SKorean banks in hot seat as rate-rigging probed

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By YOUKYUNG LEE, Associated Press

SEOUL, South Korea (AP) — Revelations that South Korean banks kept interest rates artificially high for years and used questionable criteria for determining how much to charge borrowers have stoked public anger as ordinary South Koreans struggle with high levels of debt.

A report by South Korea's state auditor that households and companies had been burdened with unnecessarily high interest payments is the latest in a series of blows to the reputation of the country's banks and its financial regulator, which the auditor said failed to closely scrutinize lenders.

It echoes the rate fixing scandal that erupted in the U.K. in which major banks are alleged to have manipulated a global benchmark lending rate to boost profits from their own trading of financial products linked to interest rates. That has sparked investigations around the world into the setting of other benchmark lending rates.

Last week, South Korea's Fair Trade Commission announced it was investigating nine banks and 10 stock brokerages over possible collusion in the setting of interest rates. The 91-day credit of deposit rate, which serves as a benchmark rate for over 40 percent of outstanding loans to households, had been kept artificially high even as other interest rates went down after the 2008 financial crisis, according to consumer groups and market experts. The cost to consumers and companies may run to billions of dollars.

The auditor's report released Tuesday said the practices of banks contributed in part to an increase in the banking industry's interest income of 20.4 trillion won ($18 billion) between October of 2008 and December of 2011. Last year, South Korea's banking industry had its biggest profits in four years.

Officials at the Korea Financial Investment Association, which publishes official CD rates, and major lenders being probed by the FTC including Woori and Kookmin, have denied the rate-rigging allegations.

The revelations have been irksome for the government which has been trying to get households to spend more as a way of countering an economic slowdown stemming from weaker overseas demand for South Korea's exports. Consumer debt is already high and experts say growth in lending has been outpacing growth in incomes and the country's economy. Outstanding household debt totaled 912 trillion won ($793 billion) at the end of 2011.

South Koreans were also angered to learn that some banks ignored credit history when deciding what interest rate a borrower should pay.

According to the auditor, Shinhan Bank, South Korea's third-largest bank, set interest rates based on a borrower's education, a practice that led to unfairly high interest rates on loans given to high-school graduates. Industry leader Kookmin Bank shortened lending periods without seeking consent from creditors. The two banks issued apologies and said they have terminated these practices. But that has not eased public anger in South Korea where the auditor's report and FTC probe have been front page news.

"I'm getting numerous calls from infuriated consumers," said Cho Yeon-haeng who heads the Korea Finance Consumer Federation. "Some even urged us to lodge a lawsuit immediately."

But the group plans to wait for the outcome of the FTC investigation, which could take at least three months to wrap up, before launching a class action to seek compensation.

In testimony to the National Assembly, the FTC's chairman said if there was a rate-rigging, banks could have pocketed 300 billion won ($261 million) of extra profit for every 0.1 percentage point increase in the CD rate.

Industry insiders and experts acknowledge it is not difficult for a few banks to influence the CD rates under the current system.

The CD market became less liquid after the 2008 financial crisis, creating conditions that would allow banks to have greater influence than market forces over the daily setting of the rate. The rate is set based on quotations submitted by 10 brokerages, which evaluate rates of CD issued by seven commercial banks.

"The CD rate has a great impact on banks' bottom line," said Cho Young-moo, a senior researcher at LG Economic Research Institute. "The problem is, under the current system, banks can wield significant power in determining the CD rates."

The CD rate was unchanged for three months since April 9, hovering above the rate for the three year South Korean government bond. But the rate began inching down after reports surfaced about the FTC investigation, dropping 0.1 percentage point every day between July 17 and Monday.

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