"KFTC Nears Decision on 'LTV Collusion to Avoid Competition' by Big Four Banks [Why&Next]"

Up to 20% Fine of Related Sales Possible
If Anticompetitive Effects Are Significant

The Korea Fair Trade Commission (KFTC) is set to announce its decision soon regarding the re-examination of alleged collusion over loan-to-value (LTV) ratios by the country's four major commercial banks. The competition authority has determined that these banks colluded by sharing collateral loan transaction conditions, thereby preventing favorable loan terms for customers. As a result, market competition to attract borrowers disappeared, and consumer welfare was harmed. During the re-examination process, the volume of sales related to the alleged violations has increased, and the scale of potential fines is also expected to rise.

KFTC Presents New Evidence for Allegations

According to industry sources on April 23, the KFTC submitted a review report to KB Kookmin, Shinhan, Hana, and Woori banks on April 18, providing new evidence to substantiate the main allegations. A government official stated, "While no entirely new claims were raised compared to the first review report, new evidence was presented to prove the anticompetitive effects of the collusive conduct." The KFTC is said to have closely examined the entire corporate lending sector during the re-examination to strengthen its case for anticompetitive effects. Under the Monopoly Regulation and Fair Trade Act, if the impact of collusion on competition is significant and the evidence is clear, fines of up to 20% of the related sales can be imposed.

Although the specific amount of fines has not been disclosed, the related sales amount, which serves as the basis for calculating fines, was raised compared to the first review report. KFTC fines are calculated by multiplying the related sales amount by the imposition rate determined by the seriousness of the violation (Article 40 of the Monopoly Regulation and Fair Trade Act). As the related sales amount increases, the total fine also increases. Industry observers are predicting the possibility of fines reaching the trillion-won range. The KFTC plans to collect written opinions from the banks on this review report and, after reviewing the submitted opinions, will convene a plenary session to decide on the final level of sanctions as early as June.

The KFTC believes that these banks exchanged LTV data to avoid competition and intentionally kept their own LTVs low. The LTV ratio represents the maximum amount banks can lend against real estate collateral. Banks set different LTVs for apartments, land, factories, and other real estate by city, county, and district nationwide. The KFTC claims that banks exchanged this LTV information and artificially aligned their ratios. According to the KFTC's investigation, the banks exchanged more than 22,500 pieces of LTV data by property type and land category over several years.

The key issue is whether such information exchange led to a restriction of competition. Higher LTVs allow borrowers to access larger loans, making high LTVs attractive to borrowers and a point of competition among banks. Lower LTVs reduce banks' risk of loss even if real estate prices fall, making low LTVs absolutely advantageous for banks. The KFTC views the LTV level as "competition-sensitive information" that affects loan conditions such as loan volume and interest rates. This means differences in LTV levels could significantly impact competition for customer acquisition. The KFTC's perspective is that collusion to lower LTVs eliminated the need for banks to compete by raising LTVs, thereby restricting competition.

Banks Deny All Four Elements of Illegality, Including Competition-Sensitive Information

The banks are completely denying the allegations. They are reportedly disputing all four elements of illegality: the exchange of competition-sensitive information, the existence of an agreement to exchange information, the presence of substantial anticompetitive effects, and the absence of efficiency gains. The banks are expected to argue that "information exchange did occur, but it was conducted for risk management purposes regarding collateral," and that "no undue benefit was gained from information sharing" in response to the KFTC's investigation.

An official from a major domestic law firm commented, "Recognizing a lower value for collateral entrusted by customers serves as an incentive for banks to strengthen their bargaining position." He added, "The banks' argument that LTV information sharing was for risk management purposes could also be interpreted as meaning that the risk was offset at the expense of consumers, who ultimately bear the interest costs." However, he noted, "While it is intuitively clear that loan volumes would increase, the same cannot be said for loan interest rates, so there is room for dispute over the evidence. The final outcome, including the amount of fines, may depend on how convincingly the KFTC presents evidence during the re-examination process."