Libor is set by a panel of banks, which submit estimates of how much they believe they have to pay to borrow from each other. Barclays is the only bank so far to settle with U.S. and U.K. regulators over allegations that it manipulated the key interest rate. Dozens of other big banks – including at least two American institutions – are currently under investigation.
Bernanke said the Fed had little power to change the way the benchmark rate is set. "We are and need to continue advocating for reforms to the Libor process. It is constructed by private organization in the U.K., and so our direct ability to influence that is limited," he told lawmakers.
Bernanke said he could not say "with full confidence" that Libor is reliable, because the "British Bankers' Association did not adopt most of the recommendations made by the New York Fed".
Documents released last week by the New York Fed showed that U.S. and British regulators were aware of the weaknesses in how Libor was set. Treasury secretary Timothy Geithner, then the head of the New York Fed, went as far as to email Bank of England Governor Mervyn King in 2008 with recommendations on how to boost the credibility of Libor.
There was no documentation showing that the Fed followed up on its concerns. At the time, Geithner and the Bush administration had their hands full with a financial crisis that was spiraling out of control.
Bernanke told lawmakers that the traders and banks involved in the Libor manipulation scandal have had the effect of undermining public confidence in the financial system.
In London, King told a parliamentary committee that the Bank of England could not be blamed for the Libor scandal. He said he only learned that Barclays had been deliberately misreporting its Libor rates two weeks ago.
He conceded there were concerns about the accuracy of Libor during the financial crisis. But he said that was not the same as proof that the figures had been manipulated for private gain, adding: "That's my definition of fraud."
In his testimony, King said that he had solicited the email from Geithner, saking him to send his concerns in writing, after learning of them at a conversation in Basel. The Bank of England passed Geithner's concerns on to the British Bankers' Association the next day.
On Capitol Hill, Bernanke offered few new clues on whether the Fed was moving closer to a fresh round of monetary stimulus. He said the U.S. economic recovery was being held back by tighter financial conditions due to Europe's debt crisis and uncertainty surrounding fiscal policy.
Financial markets had looked forward to Bernanke's testimony for any signs the central bank was moving closer to a third round of bond purchases – or QE3 in market parlance – to support the economy.
The Fed chief disappointed investors, hewing closely to the message of watchful waiting that the central bank's policy panel delivered in June.
"Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to economic growth, the committee made clear at its June meeting that it is prepared to take further action," Bernanke said in his testimony on the Fed's semi-annual monetary policy report.
U.S. stocks prices slipped and the dollar hit session highs against the euro. Prices of treasury securities trimmed losses.
Intellpuke: This article is a compilation of reporting by Guardian correspondents and various news agencies; you can read it in context here: www.guardian.co.uk/business/2012/jul/17/federal-reserve-ben-bernanke