By Max Colchester
LONDON--Rate rigging has a new victim: the Bank of England.
On Monday, Lloyds Banking Group PLC said its traders rigged a
benchmark interest rate to cut fees it paid the central bank to
access emergency taxpayer funding at the height of the financial
crisis.
The admission of wrongdoing was part of a wider $370 million
settlement the British bank made with U.S. and U.K. authorities for
attempting to manipulate a series of benchmark interest rates,
including the London interbank offered rate, or Libor.
In the latest twist to the rate-rigging scandal, the U.K.'s
Financial Conduct Authority said Lloyds's traders also manipulated
the BBA repo rate. The now-defunct benchmark helped determine the
fees that Lloyds and other banks paid to the Bank of England during
the crisis to swap toxic assets, such as mortgage-backed
securities, for U.K. government bonds. Those bonds could then be
traded for cash, helping shore up the banks. The program was in
effect in 2008 and 2009.
Lloyds, which is 25% government owned, said it has reimbursed
the Bank of England nearly GBP8 million ($13.6 million) to make up
for the fees it avoided paying to the taxpayer-backed program. The
Bank of England will pass the cash to the U.K. Treasury, making it
one of the first institutions to be compensated for the effects of
rate rigging.
"Such manipulation is highly reprehensible, clearly unlawful and
may amount to criminal conduct on the part of the individuals
involved," Bank of England Gov. Mark Carney wrote in a July 15
letter to Lloyds's chairman, posted on the central bank's website
Monday.
Lloyds apologized for its behavior on Monday and said the
rigging of the BBA repo rate was restricted to four individuals.
The bank has suspended all four traders, according to a person
familiar with the matter.
The wider rate-rigging misconduct at Lloyds wasn't confined to
low-level employees. "Sixteen individuals at the firms, seven of
whom were managers, were directly involved in, or aware of, the
various forms of Libor manipulation," the FCA said.
Lloyds said it "condemns the actions of the individuals
responsible for the conduct in question." On Monday, Lloyds's
shares edged up 0.04%, to 74.84 pence.
Lloyds Banking Group was by far the biggest user of the program
to access crisis-era funding, paying GBP1.28 billion in fees to the
Bank of England. In 2008 and 2009, U.K. banks paid a total of
GBP2.6 billion to access the facility, according to the FCA. Those
fees were in turn handed over to the U.K. Treasury.
Andrew Tyrie, chairman of the U.K.'s Treasury Committee, called
the rigging of the repo rate "appalling behavior."
Lloyds's misconduct took place before the bank's existing
management team took over in 2011. Nevertheless, the fine is a
setback to the bank's attempt to rehabilitate its reputation after
taxpayer bailouts in 2008 and 2009. Lloyds is considering clawing
back the pay of former executives who were involved in the
attempted rate manipulation, according to one person familiar with
the matter.
The bank is the seventh financial institution to strike a deal
with U.S. and U.K. authorities in a long-running probe into
allegations of widespread attempts to manipulate Libor and other
widely used interest-rate benchmarks.
Libor is used in setting rates on $800 trillion of loans and
securities and is based on daily estimates by banks about how much
it would cost them to borrow from other banks.
The U.S. Justice Department, the Commodity Futures Trading
Commission and the U.K.'s Financial Conduct Authority said
employees of Lloyds tried to manipulate benchmark rates to benefit
the bank's financial position.
As well as trying to rig the U.S. dollar Libor rate, the FCA
said Lloyds colluded with Rabobank NV to influence the Japanese yen
Libor rate. Rabobank settled Libor-rigging charges last year and
admitted wrongdoing. HBOS, a unit of Lloyds, tried to lowball its
Libor submissions to give the appearance that it was financially
sound around the time it was being acquired by Lloyds in 2008,
according to the CFTC.
Lloyds executives have argued that their involvement in rate
rigging was relatively minor compared with other U.K. banks.
Barclays PLC, which was the first bank to settle a rate-rigging
probe in 2012, paid GBP290 million in fines. In 2013, Royal Bank of
Scotland Group PLC paid GBP390 million to settle similar
allegations. Both banks admitted wrongdoing.
Write to Max Colchester at max.colchester@wsj.com