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Probe Widens in $350 Trillion Bank Scheme: Report (Update 1)

Story updated to include comments from UBS and Credit Suisse in the final two paragraphs.

NEW YORK ( TheStreet) -- A manipulation probe into the $350 trillion financial market tied to short term interest rates like the London Interbank Offered Rate is growing, with Swiss banks Credit Suisse (CS - Get Report) and UBS (UBS) coming under increasing scrutiny.

Swiss Swiss competition watchdog Comco is looking at whether banks manipulated the benchmark rate known as Libor, according to a Bloomberg report. Libor is a key reference rate for short-term bank funding, interest rate swaps, corporate bonds and even consumer financial products like adjustable rate mortgages.

The investigation adds to a July 2011 probe launched by the U.S. Department of Justice and Japanese regulators into the market, which focuses on 16 large banks including Barclays (BCS), Bank of America (BAC) and Citigroup (C)

The investigations focus on whether the banks involved in the colluded to report lower borrowing costs during the financial crisis, keeping Libor and sshort term borrowing from rising substantially. Investigations have ties to a financial crimes task force launched by President Obama in January to prosecute frauds that intensified the housing crisis because the rates are a key to consumer related financial products like ARM mortgages.

The Swiss regulator said that derivative traders might have influenced Libor and its Japanese equivalent, Tibor. "Market conditions regarding derivative products based on these reference rates might have been manipulated too," said Comco in an emailed statement obtained by Bloomberg.

At the onset of the financial crisis in the summer of 2007, overnight rates like Libor spiked as banks faced a cash squeeze, prompting the Federal Reserve and other central banks around the world to launch emergency liquidity facilities.

Even with funding help from the Federal Reserve and its peers, overnight rates continued to rise with the failure of Bear Stearns and Lehman Brothers, adding to the borrowing costs of banks and increasing questions on their health.

Keeping overnight interest rates artificially low could have also helped banks keep payments on derivatives like interest rate swaps from spiking, while also stopping consumer financial products like adjustable rate mortgage rates from rising, potentially exacerbating loss causing defaults. The Swiss and U.S. - Japanese probes focus on possible irregularities on the rates leading up to and during the financial crisis.

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