Chancellor George Osborne has promised a full investigation into Barclays bank for fixing the critical Libor interbank lending rate, but warned that senior managers, including Chairman Bob Diamond, are unlikely to face criminal charges.
Speaking to the Commons on Thursday lunchtime, Osborne suggested the rigging of the London Interbank Offered Rate would probably spread to other banks beyond Barclays, telling MPs the probe would "concern a number of institutions based both in the UK and overseas."
But he warned the Commons that "the FSA's criminal powers do not extend to criminal sanctions for the regulation of Libor", suggesting that while the current City watchdog could force senior managers to resign, it lacked the power to bring charges.
The government is in the process of radically overhauling City regulation, with a Bill going through Parliament which would abolish the FSA and transfer many of its powers to the Bank of England. A new Financial Conduct Authority will be created, and the Chancellor suggested the Bill being considered could be amended in light of the Libor scandal which broke on Wednesday.
Osborne also triggered a political row by heaping blame on the previous Labour government, saying it had been "literally clueless" about what was going on with the Libor rate, which was allegedly fixed by Barclays and potentially other banks between 2006 and 2009.
Both David Cameron and George Osborne have said there are "serious questions" for Barclays chairman Bob Diamond to answer, amid wide-ranging calls for the bank chief to resign.
Osborne told the Commons the fine imposed by Barclays on Wednesday was a "shocking indictment of the culure of banks like Barclays in the run-up to the financial crisis" and suggested Labour should apologise for presiding over it.
Earlier Ed Balls, who was not present in the Commons for the Chancellor's statement, told BBC News that he rejected claims he'd allowed the banks to get away with the Libor fixing.
"I think the opposite of that," said Balls. "Regulation was not tough enough in our financial services industry in that period but I understand the particular nature of the libor market goes back to the 1980s.
"We made it statutory, we made it legal, we made it part of the FSA," said Balls, suggesting the Tories at the time had accused him of being too heavy-handed.
The Treasury is expected to outline a series of amendments to the Financial Services Bill next week. The Bill has already cleared the Commons and is currently being considered by the House of Lords. The Chancellor has indicated that he is looking at finding a way for the massive £290m fine handed to Barclays to be returned to the taxpayer in some way.
At the moment the fine would be held by the FSA and would potentially mean other banks having to pay less in regulator fees.