The banking sector was hit with fines totaling 250 billion won by the Fair Trade Commission over allegations of a cartel in government bond bidding. Although the fines came in lower than initially expected, the implicated banks deny the very allegation of a cartel and are expected to file administrative lawsuits against the Korea Fair Trade Commission. However, downward pressure on capital soundness due to the payment of fines has emerged as a burden.
On the 11th, the Korea Fair Trade Commission imposed fines totaling 250.566 billion won on five banks—IBK Industrial Bank of Korea, Korea Development Bank, Hana Bank, NH NongHyup Bank, and KB Kookmin Bank—for violations of the Monopoly Regulation and Fair Trade Act related to a government bond bidding cartel. The IBK Industrial Bank of Korea and the Korea Development Bank, which had a long duration of the cartel and a high number of participating bids, were referred to the Serious Crime Investigation Agency.
The bank with the highest fine was the Industrial Bank of Korea, which received 135.845 billion won. This was followed by the Korea Development Bank at 62.311 billion won, Hana Bank at 25.462 billion won, NH NongHyup Bank at 23.03 billion won, and KB Kookmin Bank at 3.925 billion won. This is a reduced scale compared to initial concerns. This was due to the sales revenue and the fine calculation rate being lower than in the original review report during the fine calculation process. In addition, the financial sector's explanation that they had not gained monetary unjust enrichment was accepted, resulting in a 30% reduction.
Although the fines were reduced from expectations, there is a high possibility of administrative lawsuits as the banking sector denies the very allegation of a cartel. The banks argue that the characteristics of the government bond market must be considered. Government bond primary dealers (PDs) prioritize the underwriting of bonds in the government bond issuance market and play the role of market makers in the distribution market. Therefore, since PDs are in a situation where they underwrite a certain volume, there was no need to form a cartel, and it is explained that winning bid interest rates cannot be determined by information exchange or agreements among some financial institutions because the distribution market itself has a structure of executing orders from various institutional investors.
Some banks also cite as a counter-argument that they exchanged information on so-called "goalpost rates" rather than the actual interest rates participating in bids. The banking sector explains that goalpost rates are used for purposes such as being recognized for bid participation performance, as they are close to the PDs' winning bid rates. However, regarding this, the Korea Fair Trade Commission stated that since the structure involves sequentially adding quantities from those bid at the lowest interest rate until reaching the issuance volume, goalpost rates should also be viewed as part of the bidding interest rate.
The banks have begun legal reviews. Hana Bank stated, "There is a difference in position regarding the determination of legal violations with the Korea Fair Trade Commission," and added, "We plan to review the response direction from multiple angles after confirming the specific basis for judgment through the upcoming decision document." The Industrial Bank of Korea and NH NongHyup Bank conveyed that they would decide on their response direction after carefully reviewing the contents of the decision document.
Separately from this, the financial burden due to fines must also be considered. In particular, following the government bond cartel, fines for incomplete sales of Hong Kong H-Share Index ELS were also finalized, resulting in some banks receiving two sanctions within a week. The Financial Services Commission imposed total fines of 361.9 billion won on seven banks on the 4th regarding incomplete sales of Hong Kong H-Share Index ELS. Among these, three banks—Kookmin, Hana, and NongHyup Bank—were also included in the targets of this government bond cartel sanction. The fines imposed on just these three banks reached 357.3 billion won.
With successive sanctions, attention is focused on banks' establishment of provisions and management of capital ratios. If fines are paid immediately or set as provisions, net income decreases, which acts as a factor pressuring Common Equity Tier 1 (CET1) capital. In the case of ELS-related sanctions, provisions were set conservatively in advance and are expected to be reversed, but it is known that most banks have not set aside provisions in advance regarding the government bond bidding cartel.
In particular, a decline in the CET1 ratio is inevitable for the Industrial Bank of Korea, which faces large fines. As of the end of the third quarter, on a consolidated basis, CET1 capital was 31.836 trillion won, and the CET1 ratio was 11.48%. If the full amount of the fine is recognized as an expense and other conditions such as RWA are assumed to be identical, the CET1 ratio is estimated to drop to approximately 11.43%.
A banking sector official said, "We will reflect provisions considering various possibilities such as the scale of the fines and litigation," and added, "Since the Korea Fair Trade Commission's decision document has not been served yet, which is expected in a month, we plan to decide on our response direction after confirming the specific contents."
in FINANCE
