Paul Tucker, Deputy Governor of the Bank of England, gave evidence to the Treasury Select Committee on Monday 9 July.

Bob Diamond, who resigned last week as Chief Executive of Barclays, released to the Treasury Select Committee last week a file note of a 29 October 2008 conversation with Mr. Tucker regarding LIBOR.

David Ruffley MP questioned Mr. Tucker on his reaction to Mr. Diamond's message that other banks' LIBOR submissions were not based on real transactions, and may hence have been inaccurate.

The transcript of the exchange is below.

Q361 Mr Ruffley: Mr Tucker, can I just direct you to the sentence in the first paragraph of the Diamond note dated 29 October, when he says, 'I asked if he-that is you-could relay the reality that not all banks were providing quotes at the levels that represented real transactions. His response: 'Oh, that would be worse''. I think we have already established that this text is a masterclass in ambiguity on Mr Diamond's part, but could you perhaps just start by confirming that you used those words, 'Oh, that would be worse'?
Paul Tucker: I can't remember that I used those words, but I-

Q362 Mr Ruffley: Or words similar to them?
Paul Tucker: This goes back to something I said to Mr McFadden, I think. Banks are having to make judgments about where they could borrow in the market, if they are not actually borrowing in the market. If they were not doing real transactions, then Bob Diamond was effectively saying, 'Look, when they come to do real transactions they are going to be paying the same as us,' and that would have meant that the package was not having the effect that was desired. It would have been worse. It would have been pretty terrible, frankly.

Q363 Mr Ruffley: I understand that, but he was quite clearly suggesting to you that in relation to LIBOR pricing-because the earlier part of the paragraph makes it clear he is talking about LIBOR submissions-
Paul Tucker: Yes.
Mr Ruffley: Absolutely, we are agreeing on this. But he is putting you on notice that not all banks were providing quotes at the levels that represented real transactions. My question to you is: what did you make of that when he said that to you in this conversation? This is rather important, isn't it? He was clearly telling you, according to his note of the conversation, that other banks, not Barclays, were not all providing quotes or LIBOR submissions at the levels that represented real transactions. My question to you is, first of all, did he say that to you and, secondly, what was your response?
Paul Tucker: Certainly a bell didn't go off, 'My goodness, there is dishonesty here.'

Q364 Mr Ruffley: Did Mr Diamond say that?
Paul Tucker: I understood him to say, 'We are basing ours on real transactions; the other guys aren't doing that.' Maybe that's because-this is now me-they don't have to borrow. I don't think HSBC had to borrow during that period, for example. In which case, the suggestion is that when they come to do real transactions they will find they are paying a higher rate than they are judging they would need to pay, and that would be worse, because that would mean that the package wasn't working.

Q365 Mr Ruffley: I understand that, but just to finally nail this down, when he said that not all banks were providing quotes at the levels that represented real transactions, you did not think there was anything untoward about that and you did not want to do anything about that?
Paul Tucker: A bell did not go off in my head. I was focused entirely during this period on, 'Is the package working? Is the world going to fall to pieces nevertheless? Have things improved at all?'

Q366 Mr Ruffley: Mr Diamond says that he asked you to relay the reality that this was happening. To whom did you relay the reality, as Mr Diamond would describe it?
Paul Tucker: I am not sure. Possibly in the following days, in the conversations with colleagues and officials, but I think within less than two days Barclays announced that they had raised equity from Qatar and interest in Barclays more or less evaporated.

Q367 Mr Ruffley: In his evidence to us, Mr Diamond said, 'It was clear that a number of the firms who were posting had emergency loans or had been nationalised or were having trouble funding, and yet we were posting the highest level then. As I said to Paul, we are funding at those levels but we would question whether some of the other institutions can actually get funds at the levels they are posting.' This is what he said he told you. Were you at any stage responding to those alarm bells?
Paul Tucker: Well, if you think about those firms, two of them had taken not only liquidity assistance from us but capital from the Government, and so they had become lower risk. I don't think I would have been at all surprised in the short run that they were able to borrow more cheaply than Barclays. I talked about Barclays being next in line. They were out of the line. Indeed, to this day I remain puzzled and concerned that, as time moved on the semi-nationalised banks ended up paying more in the market than other banks, but that was not the case at this point, and I was not surprised by that. What is more, because we were lending them a lot of money they did not need to go into the market and borrow at all. It is not surprising then if they did not have real transactions.

Q368 Mr Ruffley: I agree with that, and I think that is a logical explanation, what you have just said.
Paul Tucker: The other two, HSBC and Abbey Santander-and at that point the spectre of the euro area's problems had not emerged-were perceived at the time as, how should I put it, rock-solid by the standards of the moment.

Q369 Mr Ruffley: On 30 October-this is after this disputed conversation-Mr Diamond forwarded you a note by Andrew Jones, and it is in the bundle that the Bank sent today. It outlined a recent set of transactions under the Government's guarantee scheme. Had you discussed this in your 29 October conversation?
Paul Tucker: I had mailed him earlier than that to say, 'You have used the CGS. You have paid 140 basis points over gilts. That is a lot.' That is on 25 October. I can't remember whether we touched on it in the conversation on the 29th, but it was certainly part of the background to what I am describing. Here is a bank that, even when it goes out and borrows with a Government guarantee, is paying 140 basis points over gilts. That struck me as quite a lot.

Q370 Mr Ruffley: In that 30 October email, I wonder if you could tell us what you made of it. It is the email from Bob Diamond to you, copied to Mr Jones, and he says, 'Paul, I asked Andrew Jones to give you some perspective. Quite a positive development actually that you and the Government should feel pretty good about.'
Paul Tucker: Well, I kind of took note. They had distributed it. There are some redactions here to delete the names of people that had put in big orders. But I didn't feel wowed that this scheme was going to mean that banks had to pay a percentage and a half over currency. One might say, 'Well, hold on, there is a liquidity issue here,' but as I recall, the CGS pieces of paper were eligible in our operation, so they could be converted into liquidity quite easily, and even in the market not every piece of paper needs to be super-liquid. This had a Government guarantee behind it. What I think it was, was a product of two things: just how incredibly traumatised the market was, so the market was not prepared to diverge very much at all from what it thought was safe-safe, and maybe there was a kind of Barclays element in it there as well, as the next in line.