Time of reckoning for watchdog over CD rates

The nation’s top financial regulatory agency can no longer dodge its responsibility over the controversy emanating from the alleged rigging of certificates of deposit rates.

The chief of the Fair Trade Commission (FTC) should be grilled over the matter and should resign for his failure to properly oversee and weed out such malpractice, leading Saenuri Party lawmaker Kim Jung-hoon said yesterday on a local radio show.

“People should be strictly held to account as [intentionally rigging the CD rates] is the same as exploiting debt-ridden members of the middle- and lower-income class,” Kim said. “If this controversy proves true, not only should [the head of the financial regulators] resign, but criminal charges should also be considered.”

Last week, the FTC unexpectedly raided 10 brokerages and nine banks that are suspected of fixing the CD rates. The investigation also generated questions about whether the financial regulators had any ulterior motives, and shone a light on a possible lack of coordination among the various bodies.

The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) failed to hide their surprise, especially when local media reported that one of the raided financial companies had confessed to colluding to fix the rates.

The FTC declined to confirm the veracity of the media report.

“There are rumors that the financial regulators intentionally looked the other way when CD rates were found to have remained more or less stable, even though other rates were being lowered in order to control mounting household debt,” said an industry official.

Due to the government’s loose monetary policy, which has focused on economic expansion, household debts in the last couple of years have grown past 900 trillion won ($784 billion).

Fearing that a financial market crisis may stem from the colossal household debt being accrued, the regulators have been pressing the companies, particularly banks, to restrain from handing out fresh loans.

If the CD rates are found to have been fixed, the financial regulators are likely to take more flak for creating an environment in which such illicit acts could take place.

When questioned over the matter at the National Assembly last week, FSC Chairman Kim Seok-dong said he thought it unlikely the financial companies had conspired over the matter.

“Financial companies cannot make big enough profits from manipulating the market index [to make it worth their while],” Kim said. “I don’t think the rates were really fixed.”

He also noted that the interest rates are decided freely by the market, rather than being controlled by the government.

FSS President Kwon Hyouk-se made similar comments last week, but backtracked yesterday, when the agency issued a statement insisting that his earlier comments had been misinterpreted by the media.

“Regarding the FTC’s investigation into the CD rates, the FSS president has repeatedly said there has been no acknowledgement from securities firms or banks in terms of them confessing to colluding to rig the CD rates,” the statement stated. The FTC’s probe is expected to last for up to a year.

In a separate finding yesterday, the Board of Audit and Inspection (BAI) argued that the financial regulators failed to oversee problems relating to the interest on loans.

It claimed that between 2009 and the end of last year, banks manipulated the interest rates to cover their losses resulting from a looser monetary policy by the central bank.

Hoping to stimulate the economy, the government lowered the benchmark borrowing rate to an historic low of 2 percent in February 2009. Banks reportedly profited to the tune of 1 trillion won by raising the spread on existing or extended loans.

The BAI in a statement said the FSS should systematically inspect and supervise commercial banks from managing loan interest based on rules of fair play and reasonable adjustments. It added that the FSS failed to do so under the principle that the interest is decided by market forces.

“In reviewing the oversight of financial companies including banks and insurance, it turned out that there have been cases where the financial regulators fell short,” a BAI employee said. “The lack of supervision has effectively increased the interest burden on households and companies.”

The controversy over the CD rate comes at a sensitive time amid slowing economic growth at home and a contracting global market.

As of the end of March, bank loans linked to CD rates amounted to 324 trillion won. The interest rate on 91-day CDs is used as a benchmark for various loans as well as derivatives.

By Lee Ho-jeong [ojlee82@joongang.co.kr]