Korean financial institutions' alleged rigging of their benchmark lending rates has resulted in pushing up household borrowing costs, market sources said Sunday.

Sources who checked the Bank of Korea and financial firms data interest rates that are tied to certificates of deposit (CDs) and used as a basis for household loan rate setting, said the average rates rose to 5.51 percent in May of this year, from 5.46 percent a year earlier.

The rise is in contrast to overall market interest rates that hit a high of 5.98 percent in May of last year, but fell 0.22 percentage points to 5.74 percent a year later. The drop is mainly due to rate cuts for corporate loans that track bank debentures and financial bonds.

The data showed the benefits of the overall interest rate decline in the past year went to the corporate sector, while households, who are struggling with debt of around 850 trillion won (US$745 billion), received no gains.

"The CD rates clearly do not reflect the market rate, with households being forced to pay the extra costs," said Cho Young-moo, a research fellow at the LG Economic Research Institute.

Others such as Jeon Hyo-chan, a senior researcher at the Samsung Economic Research Institute, said because the CD market itself has become so small, it has lost its ability to act as a foundation for setting rates.

As of end-March, loans that are tied to CDs made up roughly 30 percent of the all won-based lending market, or 324 trillion won of the 1,080 trillion total, although the domestic CD market stood at just 2.4 trillion won.

"Setting interest rates based on CDs is convenient, but there is a need to find a replacement system," the researcher said.

Related to the outcry, the country's financial regulators said they have been trying to get local lenders and brokerage houses to devise a new system to set "fair" rates for household loans but have received little cooperation so far.

Such actions have led to the country's Fair Trade Commission (FTC) checking into the current rate-setting mechanism at financial institutions.

The antitrust watchdog is checking the possibility of rate manipulation by financial institutions to profit at the expense of borrowers.
The government, meanwhile, said that it will take "appropriate measures" based on the outcome of the probe underway.

Seoul's actions come as similar investigations are under way in the United States and Britain into several banks, including Barclays, for their alleged involvement in rigging the London Interbank Offered Rate, or Libor, a benchmark interest rate in the global financial market. (Yonhap)