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South Korea’s Libor scandal

By Sheyna Steiner · Bankrate.com
Wednesday, August 8, 2012
Posted: 2 pm ET

In the hailstorm of recent banking scandals, there's one that doesn't involve England. Instead, it's set in South Korea and involves collusion between top banks to set a key lending rate. There, the rate for loans to businesses and consumers is based on three-month CD rates, Reuters reported in July in the story, "S. Korea expands rate-fixing probe to top banks."

From the story:

Though the CD rate is gradually being phased out as a benchmark, loans linked to the now-illiquid paper still accounted for roughly 34 percent of all outstanding loans by local banks as of the end of September 2011, official data shows. The CD rate is also used as the floating leg of interest-rate swaps in Korea.

According to a July 20 story on the Financial Times website, "S Korea: rate fixing in the spotlight" the CD rates are reported by brokerages twice daily to set the benchmark lending rate.

Commercial banks issue the short-term funding instruments, which are then distributed to investors by brokerages. Ten of the brokerages report the yields on these instruments twice a day, and the average figure is used to calculate the interest rates on loans paid by businesses and consumers throughout the country.

Despite the decline of other rates, CD rates remained relatively steady, which hinted to regulators that the fix was in.

There's not a lot that can be extrapolated to domestic CDs, but it's pretty clear that no matter where banks are located, basing benchmark loan rates off of manually reported data is a pretty bad idea.

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