New short-term Cost of Funds Index expected to shave 0.1 percentage point off interest rates


Financial authorities are expected to announce a short-term Cost of Funds Index as the new benchmark interest rate for loans next month, which would lower the key lending rate by up to 0.1 percentage point.

The government is overhauling the rate-setting system because a significant drop in issuances of certificates of deposit has made their rates of interest increasingly unrepresentative of general market rates. The nation’s antitrust watchdog is investigating local banks and brokerage houses for allegedly manipulating the CD rates.

The current COFIX, adopted in 2010, is based on the average funding costs of nine commercial banks at an average maturity of nine months and is announced monthly.

A task force of officials from the Financial Services Commission, the Finance Ministry, the Bank of Korea and the Financial Supervisory Service as well as nongovernmental experts has decided to set the average maturity of funds used to calculate the short-term COFIX at three months.

The shortened maturity is likely to lower the interest rate and better represent market reality.

Financial authorities are considering announcing the new benchmark rate once a week and will allow borrowers to shift the rate-setting standard for their loans to short-term COFIX.

An FSC official said the new benchmark rate will be set at a level similar to the CD rate. Last month’s average CD rate was 3.54 percent, 0.08 percentage point lower than the COFIX based on fresh funding ― 3.62 percent.

A nongovernmental expert in the task force said the short-term COFIX can be up to 0.1 percentage point lower than the current benchmark rate.

“The task force agrees that the more frequently the rate is announced, the better, but is weighing its options in consideration of the banks’ workload,” a member of the task force said.

The Korea Federation of Banks will calculate and announce the short-term COFIX, according to a senior FSC official. It has not been determined yet whether it will be announced every week or every other week.

Local banks are taking steps to prepare measures that allow existing borrowers to have the interest rates on their loans tied to the short-term COFIX.

“A lot of borrowers shifted from loans tied to the CD rate to COFIX-tied loans in 2010,” a local bank official said.

“Many will this time if the short-term COFIX offers a clear interest rate advantage.”

Currently, some 324 trillion won ($284 billion) in bank loans are tied to the CD rate.

Since the borrowing spreads on COFIX are smaller than those on CDs, lending rates tied to the short-term COFIX could be lower than the borrowing costs tied to the CD rate, according to members of the task force.

But as the short-term COFIX fluctuates more frequently, the lending rate could rise more sharply when it is in an upward phase.

By Kim So-hyun (sophie@heraldcorp.com)