[Song Seungseop's Financial Light] Why Did Banks Quickly Raise Deposit Interest Rates?

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[Image source=Yonhap News]

[Asia Economy Reporter Song Seungseop] On the 25th, the base interest rate was raised by 0.25 percentage points. The era of base interest rates in the 0% range ended after about 600 days, and we entered the 1% base interest rate era. However, private commercial banks simultaneously raised deposit interest rates. The maximum increase was much larger than the base rate hike. Why did banks make this decision?

The four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori?recently announced increases in savings and deposit interest rates. KB Kookmin Bank will raise interest rates on 17 types of fixed and marketable deposits and 26 types of installment savings by up to 0.40 percentage points starting from the 29th. The KB Companion Happiness Installment Savings, an online-only product, will have a maximum interest rate of 3.10% per annum for a 3-year term, and the KB Double Moa Deposit will change to 1.80% per annum for a 1-year term. Shinhan Bank will also raise interest rates on 36 types of fixed and installment savings products by up to 0.40% starting on the 29th. The maximum interest rate for the ‘Hello, Nice to Meet You Savings’ 1-year term is expected to reach 4.2% per annum.

Hana Bank and Woori Bank already applied interest rate increases on the 26th. Hana Bank raised interest rates on five products, including the ‘Main Transaction Hana Monthly Compound Interest Savings,’ by 0.25% to 0.4 percentage points. The ‘Hana OneQ Savings’ was adjusted upward to a maximum of 2.6% per annum. On the 29th, they will raise interest rates on 13 products by 0.25 percentage points. Woori Bank also increased interest rates on 19 fixed deposits, 28 installment savings, and 3 demand deposit products by 0.25% to 0.40 percentage points.

Typically, deposit interest rate hikes took about a week after the base rate hike announcement. But this time, the announcement came within one to two days. Moreover, while the base rate rose by 0.25 percentage points, deposit rates increased by up to 0.40 percentage points. Deposit rates rose more than the base rate hike. The range of deposit products affected is also broad.

Did Public Opinion Deterioration and Regulatory Pressure Influence?

A petition to the Blue House requesting to stop banks from excessive additional interest rate profiteering. Photo by Blue House Petition Board

The attitude change of major banks is closely related to worsening public opinion. Among financial consumers, there was widespread dissatisfaction that banks raised loan interest rates quickly and steeply, while deposit interest rates were raised slowly and gradually. On the 5th, a post titled ‘Please stop banks’ excessive additional interest rate profiteering under the pretext of household loan management’ was even posted on the Blue House petition board, currently supported by over 15,800 people.

The interest rate gap between deposit and loan rates is also confirmed statistically. On May 28 last year, the base rate was at a record low of 0.50 percentage points, but after the 0.25 percentage point hike in August, the loan-deposit interest rate spread widened to 2.07 percentage points. This is the largest in 11 years. The speed of loan interest rate increases was more than three times faster than that of deposit interest rate increases.

When the base rate fell, loan interest rates were lowered slowly, while deposit interest rates were lowered quickly. A representative example is when the base rate of 1.75% on November 30, 2018, was lowered four times by 1.25 percentage points. Loan interest rates dropped by 0.82 percentage points, while deposit interest rates fell by a larger 0.89 percentage points.

Lee Chan-woo, Senior Deputy Governor of the Financial Supervisory Service, attended a meeting with deputy heads of credit departments from eight major commercial banks at the Korea Federation of Banks in Seoul on the afternoon of the 19th.
[Image source=Yonhap News]

Regulatory pressure is also believed to have influenced this. On the 19th, the Financial Supervisory Service convened all deputy general managers in charge of loan operations at commercial banks. At this meeting, Lee Chan-woo, Senior Deputy Governor of the Financial Supervisory Service, ordered, “Check whether the calculation and operation of loan interest rates, especially additional and preferential rates, are being faithfully conducted according to the model regulations.” The purpose was to monitor how banks determine interest rates and whether there are any unreasonable aspects.

Jung Eun-bo, Governor of the Financial Supervisory Service, also said to reporters after a meeting at the Kensington Hotel in Yeouido, Seoul, on the 23rd, “The gap between deposit and loan interest rates is currently very wide.” On that day, Governor Jung emphasized, “The government needs to look into whether interest rates are being reasonably determined according to basic model regulations regarding excessively wide or excessively narrow interest rate gaps. If there are problems in the interest rate determination process, we will also examine whether improvements are possible.”

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