* Top four local banks confirm under investigation
* Kookmin, Woori, Shinhan, Hana under probe
* Commision probing suspicion of collusion on high CD rates
* Probe seen aimed at easing household debt burden-analysts (Updates throughout, adds details)
By Joyce Lee and Se Young Lee
SEOUL, July 18 South Korea's top four local commercial banks are being investigated in relation to a widening probe into suspected collusion in setting three-month certificate of deposit rates, officials said Wednesday.
Officials at Kookmin Bank, Woori Bank, Shinhan Bank and Hana Bank confirmed the Fair Trade Commission (FTC) was conducting inspections, but offered no details and would not comment further.
The investigation comes at a time that other governments are looking into suspected manipulation of the Libor benchmark international lending rates by global banks. But analysts in Seoul say the South Korea probe was targeted at local banks and interest rates on loans to heavily leveraged households.
The CD rates are used for a wide range of financial transactions, including home-equity loans to households.
Analysts said CD rates have failed to accurately reflect recent declines in market rates, helping boost the lenders' profitability.
An FTC spokesman said the anti-trust agency, which inspected at least nine local brokerages on Tuesday as part of the probe , does not comment on ongoing investigations.
There has been no indication that authorities are including any foreign company in their investigations.
RATES TO FALL, MARGINS TO SHRINK
Though the CD rate is gradually being phased out as a benchmark, loans linked to the now-illiquid paper still accounted for roughly 34 percent of all outstanding loans by local banks as of the end of September 2011, official data shows. The CD rate is also used as the floating leg of interest-rate swaps in Korea.
"If the investigation finds collusion, there will be significant fines. Even if there was no collusion, it's highly likely that the government's motive behind the investigation is to lower household lending rates by inducing a fall in CD rates," Taurus Investment analyst Andy Lee said in a report.
The CD rate was quoted at a uniform 3.54 percent every day for three months until last week, whereas the yield on the same-maturity treasury bonds shed 19 basis points over the same period.
At the end of the morning session on Wednesday, the CD rate was still quoted 31 basis points higher than the comparable treasury bond yield.
CD RATES TWICE A DAY
Similar to the process for the calculation of the London Interbank Offered Rate, the Korea Financial Investment Association publishes official CD rates twice a day based on quotations submitted by 10 designated brokerages.
Lee at Taurus said banks would inevitably suffer from shrinking margins from their lending linked to the CD rates as a result of the investigation, but added he was maintaining a "neutral" rating on banking shares.
A securities lawyer in Seoul said local banks have shown a pattern of issuing CDs at the same rate, which may be a reason to look into possible collusion.
A spokesperson at the Financial Supervisory Service, the financial market watchdog, said the agency is aware of the FTC's investigation but did not comment further.
The sub-index for banks trading on Seoul's main stock exchange ended down 2.3 percent Wednesday, underperforming the broader market's 1.5 percent decline. (Editing by Choonsik Yoo and Richard Borsuk)