A U.K. financial regulator says it could have responded better to evidence that banks had manipulated the London interbank offered rate.

The Financial Services Authority's focus on the financial crisis and that fact that setting Libor was not a regulated activity led the FSA to be "too narrowly focused" in its handling of Libor-related information, according to a 120-page report the regulator published on Tuesday.

The FSA should have "considered the possibility and likelihood" that some of the world's biggest banks that submit rates that determine Libor understated what it would cost them to borrow unsecured funds because they sought to avoid the news media's measuring the banks' financial health by their borrowing costs.

The report found 74 communications from banks to the FSA over a two-month period starting in April 2008 that questioned whether banks might have made misleading Libor submissions to avoid negative media coverage, a practice known as lowballing. Twenty-six of the communications directly mentioned lowballing, the FSA found.

"As the financial crisis developed in 2007 to 2008, the FSA's bank supervisors were primarily focused on ensuring they understood the prudential implications of severe market dislocation," Adair Turner, the FSA's chairman, said in a press release. "And the FSA had no formal regulatory responsibility for the Libor submission process. As a result, the FSA did not respond rapidly to clues that lowballing might be occurring."

According to the report, lowballing suggested banks had conspired to manipulate Libor. In February, Royal Bank of Scotland (RBS) agreed to pay roughly $790 million to settle charges in the U.K. and U.S. that it manipulated the benchmark. UBS and Barclays paid a combined $2 billion last year to settle similar probes, which are said to be ongoing.

"The Report also reveals that while some information was available relating to lowballing, there is, for the period covered, no evidence of any information, direct or indirect, available to the FSA which indicated that traders were manipulating Libor for profit," Adair added. "All of the authorities, both UK and US and elsewhere only discovered trader manipulation as a by-product of enquiries launched into potential lowballing."

Libor is produced daily for 10 currencies. The British Bankers Association selects banks according to size, credit quality and expertise in the currency concerned to quote rates at which they could hypothetically borrow unsecured funds in the interbank market for a given currency and period. The rate is calculated each day by Thomson Reuters, although authorities are searching for a new administrator.

Because rates on interest rate swaps, corporate bonds and other investments are tied to Libor, efforts to keep the rate artificially low or high can cost investors. Besides probes by regulators, banks face roughly two dozen lawsuits by investors who charge their investments suffered as a result of Libor tampering.

The FSA undertook the report after Barclays told the FSA about 13 instances of communication between the bank and the regulator that raised the question whether the FSA should have known that banks might be making misleading Libor submissions.

Twenty investigators at the FSA combed through 17 million records and reviewed roughly 97,000 documents in detail for the report, which covers the 17 months that began in January 2007.

According to the report, the FSA should have challenged the information it received and should have been "more sensitive to the accumulation of the communications." Regulators also should have "given explicit consideration to the FSA's responsibility for regulated firms' conduct," especially after the British Bankers Association announced its own review of Libor setting.

The findings coincide with a shift in responsibility for financial regulation in the U.K. to two newly formed regulators, the Financial Conduct Authority and the Prudential Regulation Authority, that are slated to start work this April.

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