Libor — the London interbank offered rate — serves as a benchmark for mortgages, student loans, auto loans and many other financial contracts and is an indicator for the health of the banking industry.
The scandal was exposed late last month when the British bank Barclays agreed to pay $450 million to regulators to settle allegations it manipulated Libor in years preceding and during the financial crisis.
Barclays admitted to artificially lowering its Libor rate, which made the bank appear to be healthier than it really was in the midst of the crisis. It also acknowledged that several traders rigged the rate for personal profit. Other banks are also being investigated.
Libor is calculated in Britain and reflects the borrowing costs of 18 banks, including firms in Europe and Japan and three American institutions: Bank of America, Citigroup and JPMorgan Chase.
On Tuesday, elected officials wanted to know from top financial policymakers what they knew and when they knew it.
In Britain, a parliamentary committee asked King about evidence amassed by the Federal Reserve Bank of New York in April 2008 that Barclays was manipulating Libor.
The New York Fed on Friday disclosed that it had early evidence of manipulation — including a phone call in which a Barclays executive admitted to a Fed staffer that the British bank was manipulating the rate.
“The New York Fed did not raise any evidence of wrongdoing with regards to Libor,” replied King, who said that he received only a memo of suggestions from then-New York Fed President Timothy F. Geithner, now the U.S. Treasury secretary, on reforming the rate.
Later in the day, Bernanke defended the Fed’s actions. He noted that beyond providing advice to the Bank of England, the New York Fed also presented its concerns to a broader group of U.S. financial regulators.
“There was rapid follow-up,” Bernanke said in testimony before the Senate banking committee.
In response to questions, Bernanke said he could not assure lawmakers that the problems with Libor have been remedied by its supervisory body, the British Bankers’ Association.
“I can’t give assurance with full confidence, because the British Bankers’ Association did not adopt most of the suggestions made by the Federal Reserve Bank of New York,” Bernanke said. “It’s likely the concerns are less now because we’re no longer in the crisis.”
He said that Libor remains a flawed indicator and that the industry should consider alternatives that better reflect market forces.
The Libor scandal could cost banks billions of dollars in penalties as regulators continue to probe its extent. Analysts at Keefe, Bruyette and Woods said it could cost banks in Europe up to $35 billion and U.S. banks $12 billion.
Officials have said the manipulation of Libor can have a significant negative impact on consumers and, as Bernanke said Tuesday, can have the effect of “undermining public confidence in financial markets.”
Sen. Patrick J. Toomey (R-Pa.) said he was not satisfied by the Fed’s explanation.
“Did it not occur to somebody to bring the financial institutions together and say, ‘Hey, you probably ought to consider a different way . . . because there’s this integrity problem’?” he asked.
“The question is,” Toomey added, “why have we allowed it to go on the old way when we knew it was flawed for the last four years, with trillions of dollars of transactions?”
“The Federal Reserve has no ability to change it,” Bernanke replied.