The Fair Trade Commission imposed the largest fines on record over bid-rigging in Korea Treasury Bond auctions. The brokerages and banks targeted have begun responding. Brokerages face a hit to earnings, and banks face pressure on their capital ratios. Most are expected to fight the fines in administrative lawsuits. Some have also been named in criminal complaints, exposing them to investigation risk.
According to the financial industry on the 11th, the fines the KFTC imposed on 15 primary dealers (PDs) of Korea Treasury Bonds total 1.6266 trillion won. Ten brokerages account for 1.376 trillion won, and five banks account for 250.5 billion won. The KFTC decided to file complaints with the Serious Crimes Investigation Agency against seven firms: Mirae Asset Securities, NH Investment & Securities, KB Securities, Kiwoom Securities, Korea Investment & Securities, IBK Industrial Bank of Korea and KDB Korea Development Bank.
Among brokerages, KB Securities bears the heaviest burden. Its fine is 332.2 billion won, more than 40% of its first-half net profit of 796.3 billion won this year. Measured against first-half net profit, the fine is 29% for Daishin Securities. For Shinhan Investment Corp. and NH Investment & Securities it is around 25%. For Mirae Asset Securities, Korea Investment & Securities and Kiwoom Securities, which posted net profit in the trillions of won, it is only 2% to 7%. The industry expects soundness indicators such as the net capital ratio (NCR) to remain above regulatory requirements even after the fines are reflected.
Among banks, the largest amount is IBK Industrial Bank of Korea's 135.8 billion won. It is followed by KDB Korea Development Bank at 62.3 billion won, Hana Bank at 25.5 billion won, NH Nonghyup Bank at 23 billion won and KB Kookmin Bank at 3.9 billion won. Compared with the examiner's report stage, the related sales and the base rate for imposing the fines were lowered. The argument that no undue gains were made was also accepted, resulting in a 30% reduction. Even so, the burden remains heavy.
Banks must also look after their capital ratios. Most banks are known not to have set aside provisions in advance. IBK's common equity Tier 1 (CET1) ratio was 11.48% at the end of the third quarter. If the entire fine is booked as an expense, it is estimated to fall to about 11.43%. A banking industry official said, "We will reflect provisions after considering various possibilities, including the size of the fine and lawsuits."
Kookmin, Hana and Nonghyup banks were sanctioned twice within a week. On the 4th, the Financial Services Commission imposed fines totaling 361.9 billion won on seven banks for mis-selling Hong Kong H-share index ELS (equity-linked securities). Of this, 357.3 billion won went to the three banks.
The financial industry does not admit to the bid-rigging itself. The brokerage industry argues that it was unlawful for the KFTC to use the winning bid amount, rather than operating revenue, as related sales. It explains that PDs act as intermediaries who buy Treasury bonds and sell them to the market within a short period. Their logic is that it is hard to make a profit from underwriting and selling alone.
The banks argue that the bidding is conducted by placing orders on behalf of multiple institutions. They say that some financial firms sharing information cannot determine the winning bid rate. They stress that PDs are obliged to underwrite a certain volume, so there was no reason to collude. They also countered that the information exchanged was not the actual bid rate but a 'goalpost rate.' The KFTC judged that the goalpost rate, too, should be regarded as a bid rate. A brokerage industry official said, "It is hard to see this as collusion, and the basis for calculating the fines is not reasonable either, so we see a high chance of winning in court in an administrative lawsuit."
The criminal complaints are a separate burden. Unlike fines, complaints cannot be challenged in an administrative lawsuit. If an investigation begins, executives must respond in person. Another brokerage industry official said, "Because we do not think this was collusion, the mood is to take the criminal proceedings in stride." Hana Bank said, "We will confirm the specific grounds for the decision through the written resolution later and review the direction of our response from various angles."