on early Libor notifications, Turner told the committee.

Officials at the Bank of England’s Financial Policy Committee, which includes Governor Mervyn King, put pressure on the FSA to crack down on “aggressive” behavior at Barclays, according to a board meeting summary dated Feb. 9 published by lawmakers today.

Barclays was warned by Turner in an April letter that it aggressively interpreted rules, took advantage of complex structures and submitted misleading estimates of capital levels.

Turner said the letter was the only one of its kind he has written to a bank chairman.

Chairman Level

“There have been a set of issues” the FSA had argued about with Barclays “on a case-by-case basis,” Turner said. “It is the accumulation that makes us believe that we have to draw the attention from the chairman to the chairman level.”

Confidence in Libor, a benchmark for financial products valued at $360 trillion worldwide, has been dented by Barclays’s admission that it submitted false rates. Diamond, who resigned as Barclays’ chief executive officer after the bank was fined, told British lawmakers this month that other banks also low-balled submissions.

Conservative lawmaker Andrew Tyrie’s Treasury Select Committee has grilled Diamond, bank Chairman Marcus Agius and Bank of England Deputy Governor Paul Tucker since the fine.

Tucker, 54, was questioned about his involvement in a 2008 phone call with Diamond that suggested he hinted that London-based Barclays should lower its Libor submissions.

Jerry Del Missier, the bank’s former chief operating officer who also lost his job in the wake of the Libor scandal, appeared at the committee earlier today. The 50-year-old told the committee he didn’t think instructing his traders to submit lower Libor fixings was inappropriate because of the discussions between Diamond and Tucker.

Government ‘Shots’

“It did not seem an inappropriate action given it was coming from the Bank of England,” del Missier told the committee. “The government were calling the shots.”

Royal Bank of Scotland Group Plc, UBS AG, Lloyds Banking Group Plc and Deutsche Bank AG are among the lenders regulators in Europe, Asia and the U.S. are investigating.

Diamond, who was Britain’s best-paid bank CEO, opted to forgo deferred bonuses valued at as much as 20 million pounds when he stepped down following the public and political outcry at Barclays’s role in the Libor fixing. The bank’s shares have fallen 20 percent since the June 27 settlement with regulators.

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