S. Korea Probes Banks' Suspected Rate Rigging

South Korea's anti-trust watchdog launched a probe Wednesday into major local banks suspected of colluding to fix interest rates of certificates of deposit (CD), bank officials said.

The probe comes after news in Britain that Barclays and, allegedly, other banks manipulated the London interbank offered rate in an attempt to mask their financial problems, and in some cases to profit.

They said the Fair Trade Commission sent investigators to the headquarters of Kookmin, Woori, Shinhan and Hana banks, a day after it launched a probe into brokerage firms.

Brokerages, which report CD rates twice a day, are suspected of colluding to fix rates on 91-day certificates.

A CD is a way of saving with a specified fixed interest rate and maturity sold by banks and circulated in the secondary market by brokerages. The three-month CD rate is used as a benchmark in setting lending rates for financial products.

CD rates remained relatively higher than other market rates, although the Bank of Korea unexpectedly cut its policy rate to 3.0 percent last week.

Banks benefit from a high level of CD rates as a bulk of household loans are tied to the rates.

Financial officials say household debts, which stood at 857 trillion won ($752 billion) at the end of March, pose a downside risk to the economy amid a global economic slowdown and a sluggish domestic property market.

Many South Korean households rely on debts to buy a house and pay only the interest every month, paying back the principal when they sell the house.

But a weak property market often means they cannot make enough to pay back the principal when the loan is due.

Moody's Investors Service said last month household loans have grown "at an alarming rate" and are vulnerable to financial shocks arising from the global economic downturn.

More people are borrowing just to meet living expenses and there is an increase in borrowers from the older age group and lower income group, it said.