[Banks Without Interest Play] Domestic Banks Raise Loan Rates Sharply as Base Rate Increases

Loan-Deposit Interest Rate Gap 2.07%... Largest in 11 Years
If Base Rate Rises, 'Loan Interest Rate' Increases Quickly
If Lowered, 'Loan Interest Rate' Decreases Slowly
Loan Volume Regulation and Abundant Liquidity Are Causes
Interest Rate Hike Period Makes Financial Consumers Suffer

[Asia Economy Reporter Song Seung-seop] It has been revealed that the ‘easy money’ business practices of domestic banks, relying on the interest rate spread between deposits and loans, have further intensified. The interest rate spread between deposits and loans at banks has widened the most in 11 years. This is due to banks raising loan interest rates while tightening credit screening, engaging in bold profit-seeking. Despite the national economy reaching the ranks of advanced countries, domestic financial firms are still criticized for focusing on interest rate games.

On the 17th, Asia Economy analyzed the trend of the Bank of Korea’s base rate changes over 22 years and found that from 2000 to this day, the base rate has been changed a total of 44 times. The overall trend of rate hikes and cuts has shifted 8 times. Deposit and loan interest rates, which are influenced by the base rate, tended to move more favorably to financial institutions as the timing approached the present.

From May 28 last year, when the base rate hit a historic low of 0.50%, until the 0.25 percentage point hike in August, the deposit-loan interest rate spread was 2.07%. This is the largest in 11 years. The increase in loan interest rates was more than three times steeper than that of deposit interest rates. The newly issued household loan interest rate in September was 3.18%, rising 0.37 percentage points over 15 months. In contrast, the interest rate on savings deposits increased by only 0.10 percentage points to 1.17%.

During periods of base rate cuts, loan interest rates were lowered slowly, while deposit interest rates were reduced quickly. On November 30, 2018, the Bank of Korea cut the base rate from 1.75% by a total of 1.25 percentage points over four times. During this period, loan and deposit interest rates adjusted from 3.63% to 2.81% and 1.96% to 1.07%, respectively. Loan interest rates fell by 0.82 percentage points, less than the base rate change. This was even lower than the deposit interest rate cut of 0.89 percentage points. This is why domestic commercial banks are criticized for making huge profits through interest rate manipulation.

'Maximizing Interest Income' Strategy Using Regulation and Liquidity as Excuses

This contrasts with the trend of deposit and loan interest rates from 2000 to the early 2010s. From October 2000 to November 2004, while the base rate dropped by 2 percentage points, loan interest rates (4.27 percentage points) decreased faster than deposit interest rates (3.46 percentage points). Later, when rates rose again, deposit interest rates (2.49 percentage points) increased faster than loan interest rates (1.78 percentage points), narrowing the deposit-loan interest rate spread.

The prevailing analysis is that the focus on maximizing deposit-loan margins is due to government and financial authorities’ total household loan volume regulations and abundant liquidity. Banks are using interest rate hikes as a means to curb loan growth. Also, from the banks’ perspective, with abundant liquidity and difficulty in issuing loans, there is no need to raise deposit interest rates at the expense of profitability.

The problem is that the interest burden on ordinary citizens is increasing. With household debt having grown significantly due to COVID-19 and rising real estate prices, rapidly increasing loan interest rates greatly reduce financial consumers’ benefits. Customers who find it difficult to get loans have no choice but to borrow money reluctantly even when banks raise rates. Recently, a post titled ‘Please stop banks’ excessive additional interest rates under the pretext of managing household loans’ was posted on the Blue House petition board. As of the morning of this day, over 14,000 people had agreed.

These business practices are expected to continue for the time being. This is because the head of the financial authorities stated that direct intervention in interest rate adjustments is difficult. On the previous day, Financial Services Commission Chairman Ko Seung-beom appeared before the National Assembly’s Political Affairs Committee and said, “Market interest rates are rising and preferential rates are shrinking,” adding, “It is difficult for the government to intervene directly, but we will continue to monitor the situation.”

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