Government 'Hands Off' Amid Soaring Loan Interest Rates... "Intervene" vs "Follow the Market" (Comprehensive)

"The Government Also Bears Responsibility for the Rapid Rise in Loan Interest Rates"

[Asia Economy Reporters Sunmi Park and Hyojin Kim] Public dissatisfaction is surging over loan interest rates rising faster than market interest rates. The government and financial authorities have ordered banks to manage the total household debt volume and, fearing backlash from regulatory intervention, have taken a stance of non-intervention. However, as criticism mounts over the inversion of loan interest rates between secondary financial institutions and banks, as well as excessive interest profit gouging, experts are voicing the need for appropriate government measures.

On the 16th, economic and financial experts emphasized the necessity of taking action regarding the recent rapid surge in loan interest rates at commercial banks. They pointed out that since this phenomenon is caused by the government's excessive total volume regulation, the government bears responsibility and should follow up with more proactive measures.

Professor Junggeun Oh of Konkuk University's Department of Economics diagnosed, "Regulating total loan volume inevitably distorts price functions. Since the 2008 global financial crisis, most advanced financial countries have managed loans through soundness regulations, but in our case, the fundamental problem is that we have moved toward regulating total volume." Professor Sedon Shin, emeritus professor at Sookmyung Women's University’s Department of Economics, also noted, "Banks are raising interest rates to generate profits as their lending operations are restricted by loan regulations," adding, "The government is also responsible for the rapid rise in loan interest rates."

Professor Daejong Kim of Sejong University's Business Administration Department criticized, "The base interest rate has only risen by 0.25 percentage points, but banks are raising loan interest rates to around 5-6% by increasing the spread, which is clearly problematic." He added, "The government needs to thoroughly monitor banks and actively manage so that interest rates rise only in line with the base rate increase. It is unreasonable to impose such strong regulations on real estate by not leaving it to market principles, yet leave interest rates to the market."

On the other hand, there is criticism that government intervention in bank interest rates could cause side effects. Professor Taeyoon Sung of Yonsei University's Department of Economics said, "Loan total volume regulations have given banks greater monopoly power by expanding the interest margin," but added, "However, direct government intervention in interest rates could distort the market, so strengthening competition is an alternative."

Bank Loan Interest Rates Rising Rapidly... Variable-Rate Mortgage Loans Approaching 5%

Bank loan interest rates are rapidly rising amid base rate hikes and a loan regulation atmosphere. Fixed-rate mortgage loan interest rates have already surpassed 5%, and variable-rate mortgage loans at the five major commercial banks are on the verge of entering the 5% range.

Variable rates have risen by 1 percentage point over five months, more than three times the increase in the COFIX rate. The COFIX for October, announced on the 15th, rose by 0.13 percentage points in one month to 1.29%, marking the highest level in 1 year and 8 months. Banks that calculate variable mortgage loan interest rates linked to COFIX applied the increased rates starting that day.

Kookmin Bank’s rates changed from 3.45-4.65% per annum to 3.58-4.78%, Woori Bank from 3.31-3.82% to 3.44-3.95%, and Nonghyup Bank from 3.50-3.80% to 3.63-3.93%. Other banks with different rate calculation methods, such as Shinhan (3.52-4.54%) and Hana (3.538-4.838%), already have upper rates approaching 5%.

The market is flooded with criticism that banks are exploiting the household loan regulation atmosphere to maximize interest profits. A petition titled "Please stop banks from profiteering on additional interest rates under the pretext of managing household loans," posted on the Blue House’s public petition board on the 5th, has garnered over 14,000 supporters.

While interest paid on deposits is minimal, loan interest rates have been raised significantly, causing the interest rate spread between deposits and loans in the banking sector to widen. According to the Bank of Korea, the banking sector’s interest rate spread (based on balance) expanded from 2.05% at the end of December last year to 2.14% at the end of September this year. Following the Bank of Korea’s Monetary Policy Committee’s 0.25 percentage point base rate hike in August and the expected further increase on the 25th, the upward momentum in bank loan interest rates is likely to accelerate, further widening the interest rate spread in the banking sector.

This content was produced with the assistance of AI translation services.