Image caption Many household purchases in South Korea are linked to certificates of deposit

A South Korea financial regulator has started an investigation into alleged interest rate rigging by some of the country's banks.

The Fair Trade Commission is looking at possible collusion over setting certificates of deposit (CD), used as a benchmark to set lending rates.

Kookmin, Shinhan, Woori, and Hana are the banks being investigated.

It follows the Libor-rigging scandal involving Barclays and possibly several other banks.

Brokerage firms, which report CD rates twice a day, are also under suspicion. A CD is a way of saving with a fixed interest rate and maturity sold by banks and circulated in the secondary market by brokerages.

Financial firms benefit from a high CD rates as many household loans are linked to them. They are frequently used to help South Korean's buy homes.

As with the manipulation of the Libor inter-bank rate in the UK, the possible rigging of CD can help flatter companies' financial health.

Fine threat

The indebtedness of South Koreans has become a particular worry to the authorities as the economy slows.

In June, ratings agency Moody's said household loans had grown "at an alarming rate" and were vulnerable to financial shocks arising from the global economic downturn.

"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," said Taurus Investment analyst Andy Lee said in a research report.

Shares in all four banks being investigated fell by more than 2%, with Hana down 2.7%. The banks confirmed they were under suspicion, but declined to comment further.

The investigation comes after a series of scandals to hit the banking industry, including a £290m fine for Barclays over Libor-fixing, severe criticism of HSBC over money laundering, and surprise losses at JP Morgan which have triggered a US federal inquiry.

The Reuters news agency reported that there were no indications that any foreign-based financial firms had been implicated in the South Korean investigation.