LONDON, Sept 28: Britain tightened the screws on troubled banks on Friday, vowing to overhaul a “broken” Libor interest rate system that damaged the financial sector’s reputation and threatening to imprison those who abused it.

The Financial Services Authority (FSA) watchdog made the proposals in an independent report that was commissioned by British finance minister George Osborne in the wake of this year’s notorious Barclays rate-rigging affair.

British banks, already being forced to ringfence retail and investment operations, were facing even more pressure from authorities to reform and prevent a new global financial crisis.

“The reason we are here is that we have been misled,” FSA managing director Martin Wheatley said on Friday as he published his review of Libor.

“The system is broken and needs a complete overhaul. The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust it has torn the very fabric that our financial system is built on.”

The Libor affair erupted in June when Barclays bank was fined £290 million by British and US regulators for attempted manipulation of Libor and Euribor interbank rates between 2005 and 2009.

The FSA on Friday said regulatory and sanctioning powers including the threat of imprisonment were now needed to punish those who attempt to manipulate Libor.

“Society wants the people who commit these sorts of crimes to pay the price, and if that includes jail for the most extreme fraud in the system, then that is what should happen,” Wheatley told BBC radio.

The London Interbank Offered Rate, or Libor, is a flagship instrument used all over the world, affecting what banks, businesses and individuals pay to borrow money.

Libor is calculated daily, using estimates from banks of their own interbank rates, and affects the pricing of more than $300-trillion of contracts across the world, according to the FSA.

However, the system was found to be open to abuse, with some traders lying about borrowing costs to boost trading positions or make their bank seem more secure.

Treasury Minister Greg Clark, who works under Osborne, said on Friday that Libor was “another example of the broken regulatory system that this government is committed to fixing.”—AFP