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A critical dereliction of duty

Published: 22 Jul. 2012, 18:21

As the repercussions of the London interbank offered rate (Libor) scandal spreads across the globe, local financial authorities are also in hot water amid simmering suspicion of having manipulated interest rates on certificates of deposit (CD), which serve as a benchmark for various forms of domestic loans. The three-month CD rates have served as a benchmark for more mortgages and loans, as well as derivative products, than was initially known, ramping up the level of potential damage for borrowers as a result of collusive rate-setting.

If the authorities can prove the rates were fixed unfairly, financial institutions will likely face a barrage of class-action lawsuits on top of state fines. Even if punishments are not handed down, however, the negative stigma alone would draw consumer law suits like moths to a flame. As seen with the fallout from the Libor-rigging case in Britain and the United States, such scandals can prove devastating.

Korea’s financial authorities will also have to answer for their lax oversight and slow response. The Financial Services Commission (FSC), Financial Supervisory Service and Bank of Korea are all responsible for ensuring stability in the money market. They should have responded to the case as soon as rumors first hit the market. But instead of immediately launching an investigation, they showed their reluctance to be held accountable, with each saying the case was outside their jurisdiction.

Most rate-rigging scandals stem from poor financial oversight. Suspicion over the CD rates first arose last year, but authorities kept to the sidelines even as CD trades fell sharply and the rate lost its role as a yardstick. The financial authorities formed a task force to create an alternative rate to guide the market, but no specific actions have followed, effectively widening loopholes and the room for industry players to keep manipulating the rate.

Authorities kept to the sidelines even as complaints mounted and the borrowing rates did not drop with the market, as they should have. Even when the JoongAng Ilbo first reported the case and the Fair Trade Commission launched a probe, the financial authorities dilly-dallied. FSC Chairman Kim Seok-dong even criticized the anti-trust agency for taking action out of sync with other supervisory authorities. The case underscores serious flaws in the financial oversight system. A new rate system is urgently needed to minimize unrest.