How to enhance reliability of COFIX?

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Hello, everyone! This is Dohee. I’m back with an issue being talked a lot these days! Among lots of financial news and issues, the Cost of Funds Index (COFIX) is the one attracting lots of attention.

Some of you may already know about COFIX (Cost of Funds Index). The COFIX is a new complementary measure in the benchmark rate system, for the purpose of replacing Certificate of Deposit (CD) rates in loan markets. Since the CD rate caused some concerns related to its reliability, COFIX was introduced by the FSC. In this regard, there is a pervious blog post that you can refer to. Please click the following link, if you want to know more details about the introduction of COFIX. https://financialservicescommission.wordpress.com/2012/09/10/the-key-improvements-of-the-short-term-benchmark-rate-system/

 

source: FSC

 

 

On 22nd of October, the Financial Policy Bureau at FSC held a press briefing about ‘measures to enhance reliability of COFIX’. The photo above is the one taken during the briefing, and I would like to share it with you! The Director-General pointed out a few problems related to COFIX.

First, there is no guideline verifying the COFIX rate of each bank, which makes it difficult to compare COFIX rates between banks. Moreover, there is not yet a systemic management to operate, amend and monitor COFIX rate. Rather than having a coherent management system, the Korean Federation of Banks takes one-to-one stance with each bank when there are major issues to be dealt with. However, above all, a real problem happened. A wrong rate of COFIX was announced due to an error in tying the rate. This typo caused confusion in financial system, as questioning the reliability of COFIX.

 

 

However, this does not mean that COFIX is no longer used in the market. The COFIX will be widely used, once FSC will address the current problems by implementing measures to enhance reliability of COFIX. Let’s find out what are designed so far.

First of all, a preliminary verification should be strengthened between banks and the Korean Federation of Banks. Considering that there was no standard guideline for verifying COFIX until now, a specific internal control system is urgently in need. A control system will reflect the regulatory requirement to be followed by each bank, which helps minimize errors and differences between banks.

Second, the Korea Federation of banks will ask banks to submit basic information of COFIX and details of calculation. In other words, information about COFIX will be put through a process of scrutiny, before the rate of COFIX is announced. With a careful examination by the Korean Federation of Banks, probable errors can be reduced.

Furthermore, FSC has a plan for implementing a ‘Management Committee for COFIX’. The committee will be composed of professionals from various sectors, including scholars, accountants, lawyers, and officers from Financial Supervisory Services. This committee will suggest recommendations and provide consultations.

 

I addressed FSC’s measures to enhance reliability on COFIX. With enhanced reliability of COFIX, banks’ costs of funding will be effectively reflected in the market.

Here is the URL for those of you looking for more about this issue. http://www.fsc.go.kr/info/ntc_bref_view.jsp?bbsid=BBS0029&page=1&sch1=&sword=&r_url=&menu=7210200&no=27482 If you have further questions, please feel free to email me or leave your comment here 😀

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