Banking has already become synonymous with greed and corruption but Bancorp director Earl White says the latest scandal has left the integrity of the Libor price-setting mechanism in tatters.
Libor, or the London interbank offered rate, lies at the heart of the global financial system. It is used to determine how trillions of dollars of loans, mortgages and derivatives are priced.
It is calculated daily in London for the world's 10 major currencies for 15 different maturities and represents estimates of how much it costs major banks to borrow money from each other.
Mr White said that as a part of a three-year investigation, regulators found that Barclays traders colluded to right the rate for profit and to also avoid giving the impression it was in financial stress at the height of the financial crisis in 2008.
The report by the British Financial Services Authority (FSA) noted there were 257 attempts by Barclays traders to manipulate the key interest rates between January 2005 and June 2009.
The rate submissions became increasingly suspicious in 2008 when banks were having extreme difficulty borrowing in the wholesale financial markets.
"Adding to the disorderly financial environment during this time, the checking of implausible rate submissions even saw the normal 11am publication deadline of 'the Libor fix' slip to as late as midday. Banks were effectively being asked to make a price when no market existed."
Barclays was fined by regulators a record 290 million ($NZ558 million), a figure that threatened to be dwarfed by pending civil lawsuits.
While public scrutiny had so far been directed at Barclays, at least a dozen of the world's largest banks were still being investigated by regulators worldwide, Mr White said. Evidence was also suggesting that regulators on both sides of the Atlantic had concerns about potential problems with Libor as early as 2007.
"The obvious flaw in the rate-setting process is that banks derive the rates from estimates rather than real market data."
Interbank lending had largely evaporated since the financial crisis, with banks preferring to park excess cash more safely with central banks, he said.
That left relatively few interbank transactions on which to base their Libor submissions, making the process more of an art form than a transparent mathematical science.
The industry is grappling with how to fix the process and there are calls to replace Libor with a more market-based model where pricing is derived from actual market transactions. There is also a race to develop alternatives, with both the European Banking Federation and the broker Icap recently launching their own rates.
Top central bankers and regulators are due to discuss potential reforms next month.
The European Commission has proposed making rate-fixing a criminal offence and there is growing public pressure in the United States for the Government to pursue criminal cases against individuals.
Mr White said that with investigations continuing, there was lots more to come in the rate fixing scandal and a lot of work to be done to restore confidence in the governance of capital markets.
At a glance
• Libor, the London interbank offered rate, is the global benchmark for interest rates on everything from credit cards to trillions of dollars in financial derivatives and is at the heart of a global scandal over rate rigging.
• Libor rates are based on daily estimates from a group of banks as to how much they would expect to pay to borrow funds from each other for a range of currencies and periods.
