This is the first in a series of articles regarding the Fair Trade Commission (FTC) which has been criticized for excessive use of its regulatory power. — ED.
By Yoon Ja-young
Two-and-a-half years have passed since the Fair Trade Commission (FTC) started an investigation into banks whether they colluded to keep interest rates higher to generate additional profit.
As the investigation drags on with no conclusion in sight, the FTC is facing criticism that it was hasty in starting the investigation.
"We are still investigating, and we are doing our best to quickly come up with a conclusion," said an official in charge of the cartel investigation at the FTC. However, he declined to comment on when it will be over.
In July 2012, the FTC began investigating the country's major commercial banks ― including Kookmin, Hana, Woori and Shinhan ― and brokerages over suspicion that they colluded in setting the three-month certificate of deposit (CD) rates, a benchmark for consumer bank loans.
Binh Ki-beom, a professor at Myongji University, said there was reason to suspect collusion back then. "While the central bank had cut key rates, the CD rate remained flat." CD rates remained at 3.54 percent for three months, from April 9, 2012, despite the drop in the key rate.
The FTC increased the number of inspectors on the case in August, but it is rumored that they failed to find sufficient evidence. As the inspection continues, criticism is increasing that the FTC was barking up the wrong tree from the start.
"It was almost ridiculous when the FTC started the investigation," said an official at a local bank, who refused to be named. Banks have reacted fiercely to the investigation from the beginning, saying collusion cannot work in relation to CD rates.
"Banks issue CDs, but the CD rates are determined by the brokerages. The issuance rates are determined based on the market price. Banks have almost no decision rights in this process," he said. Ten brokerages report their CD rates to the Korea Financial Investment daily, which excludes the lowest and the highest to get the average of the other eight companies. That becomes the official CD rate.
Banks had explained from the beginning that the CD rates remained flat as they stopped issuing CDs for a considerable time, as well as that they are not involved in the rate-setting process, but the FTC did not accept that.
Even financial regulators raised doubts over the FTC investigation. Kim Seok-dong, who was head of the Financial Services Commission in 2012, told the National Assembly back then that he did not think financial businesses colluded in setting interest rates.
The bank official said that FTC inspectors ransacked the emails, desktops and messenger accounts of bank employees, team managers as well as executives. "It did hamper our work. However, we couldn't complain as the FTC is a government organization," he said.
Another bank official pointed out that the inspection itself can be pressure, amid suspicion that the investigation was aiming at pressuring banks to lower consumer loan rates.
Moody's said in September that the inquiry into alleged interest rate collusion is "credit negative for banks," regardless of the investigation's outcome. The FTC eventually extended the investigation from CD rates to the overall rates of banks.
"If the FTC finds collusion, then we would expect sanctions or fines and downward pressure on margins. However, even if the FTC finds no wrongdoing among the banks, the investigation itself could pressure the banks to lower rates below levels commensurate with the risks they are taking on loans," it said.
The FTC won't be able to get out of this dilemma if it doesn't come up with clear evidence of collusion. If it penalizes the banks without clear evidence, the banks will file a lawsuit. The FTC won only 63.6 percent of lawsuits involving more than 10 billion won in penalties between 2010 and 2012.
If it ends as acquittal, however, the FTC will inevitably face criticism that it hastily started the investigation.
Professor Binh said the FTC should not focus on showing off its power. "It should know that it is shameful if it doesn't come up with a conclusion once it sets out on something. The regulator, however, seems to be satisfied with showing off its power, saying, ‘We can harry you this much.'"
By Yoon Ja-young
 |
FTC Chairman Jeong Jae-chan |
As the investigation drags on with no conclusion in sight, the FTC is facing criticism that it was hasty in starting the investigation.
"We are still investigating, and we are doing our best to quickly come up with a conclusion," said an official in charge of the cartel investigation at the FTC. However, he declined to comment on when it will be over.
In July 2012, the FTC began investigating the country's major commercial banks ― including Kookmin, Hana, Woori and Shinhan ― and brokerages over suspicion that they colluded in setting the three-month certificate of deposit (CD) rates, a benchmark for consumer bank loans.
Binh Ki-beom, a professor at Myongji University, said there was reason to suspect collusion back then. "While the central bank had cut key rates, the CD rate remained flat." CD rates remained at 3.54 percent for three months, from April 9, 2012, despite the drop in the key rate.
The FTC increased the number of inspectors on the case in August, but it is rumored that they failed to find sufficient evidence. As the inspection continues, criticism is increasing that the FTC was barking up the wrong tree from the start.
"It was almost ridiculous when the FTC started the investigation," said an official at a local bank, who refused to be named. Banks have reacted fiercely to the investigation from the beginning, saying collusion cannot work in relation to CD rates.
"Banks issue CDs, but the CD rates are determined by the brokerages. The issuance rates are determined based on the market price. Banks have almost no decision rights in this process," he said. Ten brokerages report their CD rates to the Korea Financial Investment daily, which excludes the lowest and the highest to get the average of the other eight companies. That becomes the official CD rate.
Banks had explained from the beginning that the CD rates remained flat as they stopped issuing CDs for a considerable time, as well as that they are not involved in the rate-setting process, but the FTC did not accept that.
Even financial regulators raised doubts over the FTC investigation. Kim Seok-dong, who was head of the Financial Services Commission in 2012, told the National Assembly back then that he did not think financial businesses colluded in setting interest rates.
The bank official said that FTC inspectors ransacked the emails, desktops and messenger accounts of bank employees, team managers as well as executives. "It did hamper our work. However, we couldn't complain as the FTC is a government organization," he said.
Another bank official pointed out that the inspection itself can be pressure, amid suspicion that the investigation was aiming at pressuring banks to lower consumer loan rates.
Moody's said in September that the inquiry into alleged interest rate collusion is "credit negative for banks," regardless of the investigation's outcome. The FTC eventually extended the investigation from CD rates to the overall rates of banks.
"If the FTC finds collusion, then we would expect sanctions or fines and downward pressure on margins. However, even if the FTC finds no wrongdoing among the banks, the investigation itself could pressure the banks to lower rates below levels commensurate with the risks they are taking on loans," it said.
The FTC won't be able to get out of this dilemma if it doesn't come up with clear evidence of collusion. If it penalizes the banks without clear evidence, the banks will file a lawsuit. The FTC won only 63.6 percent of lawsuits involving more than 10 billion won in penalties between 2010 and 2012.
If it ends as acquittal, however, the FTC will inevitably face criticism that it hastily started the investigation.
Professor Binh said the FTC should not focus on showing off its power. "It should know that it is shameful if it doesn't come up with a conclusion once it sets out on something. The regulator, however, seems to be satisfied with showing off its power, saying, ‘We can harry you this much.'"
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