By Eyk Henning and Alexandra Edinger, www.foxbusiness.com

Germany's banking watchdog BaFin Tuesday warned that the process for setting the benchmark lending rates, Libor and Euribor, are still exposed to manipulation despite the introduction of certain security standards.

"In the mid-term, there is no way around establishing alternatives [for calculating Libor, Euribor] which are, as far as possible, based on actual transactions in liquid markets," BaFin's President Elke Koenig said Tuesday.

The German regulator has asked all the banks on the panels that establish the rates to introduce minimum standards in a bank's organizational set-up to prevent traders from rigging them.

These panels also include one or both of the country's two largest banks, Deutsche Bank AG (DBK.XE) and Commerzbank AG (CBK.XE).

The interbank lending rates affect private households and companies as they serve as a proxy for all sorts of banking products, ranging from swaps to mortgage loans.

Global banks stand accused of manipulating the London interbank offered rate, or Libor, a scandal that has ensnared at least 16 financial institutions. The British bank Barclays last year paid more than $450 million to settle allegations by U.S. and British authorities that its executives and traders had rigged Libor.

BaFin's Ms. Koenig said the regulator so far hasn't found evidence for German banks having manipulated benchmark rates systematically, but added that the special audit hasn't concluded yet.

Commenting on the stability of the German sector, Ms. Koenig said the country's large banks have reduced the gap to meet new banking rules called Basel III to 14 billion euros ($18.11 billion) from around EUR32 billion earlier.

"This is good news," she said.