Authorities in hot water over CD rate scheme
By Kim Tae-jong
The financial authorities are in hot water for lax supervision, following the investigation by the nation’s anti-trust watchdog of commercial banks and brokerage houses over suspicions of collusion in the money market.
Although the probe is underway, critics argue that the nation’s financial regulators should be reformed after a series of scandals have apparently revealed a lack of transparency in management and monitoring of financial irregularities.
The criticism came as the Fair Trade Commission (FTC) last week launched an investigation into nine commercial banks and 10 brokerage houses over suspicions of collusion in setting the three-month certification of deposit (CD) rates. They are applied to a wide range of financial transactions here, including loans to households and corporations.
The FTC is looking into why the CD rates have been kept at 3.54 percent for four consecutive months since April when other market rates have fallen, and the watchdog suspects that the banks may have used monthly meetings between their finance executives to arrange price-fixing schemes.
Currently, the market for CD rate-tied loans is estimated at 350 trillion won. Since the probe began on July 17, the CD rate plunged for four consecutive days to 3.21 percent from 3.27 percent on July 12.
According to Hyundai Securities, a drop of 0.1 percent can translate into a decrease of interest-related profits, estimated at 224 billion won annually at eight local banks.
The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) immediately defended themselves by saying there is a slim chance of rate-rigging to avoid criticism that they looked on while lenders and brokerages ripped off customers through high interest rates.
“We need to wait until the probe results come out,” FSC Chairman Kim Seok-dong said Friday during a parliamentary interpellation session at the National Assembly. “But personally, I don’t think they were engaged in collusion.”
The remark indirectly attacked the FTC’s investigation amid mounting criticism on the financial authorities’ failure to properly regulate reckless business practices.
FSS Governor Kwon Hyouk-se also downplayed the possibility of money-market manipulation, although he conceded the problems associated CD rates should have been resolved sooner, as CDs should be retired as a benchmark for other market rates when banks are no longer willing to issue these fixed-term financial products.
The FSS, FSC and the Bank of Korea had already acknowledged the problem associated with CD rates before the FTC probe. Last year, they formed a task force to replace the rate with a new benchmark but failed to narrow their differences in a tug of war without any practical discussion.
The opposition Democratic United Party (DUP) also demanded an audit on the financial authorities for neglect of duty.
“The Board of Audit and Inspection should look into the financial authorities,” DUP spokesman Jung Sung-ho said. “If it proves to be true, lenders ripped off customers and the authorities let them profiteer.”
The sensitive reaction by the financial authorities to the alleged interest-rate manipulation could strike a severe blow against them, as they are already under fire for the savings bank fiasco.
Although the financial authorities took a bold measure in suspending the business operations of 20 debt-ridden savings banks, they are not free from criticism as they failed to take preventive action before the lenders entered a terminal stage. Many experts and market insiders argue that the financial regulator’s neglect of duty to supervise firms properly triggered the savings bank fiasco.
Prosecutors have also launched a full investigation into financial authorities in relation to corruption at debt-saddled savings banks, as senior officials at the FSC allegedly received tens of millions of won from executives of savings banks in return for keeping them off the list of savings banks facing suspension.
Banks and brokerage houses have been passionate in denying the accusations of collusion and rate fixing, but consumer groups like the Korea Finance Consumer Federation (KFCO) are furious and threatening massive class action suits if the FTC proves that banks have been ripping off their customers through borrowing costs. The collective action could overturn the financial market and system.