I watched the BBC Panorama tonight. As I have some acquaintance with the process I fill in some of the many gaps in the BBC's typically poor, shoddy journalism.
Libor rates c 2007 were set by the Britsh Bankers Association, the BBA. They were set or around 20 currencies, not just Sterling ove a range of tenors from overnight to 2 years. The most important were the one month and 3 month rate. The latter was used for swaps and option pricing world wide
Each currency had an associated panel of banks, around 16 for Stering. Every morning the BBA would phone all the panel members nd ask for their Libor rate ie the rate they would lend at in size to another bank on the panel. In size means circa £100 to £500 million. The BBA discarded the 4 top rates and the 4 bottom rates and calculated the average of the middle 8 rates which was published at 11:00 as the that day's Libor rate. It is therefore difficult to see how one bank could shift the rate significantly there had to be a group of banks involved, a comspircy.
In my work at the BoE I always distrusted LIBOR rates because they were not traded rates. I always used OIS , overnight interest rate swap rates which only the biggest 6 to 8 banks did and were trraded rates at which actual swap transactions took place.
I saw no evidence of rigging of the Libor market just a nagging uncertainty about the way LIBOR was compilied. It was open to manipulation.
All banks keep a giant spreadsheet that aggregates their net postions over all instruments, swaps, FRAs, options etc but they all settled against LIBOR so banks knew the precise effect of a one basis point move in LIBOR on their profits.
Thx to Austrianpeter for his comment. I should have pointed out that Libor is an unsecured rate and what you are detecting is the credit spread which can be very large to the point that you refuse to lend to some banks, called a credit crunch. Its not good to lend to counterparties you do not think can repay! Thats what happened to Northern Rock.
Banks can still borrow and lend on the GCRepo market where govenment bonds are pledged as collateral for the loan, All the BoE lending to commercial banks is done on this secured basis. Its been a legal requirement since 1848 ie before I was born. The problem is than to estimate the margin you need to take on the loan in case the collateral price falls. That hot potato always ended up in my lap in my BoE days. A mistake would have been career terminating for those with BoE ambitions! I was often told I was expendable and had no BoE career. I was old even then.