THE Federal Reserve Bank of New York may have known as early as August 2007 that the setting of global benchmark interest rates was flawed. Following an inquiry with UK bank Barclays in 2008, it shared proposals for reform of the system with British authorities.

The role of the Fed is likely to raise questions whether it and other authorities took enough action to address concerns they had about the way Libor rates were set, or whether their struggle to keep the banking system afloat through the financial crisis meant the issue took a back seat.

Bob Diamond, the former CE of Barclays, had forgone bonuses worth up to £20m following his resignation over the scandal, the bank's chairman said in parliamentary testimony.

A New York Fed spokesman said in a statement yesterday "in the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and e-mails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor.

"In the spring of 2008, following the failure of Bear Stearns and shortly before the first media report on the subject, we made further inquiry of Barclays as to how Libor submissions were being conducted. We subsequently shared our analysis and suggestions for reform of Libor with the relevant authorities in the UK."

The New York Fed statement did not provide the precise timing of the communication with the British authorities. Meanwhile, legislators on Capitol Hill have signalled they are interested in learning more about what Fed officials knew.

Barclays last month agreed to pay $453m to British and US authorities to settle allegations it manipulated Libor, a series of rates set daily by a group of international banks in London across various currencies.

The rates are an integral part of the world financial system and have an effect on borrowing costs for many people and companies as they are used to price about $550-trillion in loans, securities and derivatives.

By manipulating Libor, banks could have made profits or avoided losses by wagering on the direction of interest rates. During the enormous liquidity problems at the time of the financial crisis they could, by reporting lower than actual borrowing costs, have signalled that they were in better financial health than they really were.

More than a dozen banks are being investigated for their roles in setting Libor, including Citigroup, JPMorgan Chase, Deutsche Bank, HSBC, UBS and Royal Bank of Scotland. Marcus Agius, the man at the top of Barclays when its traders manipulated the Libor rate, appeared before a hostile panel of British parliamentarians yesterday amid widespread public anger.

In two-and-a-half hours of gripping testimony, Mr Agius acknowledged that the central bank governor, Mervyn King, had played a pivotal role in pushing Mr Diamond out of his job, and described the personal drama behind the scandal which erupted last week and culminated in Mr Diamond's resignation from the bank.

"I'm not happy to be where I am, as you can imagine," Mr Agius told the panel in a quiet, clipped voice.

"It's very difficult as you go back to say what you would have done differently. Bob Diamond has voluntarily decided to forego any deferred consideration and deferred bonuses to which he otherwise would have been entitled to.

"The maximum amount would be £20m," he said.

Mr Diamond would still receive a year's pay and a cash payment instead of a pension, together worth £2m, Mr Agius said.

Reuters