SEOUL, South Korea - South Korea's financial regulator said Wednesday that it planned to introduce a new short-term reference rate for bank lending as part of efforts to better reflect banks' funding costs in the lending rates.

Short-term COFIX, which stands for Cost of Funds Index, will be adopted as a new reference rate for bank lending, according to the Financial Services Commission (FSC).

The new index will be calculated based on 3-month funding costs data provided by 9 major domestic banks. The Korea Federation of Banks (KFB) will announce the short-term rate every Wednesday starting the first Wednesday of November.

The COFIX was first introduced in January 2010, but the index with a maturity of around 10 months has been announced just once a month, raising worries that it may not serve as a timely short- term reference rate for bank lending due to scarce disclosure.

The introduction of the new short-term rate came after the country's anti-trust watchdog launched its probe into local brokerages and banks in mid-July on suspicion that securities firms and lenders colluded on fixing rates for 91-day certificate of deposit (CD).

The CD rate, which is widely used as a benchmark in setting lending rates, stayed at a high level despite the drop in other marketing interest rates, adding debt-servicing burden to households. High level of CD rates tends to benefit banks as a large portion of bank loans consists of CD rate-linked loans.

Loans linked to the CD rate accounted for 37 percent of the total lending to households as of the end of March, but the proportion sharply declined compared with 72.1 percent for December 2009 when the COFIX was not adopted.

The COFIX-linked loans to households made up 34.2 percent of total household loans as of end-March, sharply up from 10.2 percent for September 2010. The financial regulator forecast that the short-term COFIX will act as a benchmark for short-term credit loans to households by replacing the CD rate.

While inducing the COFIX to be used more as a benchmark for lending rates, the FSC planned to maintain the CD rate as a benchmark in the short-term funding market. The CD rate has been widely used as a benchmark for floating rates of financial products such as interest rate swap (IRS) and floating rate note ( FRN).

"The COFIX rate has been induced to be used as a benchmark for lending rates. The short-term COFIX will be used as a short-term benchmark. Using the CD rate in the short-term funding market will be inevitable for the time being. We will not abolish the CD rate. Instead, we will revitalize the CD issuance," Koh Seung-beom, director general of FSC's financial policy bureau, told reporters at a briefing.

CD issuance by local banks continued to reduce as lenders were reluctant to sell the securities to meet the loan-to-deposit regulation. The financial regulator required banks to lower the ratio of loans to deposits below 100 percent by the end of 2013. CDs were classified as wholesale funding, not as deposits.

Outstanding CDs issued to local brokerages stood merely at 0.3 trillion won ($264 million) as of Tuesday, sharply down from 2.4 trillion won at the end of June. The issuance continued to decline from 20 trillion won as of the end of 2008 to 3.2 trillion won at the end of 2011.

The FSC planned to maintain the CD issuance at around 2 trillion won by encouraging banks with much CD rate-linked loans to issue CDs to securities firms.