July 19, 2012 / 2:00 AM / 6 years ago

South Korea widens rate-fixing probe, bank shares fall

SEOUL (Reuters) - South Korea’s anti-trust agency, probing suspected collusion in setting three-month rates, has inspected offices of the local unit of Standard Chartered PLC (STAN.L) and three local banks as part of the investigation, the four banks said on Thursday.

Media officials at Standard Chartered Bank Korea, Busan Bank, Daegu Bank and Nonghyup Bank said officials from the Fair Trade Commission (FTC) conducted inspections of their offices on Wednesday, when four bigger local banks already confirmed they were under investigation.

The banks gave no further details.

An FTC spokesman said on Thursday the agency had investigated 9 banks and 10 brokerages since Tuesday over suspected collusion in quoting the official certificate of deposit (CD) rates substantially high even when other market rates fell. He did not identify the firms by name.

Officials at the country’s top four local commercial banks — Kookmin Bank, Woori Bank, Shinhan Bank and Hana Bank — said on Wednesday that they were part of the FTC’s widening probe into how certificate of deposit rates were quoted. The identity of the ninth bank being investigated by the FTC is not known.

Shares of banks and their holding companies slid on concerns they could face fines or at least shrinking profit margins as a result of the investigations, if not heavier penalties on their overall operations, analysts said.

The sub-index for banks and their holding companies .KRXBANK trading on Seoul’s main stock exchange fell 2.2 percent as of 11.34 p.m. EDT on Wednesday, in stark contrast to the broader market’s .KS11 1.9 percent rise.

The CD rate has been South Korea’s benchmark money market rate used in a massive amount of financial transactions ranging from mortgage loans to financial derivatives but issuance of the paper has declined sharply in recent years.

The government has encouraged lenders to use alternatives such as the Korean inter-bank offered rate, or KORIBOR, and the cost of funds index, or COFIX, but much of the lending is still made on the basis of the CD rate.

The CD rate has failed to reflect changing market interest rates for a long time, for instance staying at a uniform 3.54 percent for three months even as the same-maturity treasury bond yield fell 19 basis points.

While the probe comes amid similar investigations in other major economies over the suspected manipulation of the Libor international benchmark, analysts in Seoul suspect the government wants to force banks to cut lending rates in order to help heavily-leveraged households.

Though the CD rate is gradually being phased out as a benchmark, loans linked to the rate still accounted for roughly 34 percent of all outstanding loans by local banks as of the end of September 2011, official data showed.

The CD rate is also used as the floating leg of interest-rate swaps in Korea and other derivative products.

Later on Thursday, officials from the financial regulators as well as the finance ministry and the Bank of Korea, the central bank, will hold a meeting to discuss how to make the CD market more transparent and develop an alternative to it.

The Korea Financial Investment Association publishes official CD rates twice a day based on quotations submitted by 10 designated brokerages. The process is similar to the one used to calculate the London Interbank Offered Rate.

Editing by Choonsik Yoo and Jacqueline Wong

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