Deposit and Loan Interest Rates Also Like Yeot Vendor's Mood? Banks' 'Interest Play' Business Practices Intensify (Comprehensive)

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

[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 intensified further. The interest rate spread between deposits and loans (deposit-loan interest rate spread) of banks widened the most in 11 years. This is due to banks raising loan interest rates while tightening credit screening, engaging in bold business practices. 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 the present day, the base rate has been changed a total of 44 times. The overall trend of rate hikes and cuts changed 8 times in total. The interest rates on loans and deposits affected by the base rate tended to move more favorably to financial institutions as the current time approached.

From May 28 last year, when the base rate hit a record low of 0.50%, to August when a 0.25 percentage point hike was implemented, 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 the increase in deposit interest rates. The interest rate on newly issued household loans 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. The Bank of Korea sharply cut the base rate by 1.25 percentage points in four steps from 1.75% on November 30, 2018. During this period, loan and deposit interest rates adjusted from 3.63% to 2.81% and 1.96% to 1.07%, respectively. The loan interest rate fell by 0.82 percentage points, less than the base rate change. It was also 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 business.

This contrasts with the trend of loan and deposit 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.

When the base rate rises, only loan interest rates sharply 'soar'

The prevailing analysis is that the focus on maximizing deposit-loan margins is due to government and financial authorities’ total household loan regulations and abundant liquidity. This means banks are using interest rate hikes as a means to curb loan growth. Also, banks do not need to raise deposit interest rates, accepting reduced profitability, in a situation where liquidity is abundant and lending is difficult.

The problem is that the interest burden on ordinary people 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 interest rates. Recently, a post titled ‘Please stop banks’ excessive additional interest rate profits under the pretext of household loan management’ was posted on the Blue House petition board. As of the morning of this day, over 14,000 people had agreed.

Such business practices are expected to continue for the time being. The head of the financial authorities has stated that it is difficult to intervene directly in interest rate adjustments. 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.” Financial Supervisory Service Governor Jeong Eun-bo also said at a press meeting after meeting with major bank CEOs, “Interest rates are prices determined by the market,” and “We are carefully monitoring the overall trend of these market interest rates.”

The government’s stance is the same. Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki explained at the National Assembly Budget and Accounts Special Committee comprehensive policy inquiry, “The government is limited in excessively intervening in setting interest rate levels.”

Meanwhile, the base rate is likely to rise once more this month. Due to inflation continuing higher than expected, it is speculated that the Bank of Korea will respond. Bank of Korea Governor Lee Ju-yeol emphasized after holding a Monetary Policy Board meeting last month and keeping the base rate at 0.75%, “If the economic trend proceeds as expected, we may consider an additional base rate hike at the next meeting (November).” The Monetary Policy Board meeting is scheduled for the 25th.

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