'Deposit Interest Rises, Loan Interest Rises Even More'... The Gap Widens

Loan-Deposit Interest Rate Gap 2.21 Percentage Points... Largest in 2 Years and 4 Months

Banks Raised Deposit Rates in January, but Increase Was Minimal

Loan Rates Expected to Rise Again if KOFIX Jumps in February

Political Circles Also Watching Loan-Deposit Interest Rate Gap

[Image source=Yonhap News]

[Asia Economy Reporter Sim Nayoung] While commercial banks have raised deposit and savings interest rates just enough to show off, it has been revealed that loan interest rates have increased sharply.

During the period of rising interest rates caused by the Bank of Korea's base rate hikes and regulations limiting total household loans, the interest rate spread between loans and deposits, calculated by subtracting deposit interest from loan interest, has been widening over time. Since this issue could disrupt the balance between financial consumers' burden and banks' profit increases, the political sphere is also paying close attention.

According to the Bank of Korea on the 30th, as of the end of December 2021, the total deposit interest rate was 0.83% per annum (up 6 basis points from the previous month), and the total loan interest rate was 3.04% per annum (up 8 basis points from the previous month). The loan-deposit interest rate spread was 2.21 percentage points, the largest in two years and four months.

After the Bank of Korea raised the base rate by 0.25 percentage points on the 14th, the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?raised deposit and savings product interest rates by 0.3 to 0.4 percentage points. Although this increase was larger than the base rate hike, banks applied it only to a few products, and the increase varied by product, failing to exceed the base rate hike level. Except for some high-interest special promotional products, fixed deposit interest rates remain in the 1% range, and savings interest rates are in the 2% range.

The loan-deposit interest rate spread has been continuously widening. It was 2.05 percentage points at the end of 2020, 2.14 percentage points in September last year, 2.16 percentage points in October, and 2.19 percentage points in November.

The problem is that it will be difficult to narrow the gap in the loan-deposit interest rate spread going forward. The cause lies in the structure of 'Bank of Korea base rate increase → deposit and savings interest rate increase → banks' funding cost for loans increase → rise in the loan benchmark rate called 'COFIX' → increase in consumer loan interest rates.' COFIX is an index representing the cost banks incur to raise loan funds, calculated as a weighted average of interest rates on fixed deposits and financial bonds from eight domestic banks. Among these, deposit interest rates have the largest weight, so when deposit rates rise, COFIX and loan interest rates rise sequentially with a time lag.

The banking sector expects that when the increase in deposit interest rates this month is reflected in February's COFIX, loan interest rates will rise again, and the loan-deposit interest rate spread will remain wide. This was evident when the Bank of Korea raised the base rate at the end of November last year. At that time, banks raised deposit and savings interest rates by 0.4 percentage points. Subsequently, COFIX rose by 0.26 percentage points in November and 0.14 percentage points in December, which immediately led to increases in variable mortgage loan rates and jeonse loan rates.

As the loan-deposit interest rate spread widens, the political sphere has also begun to take interest. On the 19th, Yoon Seok-yeol, the presidential candidate of the People Power Party, stated, "We will require commercial banks to periodically disclose the gap between deposit and loan interest rates," and added, "If the loan-deposit interest rate spread rises sharply when the base rate changes, we will investigate whether there is any element of collusion to protect financial consumers."

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