Bank of England Probe Over Crisis-Era Auctions Closed by SFO

A U.K. Serious Fraud Office probe into the Bank of England’s crisis-era liquidity auctions that involved interviews with at least two former deputy governors was closed Friday, with prosecutors saying there was “no evidence of criminality.”

In a welcome relief for the central bank, the SFO investigation was ended after a 2 1/2-year look into whether the BOE had favored certain financial institutions in bids for the funding facilities the bank made available in 2007 and 2008 to the detriment of other firms.

As money markets froze during the financial crisis, the BOE stepped in to provide emergency liquidity to lenders. It allowed them to swap a wider range of assets for funding through programs including its Extended Collateral Long-Term Repo Operations in 2007 and the so-called Special Liquidity Scheme in 2008. A central focus of the SFO investigation was whether BOE officials told lenders what prices to bid at the auctions to play down questions about firms’ financial health.

U.K. prosecutors opened an investigation into how the liquidity programs were run after the BOE referred the matter to the agency in November 2014 following an internal review by senior trial lawyer Anthony Grabiner. Paul Tucker and John Gieve, both former deputy governors of the central bank, were among about 10 current and former officials interviewed as part of the SFO’s probe.

The bank, which called the investigation internally “Project Tile,” said the financial crisis exposed shortcomings in its ability to provide liquidity insurance, its operating procedures and its governance, which hadn’t been designed for the stress of reduced liquidity and unstable overnight interest rates.

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“This hindered the effectiveness of the bank’s response in the early phase of the crisis, and was overcome only through the commitment of bank staff to innovate continuously in difficult circumstances to meet the liquidity needs of the banking system,” it said in an emailed six-page statement Friday.

The BOE paid about 4.7 million pounds ($6 million) in legal fees in connection with the SFO probe, the central bank said. After U.K. prosecutors opened the investigation the BOE started a second internal review of other key market operations during the financial crisis but found no evidence of misconduct.