EVERY weekday, at around 11.30am UK time, trading screens update with that day's new London inter-bank offered rates (LIBOR). The numbers are supposed to measure the interest rates banks pay when they borrow from each another. Along with other benchmarks like central-bank rates and government-bond yields, LIBOR rates are one of the foundations of finance. Contracts worth around $360 trillion, five times global GDP, are based on them.

Something this important needs to be rock solid, and there are concerns that LIBOR is not. A 2008 study by the Bank for International Settlements, for instance, spotted days when financial risks spiked but LIBOR did not. Given that lending rates should be highly influenced by credit risk, such disconnects have led some to suspect foul play. The Canadian antitrust watchdog is searching for evidence of collusive conduct between banks, including price-fixing. Competition authorities in Switzerland, America and the European Union are likely to probe the same thing. Financial regulators in America, Britain and Japan are also investigating LIBOR; they may look at whether banks have acted alone to manipulate LIBOR to their advantage.

LIBOR was developed in the 1980s to simplify the pricing of interest-rate derivatives and syndicated loans. Such loans blend funds provided by several banks; a common yardstick for the cost of cash was needed. In response the British Bankers' Association (BBA) started publishing LIBOR rates in 1986 and they quickly became a vital reference point for the pricing of financial instruments.

Libor is set, or “fixed”, every day. Unlike other benchmarks it is not based on actual borrowing costs. Instead, each bank estimates the rate it would be charged if it borrowed cash that day, across 15 maturities in ten different currencies. The amount borrowed in this hypothetical contract is not specified, it just has to be a “reasonable” amount. This process ensures that full LIBOR coverage is available every day, even in lesser-used currencies.

Up to 20 banks submit their best guesses of lending costs. Once these are all in, Thomson Reuters, on behalf of the BBA, ranks them, removes the top and bottom 25%, averages the rest and then publishes the day's LIBOR fixing. At this stage every bank's individual estimate is revealed, too.

So LIBOR is subjective by design. It is a bankers' poll, not a statistical measure. And there are reasons to believe that banks have an incentive to cook the numbers. Banks whose actual borrowing costs are high do not want to admit they are seen as risky by creditors. And some banks' liabilities are more closely tied to LIBOR than their assets. By lowering LIBOR, these banks' interest costs would fall more than interest revenues, boosting profits.

Accurate benchmarks are vital if risk is to be correctly priced. According to Zohar Hod of SuperDerivatives, a derivatives-pricing firm, there has already been movement away from LIBOR towards using overnight index swaps to discount cash flows on certain instruments. In the meantime the BBA is considering a LIBOR revamp. It is needed. Where actual rates are available, these should be used. If estimated rates are required, incentives to report accurately need to be sharpened. Collecting each bank's estimates of its rivals' borrowing rates would help identify any over-optimistic self-assessment. Keeping these cross-checks anonymous could promote truth-telling. Such steps could lead to an accurate LIBOR fix, not just a fixed one.