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Bank of Canada Governor Mark Carney listens to a question during a news conference upon the release of the Monetary Policy Report in Ottawa July 18, 2012.CHRIS WATTIE/Reuters

Central bankers are moving toward a dramatic overhaul of the benchmark interest rate Libor, which may include scrapping it entirely, amid a rate-rigging scandal that has engulfed some of the world's largest financial institutions.

In what is being called a "co-ordinated global initiative," the U.S. Federal Reserve, the Bank of England, the Bank of Canada, and a number of other central banks have started discussing critical changes to Libor, and will hold formal talks on the matter in early September.

Such measures are being taken to restore confidence in how key global interest rates are set after the credibility of Libor has been called into question.

The London interbank offered rate, better known as Libor, is set by a small number of banks, based on their borrowing costs.

It ultimately influences more than $800-trillion (U.S.) in financial products around the world, including bonds, corporate loans, credit cards and mortgages.

However, more than 16 banks are now being probed over their submissions to Libor, including Barclays Bank PLC, which recently paid $453-million in fines after admitting that its employees submitted false data to the Libor process to boost profit and cloud the bank's financial picture.

UBS has also settled with financial regulators, co-operating in the investigation in exchange for immunity from prosecution.

Bank of Canada Governor Mark Carney, who is also chairman of the Financial Stability Board, said he has started canvassing relevant central bankers and regulatory authorities about how Libor might be reformed to prevent future problems.

Under consideration are which steps are needed to "restore credibility to Libor" or if the benchmark rate should be retired, and replaced with a more transparent process.

"Public authorities have to play the lead in determining what next with Libor and if not Libor, what else and how to manage that transition, because there has to be absolute confidence in this," Mr. Carney said Wednesday in Ottawa. "If Libor cannot be fixed, if it's structurally flawed and cannot be fixed – which is a possibility – there may need to be different types of approaches and we need to think that through.

Mr. Carney said the FSB potentially has a "constructive" role to play, as the body tasked with co-ordinating an overhaul of the rules governing international finance."I have had some discussions with the relevant officials, and I will have more and we will take this up at the FSB when we next meet."

His comments echoed the sentiments of central bankers in the U.S. and England Wednesday, suggesting a critical mass is building for significant changes to Libor. And Bank of England Governor Mervyn King sent a letter to members of the Economic Consultative Committee, proposing a meeting on Sept. 9 in Basel, Switzerland, where financial policy makers will discuss Libor's weaknesses, and propose changes.

In Washington, Federal Reserve Board Chairman Ben Bernanke said he has discussed the issue with Mr. Carney and other central banks, and has suggested other benchmarks in the market as an alternative to Libor. Among them, Mr. Bernanke believes other financial barometers such as Overnight Index Swaps, Treasury markets, or the market for repurchase agreements could be used as a stand-in for Libor to gauge where interest rates stand.

Amid the international Libor investigation, central bankers also appear to have the support of some influential members of the industry in pushing for reforms.

Speaking at an event in Washington, Goldman Sachs Group Inc. chief executive officer Lloyd Blankfein, whose bank was not involved in setting Libor, said the allegations of rate-fixing are "one more thing undermining the integrity of a system that already had been undermined substantially."

In addition to determining alternatives for Libor, the September meetings will also consider what transitional steps need to be put in place if Libor is replaced with another system of setting interest rates. "Such an evaluation would also need to take into due account the associated, and considerable, transition issues," Bank of Canada spokesman Jeremy Harrison said.

Mr. Carney said he is not aware of evidence that any Canadian bank helped conspire to rig key global interest rates, but the facts around the numerous investigations into the matter are "deeply troubling" and show that lessons from the financial crisis "have not been learned fast enough."

"It's not just a question of the structure of the index," Mr. Carney said. "It's active, conscious, repeated manipulation of that index."

Canada's Competition Bureau is among the agencies involved in an international probe into the manipulation of Libor, and has been tapped to assist British regulators. Canada's largest bank, Royal Bank of Canada, is involved in setting Libor, but has issued a statement saying it does not believe it ran afoul of British banking rules in its reporting to the Libor process. The bank has also said it is not being investigated by the Competition Bureau.

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