Escalating suspicion

FTC should uncover truth of CD rate scandal

Ripples from the suspected certificates of deposit (CD) rate-rigging scandal are spreading.

Consumer groups are poised to lodge class-action lawsuits, saying many of the allegations revealed so far are suspicious enough to believe that banks and brokerage houses colluded to fix three-month CD rates. There are also signs that the scandal may escalate into international lawsuits like in the U.K.’s Libor rate-rigging scam.

The Korea Finance Consumer Federation (KFCF) says it will first ask financial firms to return illicitly earned gains to consumers if the claims turn out to be true. Should their demand be rejected, the next step would be to take legal action.

The most serious and painful part of the latest row is that banks and other financial companies preyed on ordinary people. In this environment, people are seething with anger in response to the revelations. The KFCF has been flooded with phone calls asking about class-action suits. Internet message boards and social networking sites are plastered with postings lashing out at the government.

People’s indignation is rising further as it has been alleged that households have been discriminated against with an increased interest burden due to the manipulation of the CD rates. That is, the fall in market interest rates resulted in corporate lending rates declining, whereas the rate on household loans rose as the CD rate was used as a benchmark for them. In contrast, corporate loans are tied to bank debentures and financial bonds.

This explains why the average lending rate for companies, which reached 5.98 percent in May, 2011, when market rates peaked, fell to 5.74 percent in May this year. During the period, however, the rate for household loans rose from 5.46 percent to 5.51 percent. This means the benefits of the overall interest rate decline went to the corporate sector, while households, struggling with combined debt of more than 900 trillion won, received nothing.

More recent statistics show that over 300 trillion won in household and corporate loans was tied to CD rates as of the end of March. Analysts, based on this estimate, predict that damages sought would amount to up to 20 trillion won.

Furthermore, the value of derivatives whose underlying assets are CDs is tallied at more than 4.5 quadrillion won, raising fears that the scandal would deal a fatal blow to the transparency and credibility of local financial markets.

It would be irrational to jump to hasty conclusions at this point but the financial authorities will have nothing to say with regard to the CD rate fiasco, given their dereliction of duty. The problem of distorted interest rates was already raised last year and the Financial Services Commission, the Financial Supervisory Service and the central Bank of Korea should have come up with measures when the CD rate lost its function as a benchmark amid the steep fall of CD issuances.

There remains a strong possibility of claims for damages arising from the distortion of interest rates and nothing will compensate for the confusion and lowered confidence that has shaken the local market.

What matters most is that the Fair Trade Commission should uncover the truth of the alleged collusion case through a thorough investigation. Given that it will take time to develop an alternative index, the financial authorities should make it mandatory for banks to issue CDs and make efforts to promote such transactions as short-term measures. <The Korea Times>

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