FSA objectivity in question over Diamond departure

The maelstrom over the alleged manipulation by major banking groups of interbank lending rates stubbornly refuses to die down.

It is easy to see why: the London and European rates - Libor and Euribor respectively - are key determinents of the rate at which banks lend money across the economy and are used as a benchmark by many institutional and retail investment funds.

This is market abuse on a grand scale.

The scandal has already claimed a major scalp at Barclays - the only bank so far hit with enforcement action after the Financial Services Authority levied a record £59.5m fine, part of a £290m package of fines from UK and US regulators - with chief executive Bob Diamond stepping down at the beginning of last week.

The chairman of the bank, Marcus Agius, had also previously announced he would step down, only to be reinstated as full-time chairman following the departure of his right-hand man.

At least five banks had to have been involved in the rate rigging, with names such as part-nationalised Royal Bank of Scotland and Lloyds Banking Group having been thrown into the mix by chancellor George Osborne, meaning there will undoubtedly be further fall-out from this crisis.

The contagion already saw deputy Bank of England governor Paul Tucker called into question over apparent foreknowledge of the manipulation, while even members of the former Labour government were implicated by Mr Osborne to have been involved. The accusations have been strenuously denied by all parties.

But aside from questions of who knew what and when, as well as over the efficacy of any attempts to influence the rate, there have already been some startling revelations over how the regulator acted in the wake of the furore.

Following on from a rather turgid evidence session in front of the Treasury Select Committee with Mr Diamond, the appearence of the Barclays chairman Mr Agius resulted in some explosive admissions over how the former came to fall on his sword.

Mr Agius told MPs that Bank of England governor Sir Mervyn King called an urgent meeting last Monday evening (3 July) with both himself and senior Barclays director Michael Rake.

At the meeting, Sir Mervyn told the executives “in no uncertain terms” that Mr Diamond “no longer enjoyed the support of his regulators”. Mr Diamond stepped down as chief executive of the bank the following day (4 July), after a hastily arranged teleconference call with his superiors in the immediate aftermath of the meeting.

Some have welcomed the intervention of Sir Mervyn on behalf of the FSA and the tougher approach the meeting could signify; there is certainly little in the way of sympathy for Mr Diamond.