* Central bank urges rethink of how the benchmark is calculated
* Actual lending rates could replace use of bank estimates
* ECB in frame to take on supervision of Euribor
By John O'Donnell and Marc Jones
FRANKFURT/BRUSSELS, July 18 The European Central Bank is putting pressure on the organisers of Euribor for an overhaul to shore up faith in the benchmark interest rate following a scandal over the manipulation of the Libor standard, sources familiar with the matter said.
The move chimes with Tuesday's warning from U.S. Federal Reserve Chairman Ben Bernanke that the system for determining the London interbank offered rate (Libor) is structurally flawed.
Manipulation of Libor, which is used to set prices for trillions of dollars of financial products around the globe, has landed British bank Barclays with a penalty of $453 million, claimed the scalp of its chief executive and threatens to drag in several other banks.
Now the ECB is calling for a rethink on Euribor, including possibly shifting the basis of the calculation to actual lending rates instead of the current system, which like Libor's uses banks' assessments of what they expect to be charged.
Regulators fear the existing set-up allows too much discretion.
The ECB could also take a role directly monitoring the benchmark.
The push to change Euribor, launched with the euro in 1999 and which takes estimates from many of the same banks as Libor, comes as regulators investigate whether banks deliberately underestimated their borrowing costs to depress or fix the rate.
Euribor, the euro interbank offered rate, and larger counterpart Libor, are the key gauges of how much banks pay to borrow from peers and underpin swathes of financial products from Spanish mortgages to derivatives contracts sealed in London.
Regulators have not yet shown evidence of manipulation in Euribor, and the benchmark's organisers - an arm of the European Banking Federation - say the number of banks involved in determining the rate would make it difficult to fix.
"The big choice one has to make is whether you want posted rates or actual rates ... so at the end of the day, banks say what transaction they had at which price," said one central bank source. "If you use actual transactions you would have solved the problem."
A second source familiar with the matter said: "Everyone would like to go for this solution. The question is the timing. And the other question is whether you use a panel (of banks) or if you can work on it with global data."
The debate about the index's future comes as the European Commission investigates possible collusion on the Libor and Euribor benchmark rates. The EU's executive has the power to impose heavy fines if it finds wrongdoing.
Separately, the European Union's top regulatory official, Michel Barnier, has launched a review of how such benchmark rates work. This could result in a new supervisory regime to keep tabs on them.
One of the main candidates for a supervisory role is the ECB. The Frankfurt-based ECB and the euro zone's 17 national central banks have hundreds of money market operations experts who deal with traders involved in setting Euribor and Libor daily.
The other possible authority, the European Securities and Markets Authority (ESMA), only has 80 staff at present and lacks the market expertise of the ECB. Insiders there say that taking on such a task would require a major recruitment drive.
The ECB declined to comment on whether it could become more hands-on, but the minutes of one of its regular meetings with money market experts show the issue of the Euribor and Libor credibility came up back in March.
At the time, one of its top officials, Paul Mercier, said benchmarks were best left to the market, but ECB insiders are aware that with the bank now set to get new oversight powers from next year, the task of watching Euribor may be thrust upon them.
"If the conclusion (of the Commission's investigation into Euribor) is that the market mechanism cannot be trusted, then the only option is to turn to a public institution," said one euro zone central banker.
"We are not pushing for that, but the ECB might be a candidate. It is not easy to find an alternative."
The ECB is already involved in setting one of Europe's key market rates, Eonia, an overnight lending rate that ECB monetary policy is designed to steer in order to control inflation.
Unlike Euribor and Libor, which are based on banks' theoretical 'average' borrowing price, Eonia is priced from real transactions provided by a panel of banks.
The ECB can also make checks if they have concerns with the rates going through the system.
Replicating this for Euribor could, however, be complicated by the current reluctance of banks to lend to one another, which would make it difficult to establish actual rates.
"If you use actual rates, it is unlikely that you would have liquid markets up to 12 months every day," said one central bank source. "So it can be very unstable. Liquidity on the unsecured market has suffered a lot."
Similar concerns were echoed elsewhere. "We would make it absolutely visible that the European economy is maintained by activity in the ECB," said one source familiar with the matter.
Guido Ravoet, the chief executive of Euribor-EBF, which oversees the benchmark, said: "We are fully transparent and would be happy for Euribor to be subject to direct supervision, which could be done by either the ECB or ESMA, for instance."
Ravoet defended the benchmark.
"It is not possible to influence the Euribor benchmark with fewer than 15 banks," he said. "We closely monitor for banks who are too frequently part of the highest or lowest quotes."
"There is also a great diversity of banks both in geographical spread and types of activities, and therefore a diversity of interests."
Euribor rates submitted by banks are compiled by Thomson Reuters, parent company of Reuters, on behalf of Euribor-EBF.
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