WASHINGTON - A group of Senate Democrats is urging the U.S. Department of Justice and federal banking and securities regulators to investigate allegations that domestic and foreign banks manipulated the London Interbank Offered Rate, or Libor, which is used as a benchmark in municipal bond-related swaps and other financial products.

"We urge you to direct your staff to thoroughly investigate the banks and the process involved in setting Libor for any wrongdoing," said the senators in identical letters sent Thursday to U.S. attorney general Eric Holder and members of the Financial Stability Oversight Council. "Banks and their employees found to have broken the law should face appropriate criminal prosecution and civil action."

Senators said they are troubled by allegations that U.S. and foreign regulators may have been aware of wrongdoing for years.

"Just like the banks and executives they oversee, regulators who were involved should be held to account for any failures to stop wrongdoing that they knew, or should have known about," the senators wrote in the letters.

"Restoring integrity to our financial system is critical to restoring confidence in our economy. This scandal calls into further question the integrity of many Wall Street banks," they said.

The Senators also asked the regulators to "outline proposals that will restore the market's confidence" and "fix...this process so that breaches of confidence like this do not happen again."

The Senate Banking Committee and the House Financial Services Committee have also said they are looking into the Libor allegations and plan to question Treasury Secretary Timothy Geithner and Federal Reserve Board chairman Ben Bernanke during upcoming hearings.

Last month Barclays agreed to pay $453 million to U.S. and U.K. regulators to settle allegations that it manipulated Libor.

Barclays and other major international banks are alleged to have colluded to keep Libor artificially low to give the impression that their borrowing costs were not affected by the financial crisis. As a result, Libor-related swap payments to issuers may have been reduced.

Industry sources estimate that municipal issuers have between $50 billion and $100 billion in Libor-related transactions, most tied to the one-month Libor rate.

The letter was signed by Sens. Jack Reed, D-R.I., Carl Levin, D-Mich., Dianne Feinstein, D-Calif., Tom Harkin, D-Iowa, Patrick Leahy, D-V.T., Robert Menendez, D-N.J., Sherrod Brown, D-Ohio, Jeff Merkley, D-Ore., Sheldon Whitehouse, D-R.I., Frank Lautenberg, D-N.J., Daniel Akaka, D-Hawaii and Jeanne Shaheen, D-N.H.

Other members of the FSOC include the heads of the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Federal Housing Finance Agency, the Consumer Financial Protection Bureau, and the National Credit Union Administration.

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