Federal Reserve Chairman Ben Bernanke defended the Fed's response to manipulation of the London interbank offered rate, saying the Fed cooperated with other regulators and suggested a fix.
"The investigations took place, but they were taken up quite quickly by not the Fed, which is a safety and soundness regulator, but by the authorities that had the most direct responsibility for those issues," Bernanke testified Tuesday to the Senate Banking Committee.
The Federal Reserve Bank of New York "took the lead" and "informed all the relevant authorities" in the U.K and U.S.
Regulators in both countries have defended their reaction to the manipulation of Libor, the global benchmark for $500 trillion of securities, after Barclays was fined a record 290 million pounds ($453 million) for rigging borrowing costs.
The New York Fed last week released documents showing it knew Barclays underreported rates and that Timothy Geithner, then the president of the regional Fed bank and now the Treasury secretary, sent a memo in June 2008 to Bank of England Governor Mervyn King recommending changes to how Libor was calculated. He made a total of six suggestions.
King told Parliament's Treasury Committee Tuesday in London that he only knew of wrongdoing two weeks ago and that Geithner's memo in 2008 didn't highlight malpractice.
"Mr. Geithner was sending that to us as a suggestion for how these rules should be constructed and we agreed with him, but neither of us had evidence of wrongdoing," King said. "The first I knew of any alleged wrongdoing was when the reports came out two weeks ago."
The Fed didn't have information to suggest that banks were manipulating rates "for profit," only that some were "possibly submitting low rates to avoid appearing weak" during the financial crisis, Bernanke said.
Still, misreporting of Libor is "very troubling," he said.
Bernanke said the Fed doesn't know that U.S. banks are innocent of rate-rigging.
"The Libor system is structurally flawed," Bernanke said. An "international effort" is needed to fix the problem, he said.
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