Authorities Issue 'Warning'... Interest Rate Spread Between Loans and Deposits Widens Further in Financial Sector

Cooperative Financial Sector Records 2.85% Loan-Deposit Interest Rate Spread
Largest in 36 Months Since December 2018
Commercial Banks Also See Increased Balance-Based Loan-Deposit Rate Spread
Financial Authorities: How Effective Will the "Corrective Measures" Be?

The gap between deposit interest rates and loan interest rates in the financial sector is widening. Due to factors such as the base interest rate hike, loan interest rates are rising sharply, while deposit interest rates are virtually stagnant. In particular, mutual finance institutions, which serve as financial channels for ordinary citizens, have been found to be more focused on profiting from interest rate spreads. Despite financial authorities issuing warnings last year amid controversy over excessive profits caused by the widening loan-deposit margin gap, these measures seem to have had no effect.

According to the Bank of Korea on the 12th, the general credit loan interest rate (based on new transactions) of mutual finance sectors (credit unions, fisheries cooperatives, agricultural cooperatives, and forestry cooperatives) was 4.17% in November, up 0.17 percentage points from the previous month. Meanwhile, the interest rate on savings deposits rose by only 0.09 percentage points to 1.32%, resulting in a loan-deposit interest rate gap of 2.85%. This is the largest gap in 36 months since December 2018, when it was 2.92%, due to loan interest rates increasing faster than deposit interest rates.

This trend continued last year as well. In January, deposit and loan interest rates were 1.04% and 3.68%, respectively. In terms of growth rate, deposit rates increased by 0.25 percentage points, while loan rates rose by 0.49 percentage points, nearly twice as much.

Commercial banks have also seen the loan-deposit interest rate gap widen for four consecutive months based on outstanding balances. The total loan interest rate was 2.96%, while the total deposit interest rate (including demand deposits and passbook savings) was 0.77%, resulting in a gap of 2.19%. This is the largest since August 2019, when the gap was 2.21%. The widening has been influenced by the Bank of Korea’s base rate hikes, which have caused the gap to increase by 0.01 to 0.03 percentage points each month since July last year, when the rate hike was anticipated.

Financial Authorities Shift from Market Autonomy to Corrective Measures... What Are the Effects?

The loan-deposit interest rate gap based on new transactions was 2.04%, slightly down from last month’s 2.17%, the highest in 11 years. However, considering that the loan-deposit interest rate gap of commercial banks has typically ranged between 1.3% and 1.8% over the past decade despite various economic and financial crises, the current level remains high.

Initially, financial authorities held the position that the loan-deposit interest rate issue should be left to ‘market autonomy.’ Financial Services Commission Chairman Ko Seung-beom also took a stance close to non-intervention in early November. When appearing before the National Assembly’s Political Affairs Committee at that time, Chairman Ko responded to criticism that “the banking sector’s loan-deposit margin is excessive” by saying, “Market interest rates are rising and preferential rates are shrinking; it is difficult for the government to intervene directly, but we will continue to monitor the situation.”

Facing criticism for neglecting interest rate manipulation, financial authorities shifted toward implementing ‘corrective measures.’ However, it remains uncertain how much the loan-deposit interest rate gap will decrease. The authorities are reviewing whether the calculation and operation of loan, additional, and preferential interest rates comply with the ‘Model Guidelines for Enhancing the Rationality of Loan Interest Rate Systems’ established in 2012. If there are no clear issues with the calculation methods, the gap may not narrow significantly.

Jung Eun-bo, Governor of the Financial Supervisory Service, said at a press meeting at the Bankers Hall in Myeong-dong, Seoul, “The loan-deposit interest rate gap will be adjusted in a way that benefits consumers,” adding, “We have already reviewed deposit interest rates, and now we are examining loan interest rates by financial company.”

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