Mark Carney has been forced to admit that allegations of rigging in foreign exchange markets could prove be a bigger scandal than the manipulation of Libor as he sought to rebuff criticism that the Bank of England had been slow to react.
During almost five hours in front of the Treasury select committee on Tuesday, Carney also unveiled plans for a new deputy governor to focus on banking and markets as part of an overhaul to bolster the Bank's credibility. He also told MPs the Royal Bank of Scotland may have to move its headquarters to England if Scotland voted for independence in September.
Carney was speaking just days after the Bank suspended a member of staff in connection with its review of the £3 trillion a day foreign exchange market and began a formal inquiry into whether its staff knew about potential market rigging.
Facing renewed criticism from the committee's chair, Andrew Tyrie, that the Bank's governance structure was "opaque, complex and byzantine", Carney said a strategic review to be outlined next week would reinforce compliance, make staff more accountable and create the post of a fourth deputy governor.
The Bank was "ruthlessly and relentlessly" investigating what had happened in foreign exchange markets and "intensively cooperating" with other central banks around the world, he added. But the governor sought to lay much of the blame at the feet of certain market players who "have lost sight of what a real market is".
He told MPs: "This is a very serious matter that has to be chased down as rapidly and fairly as possible. This is as serious as Libor, if not more so because this goes to the heart of integrity of markets.
"We cannot come out of this with a shadow of doubt about the integrity of the Bank of England."
The scandal escalated on Tuesday as Bloomberg news agency reported a senior currency dealer at Lloyds Banking Group tipped off a trader at oil company BP about a £300m foreign exchange deal. Bloomberg, which first broke news of allegations of price rigging in forex markets last June, cited people with knowledge of the matter saying the Lloyds's dealer, Martin Chantree, alerted the other trader on 31 January 2013 that his desk had received instructions from the bank's treasury department to swap more than £300m for dollars and that they would continue selling regardless of price movements. Lloyds suspended Chantree last month.
Experts say the foreign exchange scandal could have huge implications for London as a global financial centre.
Carney's repeated vows to reinforce integrity follow a warning from one of the Treasury committee's MPs, Labour's Pat McFadden, that the Bank faced "enormous" risks to it reputation from reports of wrongdoing in the foreign exchange market, where London accounts for 40% of the trade.
The governor's comments did little to allay Tyrie's concerns about the Bank's ability to cope with a new crisis. "This is the first real test for the Bank of England's new governance structures. Early signs are not encouraging," the MP said in a statement after the hearing. He reiterated criticism of the slowness of the Bank's oversight committee – made up of non-executive members of its governing body – to take the lead on accusations of misconduct in the forex markets. An internal inquiry was launched in October when the allegations were first made but the investigation was only moved up to the oversight committee last week.
"The public needs confidence that the Bank's governance structures will ensure that it gets to the bottom of forex-related misconduct allegations. The public also needs confidence that any misconduct in other areas will be discovered," Tyrie said.
The committee's Andrea Leadsom repeated several times a question to Paul Fisher, the Bank's executive director for markets over why Threadneedle Street did not once deign to follow up the committee's queries in the wake of the Libor scandal over whether other prices may have been rigged.
She quoted from minutes from 2006 meetings between the Bank and its chief dealers subgroup, which noted "evidence of attempts to move the market" at certain times and said that should have set bells ringing. "It goes back to this complacency that all will be fine," Leadsom said to Fisher.
But Fisher said: "Those minutes did not convey to me that markets were being rigged."
On the question of being spurred into further investigations, Fisher said: "It isn't our job to go out hunting for rigging of markets."
The hearing also covered the Bank's move last month to overhaul its forward guidance policy, under which it seeks to provide assurance over when interest rates will begin to rise. Renewed divisions between members of the monetary policy committee (MPC) were revealed over the size of the so-called "output gap", the difference between the actual level of activity in the economy and its potential level.
Tyrie was visibly shocked when questions about MPC discussions led to the revelation that recordings of the monthly meetings were destroyed once they had been turned into redacted minutes.
He argued that recordings were of significant historical value, as seen in the US where the Federal Reserve's open market committee publishes full transcripts with a long time lag. He was reluctant to accept Fisher's explanation that previous attempts to transcribe meetings had failed. "Is that because you are all shouting and throwing things at one another? Most organisations manage to transcribe a record, even the House of Commons manages to do it on a good day."
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