Banks face probe for CD rate fixing
By Na Jeong-ju
Banks and brokerage firms are facing an investigation over suspicions that they rigged the benchmark interest rates for loans since 2010 to reap huge illicit gains.
The investigation is based on complaints from 205 consumers, who claim they suffered a huge financial damage due to the collusion by financial firms. The Korea Consumer Agency (KCA) will lodge a formal application Tuesday for an investigation into the case at the Financial Supervisory Service (FSS) on behalf of the consumers, officials said Monday.
The consumer group claims that loan borrowers have paid additional interests of 1.6 trillion won ($1.4 billion) annually since 2010 due to the alleged rate fixing.
FSS officials said they will accept their request to look into the case.
“Financial firms will have to compensate the victims for damages if they are found to have engaged in unfair practices,” an FSS official said on condition of anonymity.
At the center of the controversy is the interest rate on certificates of deposit (CDs), one of the reference lending rates for loans to individuals and companies.
In July last year, the Fair Trade Commission launched a probe into the suspected collusion among financial firms to fix the CD rate. The commission, however, suspended the case amid the uncertain outlook for the financial industry.
“The consumers decided to request an investigation themselves because the FSS has vowed to protect consumers from unfair business practices committed by financial firms,” a KCS spokesman said. “Most Korean banks depend heavily on interest income by charging higher spreads on lending rates, drawing public discontent that they prey on households and smaller firms. We need to address these concerns.”
Last year, the government introduced a new benchmark market rate, called COFIX, to replace the CD rate after the rate rigging case was first reported. However, a bulk of financial products in South Korea, including mortgage loans and interest swaps, are still tied to the CD rate.
According to the FSS, the interest income accounts for over 85 percent of local banks’ total profits.
“Depending on the results of the probe, banks will suffer a huge damage because their profits mostly are generated from spread between deposit and lending rates,” another FSS official said.
The FSS probe followed similar investigations underway in the United States and Britain into banks, including Barclays, for their alleged involvement in manipulating the London Interbank Offered Rate or Libor, a benchmark interest rate in the global financial market last year.
The probe is expected to deal a setback to Korean banks, which are suffering from worsening bottom lines due to falling interest margins.
Korean banks generated 88 percent of income from interest margins in the first quarter, compared to 81.5 percent a year earlier. Comparable figures for lenders in France, Britain, the United States and Japan are 41, 44, 65 and 69 percent, respectively. However, their heavy dependence on interest margins and weak investment banking business is making it difficult to escape trouble, according to analysts.