- A Korean Libor Scandal?
- By Hong In-pyo, Editorial Writer
After the Duke of Wellington beat the forces of Napoleon in 1815, London produced an outstanding investor of Rothschild and established itself as the financial center of Europe.
It may be no wonder that Libor, an interest rate at which banks borrow money from other banks in the London interbank market, sets the interest rate standard in the global financial market.
Libor is fixed on a daily basis by the British Banker's Association, collecting interest rate reports from top 20 or so banks in London and calculating an average from the data after throwing out top and bottom 25 percents.
FTC's probe into the possible CD rate manipulation causes tension in Yeouido's financial street, where securities firms are clustered together. From Kyunghyang Shinmun Photo Archive
Since it was found out that Barclays, one of the top 3 banks in the country, had manipulated the Libor interest rate, there was huge aftermath. Around the global financial crisis in 2008, a Barclays employee responsible for Libor rate submission reported lower rates, conspiring with another employee responsible for bonds.
At the time, the interest rate was hiking up under the bad market environment and most of the investors forecasted the rate would go up: the Barclays employee did the opposite and invested into the derivatives trading to gain a huge profit. And they had help from other banks while doing this. Talk about letting the fox guard the hen house.
In Korea, we have CD (Certificate of Deposit) rate to form the basis for loan interest rates. CD rate is published by 7 domestic banks: it is announced daily after 10 securities firms submit rates and the Korea Financial Investment Association (KOFIA) averages them.
The problem is that the recent 3-month CD rate has gone down only very slightly, compared to bank debenture or currency stabilization bond. This indicates an unfair burden to borrowers who pay interest linked to the CD rate.
The Fair Trade Commission (FTC) is investigating the 10 securities firms that daily report CD rates and another 4 banks that publish CD rates.
These financial institutions strongly deny the accusation: securities firms claim that there is no practical advantage in manipulating the rate; banks claim that the rate is determined by the securities firm.
We do not know what the FTC will find out through this investigation, but this probing has its own merits in that we can closely look at the management of CD rate. It might be a good idea to find some other alternatives than CD rate for loan interest rate.
Turning a blind eye just because it has been a general practice will be the neglect of duty on the part of the government.