Fed Chairman Ben Bernanke was questioned by senators Tuesday about the central bank's role in the LIBOR rate-setting scandal. ?He said the Fed had pushed for reform of the rate setting process in 2008 when it became concerned about manipulation of the influential benchmark.
Federal Reserve Board Chairman Ben Bernanke pauses before giving a semiannual report to the Senate Banking Committee, Tuesday, on Capitol Hill in Washington.
Carolyn Kaster/AP
EnlargeThe chairman of the US Federal Reserve came under pressure Tuesday to explain what role his institution played in the scandal over the LIBOR, an interest rate that serves as a benchmark for numerous other lending rates in the global economy.
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Ben Bernanke told a Senate Committee that Fed officials pushed for reform of the rate-setting process in 2008, when it became clear that the LIBOR system was subject to manipulation by private sector banks. The LIBOR, which stands for London Interbank Offered Rate, is set based on voluntary reports by private banks -- rather than by observable transactions such as prices on bond trades.
Chairman Bernanke said the Fed in 2008 gave a substantial response by alerting other regulatory authorities and by making recommendations to officials in Britain, where a bankers'association helps to manage the LIBOR calculations. ?
"Why have we allowed it to go on the old way when we knew it was flawed?" Sen. Pat Toomey (R) of Pennsylvania asked.
"Because the Federal Reserve had no authority to change it," Bernanke replied.
"You have enormous influence," Senator Toomey retorted.
Controversy over the rate-setting process has emerged in recent weeks, as news reports have focused on the role of Barclays, one major bank that will pay $453 million in fines for falsely reporting its borrowing costs, and thus distorting the LIBOR benchmark.
LIBOR is used as a guide for numerous financial contracts, such as adjustable rate mortgages, that affect consumers and business.
Bernanke described the issue of LIBOR manipulation as a two-part problem. First, banks under-reported their costs from borrowing from other banks -- a move that stood to benefit them during the financial crisis that began emerging in 2007. Second, it appears that banks provided false borrowing-cost reports to enable their own traders to make profitable investments tied to LIBOR.
Bernanke said the Fed in 2008 became aware of the first issue, but not the second.
The tone of the hearing was not sharply confrontational, as Bernanke appeared on Capitol Hill for a scheduled question-and-answer session on the economy. He also answered questions about monetary and fiscal policy, urging Congress to avoid a "fiscal cliff" of tax breaks that expire together at year end.
But Senators from both parties questioned Bernanke about what the Fed knew and what it has done regarding LIBOR.
"Seems like somebody dropped the ball," said Sen. David Vitter (R) of Louisiana. He cited the fact that "we're four years later and we don't know" whether three US banks that also participate in setting LIBOR were guilty of Barclays'-style misreporting their cost of borrowing from other banks.?
"Knowledge of this occurred [at the Fed] in 2008," said Senator Vitter, yet the matter is still unresolved. "Am I missing something?"
"Only that ... I think the responsibility of the New York Fed was to make sure that appropriate authorities had the information, which is what they did," Bernanke responded.
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