Time to develop viable alternative index

Will the Korean version of the Libor rate-rigging scandal take place?

Tensions are building up in the financial community as the Fair Trade Commission widens its probe into alleged collusion between banks in setting interest rates on certificates of deposit (CDs).

The antitrust agency sent its investigators to the nation’s leading commercial banks Wednesday on suspicions that they colluded to fix rates on three-month CDs. The raid came a day after FTC investigators searched the offices of the top 10 brokerage houses.

If the banks are found to have engaged in rigging CD rates, it will create far-reaching ripples. The probe started because the CD rates remained higher than other market rates.

As of the end of May, about 278 trillion won or 43 percent of the banks’ 642 trillion won in household loans is tied to CD rates. This means that an increase of 0.1 percentage points in CD rates will enable banks to earn 278 billion won in illicit gains a year. The interest rate on three-month CDs is used as a benchmark for a variety of financial products.

Allegations on rate collusion gained traction Thursday when reports broke that a securities company informed the FTC of an illegal cartel voluntarily, capitalizing on its leniency policy. The fair trade agency operates a leniency policy whereby companies that provide information about a cartel in which they participated can receive full or partial immunity from fines.

Questions about the possible rate collusion arose because the CD rate was kept at 3.54 percent from April 9 to July 11. In contrast, the rate on three-month monetary stabilization bonds fell from 3.38 percent to 3.22 percent during this period.

Banks say there is nothing they can gain from the manipulation of rates, arguing that the rise in CD rates would push up deposit rates as well as lending rates. They discounted the FTC probe as part of government tactics to pressure them to lower lending rates amid the worsening household debt problem.

While angry reactions from the banks are understandable, it’s true that the current rate-setting system gives banks and brokerage houses much room to manipulate rates. Given that issued CDs and their transactions have dipped in recent years, the possibility of collusion ran high in the absence of transparency and objectivity.

CD rates are announced twice every day after the Korea Financial Investment Association calculates the average of figures collected from the top 10 securities firms.

The biggest question is whether banks are able to exercise their influence in setting CD rates through their affiliated brokerage houses in an environment where CD rates are directly linked to the bank’s profits.

The biggest blame should lie with the financial authorities that have been negligent in developing a viable alternative index. The FTC should conduct a thorough probe into the domestic rate-rigging scandal in consideration of its profound damage to borrowers. At the same time, huge fines must be imposed on banks that could face a barrage of class-action lawsuits.