* Some banks suspected Nibor rigging last year
* Investigation was inconclusive, followed Libor/Euribor scandal
* Reforms suggested by central bank are insufficient -critics
* Central bank says cannot explain some deviations in Nibor rate
By Gwladys Fouche
OSLO, July 4 (Reuters) - Proposed central bank reforms to Norway's Nibor interbank lending rate will not eliminate the risk of manipulation, finance industry critics argue, saying the mechanism still lacks transparency and the panel that sets the benchmark is too small.
Norway promised reforms of the Norwegian Interbank Offered Rate last year after some foreign banks complained about suspected rigging.
After investigating, the banking regulator said it found no evidence of rate-rigging but could not rule it out either. .
That evoked unwelcome comparisons with the scandal that led to some of the world's biggest banks being fined $6 billion for rigging the London Interbank Offered Rate (Libor) and its European counterpart Euribor.
Norway introduced new rules for Nibor - which sets parameters on a range of financial instruments including bonds - last autumn, including the creation of a control committee.
Additional measures have been under consideration since then.
In a letter to the Norwegian financial regulator published in early June, Norges Bank said regulations needed to be changed as soon as possible "to make Nibor more robust and create more trust than it does today".
But the central bank suggested no concrete measures, something critics says it needs to rectify.
"All the suggestions were sensible but they did not go far enough because ... they (the central bank) did not suggest or signal any instrument to enforce it," Knut Anton Mork, chief economist at Handelsbanken in Oslo, told Reuters.
"They have some instruments they can use if they want to. For example, they could require banks to follow their recommendations for changing the Nibor routines in return for access to central bank funding."
One of his main concerns is whether Nibor, which is set by a panel of six banks - DNB, SEB, Danske , Nordea, Swedbank and Mork's employer Handelsbanken - is still at risk of manipulation.
"Norges Bank actually points to cases that they claim to have found were deviating quotes, fixes from individual banks that were enough to change Nibor materially on a given day," he said.
"They did not find any market reasons. Obviously that is troubling."
None of the six Nibor-setting banks were implicated in the Libor and Euribor scandals.
Another economist said the number of banks on the Nibor panel should be increased.
"There are few banks that are contributing to the Nibor and so one single bank can affect the quote," said Kyrre Aamdal, a senior economist at DNB, one of the banks that is part of that panel.
"There is a problem with the number of banks on the panel, it is small. I don't think they have any measures that would increase the number of banks on the panel," he told Reuters.
Another concern, shared by the central bank, is that Nibor is not a quotation of rates in crowns, but works via the eurodollar market and is then converted into crowns. Banks argue this is necessary because if Nibor was quoted in crowns, it would not be liquid enough.
"I feel it clouds the transparency of the Nibor market," said Handelsbanken's Mork. The issue of liquidity, he argues, is linked to the fact that most small banks, for historical reasons, use DNB as their settlement bank. If they relied on Nibor instead, concerns over liquidity would be less acute.
The finance ministry is conducting a review of the potential Nibor reforms that is due to conclude on Aug. 4. (Editing by John Stonestreet)