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LONDON (Reuters) - The Bank of England's deputy governor, Paul Tucker, strongly denied suggestions on Monday that government ministers had pressured him to encourage banks to manipulate interest rates in a scandal gripping Britain's financial sector.
A row over how much top officials knew about the rigging intensified as Tucker appeared before a parliamentary committee as part of its investigation into Barclays (BARC.L) and other banks suspected of manipulating a key interbank lending rate.
Barclays has been fined more that $450 million for its part in manipulating Libor, the interest rate that is the global benchmark for transactions worth billions of dollars.
Softly beating the surface of the table with both hands for emphasis, he flatly denied - repeating "Absolutely no" several times - that any minister had ever urged him to influence Barclays or other banks over the rates. He said he was unaware of any rigging.
"This was a cesspit," he said of the Libor manipulation, gazing over the top of his eyeglasses at the lawmakers of the House of Commons Treasury Select Committee. "We were not aware of it, other than what is starting to come out in these investigations. We didn't have any knowledge, I didn't have any knowledge."
"Such collusion would never have occurred to me until the revelations of the last few weeks," he said during his evidence, sometimes shoving both hands in his pockets when defending himself against criticism from the committee.
The scandal - complete with emails showing bankers boasting of manipulating interest rates and congratulating each other with offers of champagne - has triggered fierce criticism about the financial industry in general and Barclays in particular.
Barclays chief executive Bob Diamond was forced to resign last week, paying the price of a scandal that is expected to drag in other international banks.
The suggestion that senior British officials may have known about or even condoned the 2008 manipulation has turned the case into a political storm, with newspapers from across the political spectrum accusing the banking sector of greed and arrogance.
Speculation has intensified since last week when Barclays released notes suggesting authorities might have prompted it to lower estimates of the rate it pays other banks to borrow at the height of the financial crisis in 2008.
That memo compiled by Diamond after a conversation with Tucker has drawn the deputy governor into the storm because it appeared to suggest that Tucker, who has been tipped as the next governor of the Bank of England, was condoning rate-rigging.
His voice noticeably hoarse towards the end of the two-hour session, Tucker strongly challenged that account, saying the purpose of that conversation was to share his concerns about Barclays' funding rather than discuss interest rates.
"It wasn't a call about analyzing what's going on in the market. The purpose of the call (was to say) 'people in the market are talking about you, they're talking to everybody about you, including people in Whitehall (the seat of government)," he said.
"There's concern about you. Just make sure that the day-to-day funding operations of your bank don't tip you over the cliff'." He said however he did not record that conversation.
He added: "This isn't about Libor. It's about the conduct of their (Barclays) treasury desk in the money markets apparently paying higher rates of interest. Money markets desks can send out distress flags."
Tucker produced a predictable, unspectacular performance, according to Professor Karel Williams, a politics specialist from the University of Manchester.
"It would have been very difficult for him to have a triumph today and he didn't have a triumph today," Williams told Reuters.
Barclays is among more than a dozen global banks under investigation by authorities in North America, Europe and Japan and the only one so far to admit wrongdoing.
As Diamond quit last week after the row erupted, Prime Minister David Cameron announced a parliamentary inquiry into banks in an attempt to quell public outrage with the industry.
Finance Minister George Osborne has said people close to ex-Prime Minister Gordon Brown were implicated but Tucker's denial that ministers or government officials had leaned on him appeared to undermine the accusation.
Raising the stakes, the European Union stepped up its involvement in the investigation, saying it would propose new rules to criminalize the manipulation of indexes such as Libor.
"The events of the last two weeks show that absolutely decisive action was needed to start a new chapter. What has been revealed has come as a deep shock," Tucker said.
"It was a mess ... The world financial system was progressively falling apart, and then (it) did fall apart, and we had experienced nothing like it."
Barclays says some of its traders tried to manipulate Libor for profit as far back as 2005, and says it wrongly lowered estimates of the interest it paid other banks at the height of the crisis in 2008 to make its financial position appear better.
According to emails released on Monday by John Mann, a Labour member of the Treasury Select Committee, Tucker had discussed the issue with Jeremy Heywood, Britain's most senior civil servant and a close adviser to both Cameron and his predecessor Gordon Brown, in power until 2010.
Heywood has not so far commented but a government spokeswoman said Libor was among many other issues discussed in the broader context of the market situation. "The key point is all the discussions were completely above board and there was no suggestion at any point of manipulating the rate," she said.
Libor, or the London interbank offered rate, is compiled from estimates by large international banks of how much they believe they have to pay to borrow from each other. It is used for $550 trillion of interest rate derivatives contracts and influences rates on mortgages, student loans and credit cards.
The rates submitted by banks are compiled by Thomson Reuters (TRI.TO), parent company of Reuters, on behalf of the British Bankers' Association.
Additional reporting by Douwe Miedema, Sven Egenter, Michael Holden, Jonathan Cable, Kate Holton, Mohammed Abbas, Matt Scuffham; John O'Donnell in Brussels, Philipp Halstrick and Arno Schuetze in Frankfurt and Emma Thomassen in Zurich; Writing by Maria Golovnina