Compare Bank Loan-Deposit Interest Rate Spreads and Loan Rates by Credit Score Starting July

Financial Services Commission to Provide Loan-Deposit Interest Rate Information on Bank Federation Website from July

Widening Loan-Deposit Interest Rate Spread During Rate Hike Period
Key Question: Whether Interest Rate Disclosure Will Reduce Loan-Deposit Spread

Korean Banks Show Lower Loan-Deposit Interest Rate Spread Compared to Major Countries

[Image source=Yonhap News]

[Asia Economy Reporter Shim Nayoung] Starting this month, the interest rate spread between deposits and loans of all banks will be compared and disclosed once a month through the website of the Korea Federation of Banks. The Financial Services Commission announced on the 6th that it has prepared improvement measures for the disclosure system of bank-specific interest rate information, including this content.

At the beginning of this year, household loan interest rates (mortgage loans, credit loans, etc.) rose sharply, leading to an expansion of the interest rate spread between deposits and loans in the household sector. As a result, voices calling for an interest rate disclosure system grew louder in the political and financial authorities. The household sector interest rate spread was 1.96 percentage points (p) in December last year, then 2.26 p in January this year → 2.23 p in February → 2.18 p in April → 2.12 p in May.

The Financial Services Commission explained the background, saying, "As consumers' financial cost burdens may increase during a period of rising interest rates, there has been an increase in demands for checking the operation status of related systems and improving the system."

Currently, individual banks also disclose the interest rate spread quarterly as one of the management disclosure items under the Banking Act. This is in the form of quarterly disclosure on the bank's website of management performance such as profitability, liquidity, and risk management status. However, since banks disclose individually, it was difficult to compare between banks, and the disclosure cycle (3 months) was also long. To compare interest rates between banks, consumers had to visit each bank's website individually, which was inconvenient.

Accordingly, starting in July, the Financial Services Commission decided to compare and disclose the interest rate spread of all banks through the Korea Federation of Banks website and shorten the disclosure cycle from the existing 3 months to 1 month. Since the purpose is to disclose monthly fluctuation information of the interest rate spread (average loan interest rate minus savings deposit interest rate), it will be calculated based on new transaction amounts.

The interest rate spread will be disclosed based on both the average loan (household loans + corporate loans) and household loans. The average loan-based interest rate spread aims to check monthly fluctuation trends. In particular, the household loan-based interest rate spread will be disclosed along with loan interest rates by credit score segments to make it easier for consumers to use.

Considering that internet banks with a high proportion of loans to middle- and low-credit borrowers may show an expanded average interest rate spread, the interest rate spread figures by credit score segment and the average credit score (which tends to be lower if the proportion of middle- and low-credit borrowers is high) will also be disclosed together to avoid misunderstandings.

Although loan interest rate information by bank (based on new transaction amounts) has been disclosed monthly through the Korea Federation of Banks, household loan interest rates (mortgage loans, credit loans, limit loans) were disclosed based on each bank's own credit rating standards (total 5 levels), making it difficult for consumers to check interest rate information matching their own credit scores.

Therefore, to make it easier for consumers to check interest rate information matching their own credit scores, the disclosure standard for household loan interest rates was changed to credit scores from credit rating agencies. Considering the characteristic of a higher proportion of high-credit borrowers compared to other sectors, it will be divided into 9 levels and disclosed in 50-point increments. Savings banks and specialized credit finance companies disclose loan interest rates in 100-point increments.

For deposit interest rates, to allow consumers to check the actual interest rate information applied to them, the average interest rate of each deposit and installment savings product for the previous month (new transactions) will also be additionally disclosed. Until now, only the base interest rate and the highest preferential interest rate were shown on the Korea Federation of Banks website, but going forward, the base interest rate, highest preferential interest rate, and previous month's average interest rate will be posted. This will solve the problem where consumers had difficulty confirming the actual applied interest rate information due to differences in preferential interest rate application criteria among banks.

Meanwhile, according to the Financial Services Commission's survey, Korea's interest rate spread and net interest margin are relatively low compared to major countries. Based on data from the International Monetary Fund (IMF), an analysis of the average interest rate spread over the past five years (2017?2021) showed Korea at 2.01 percentage points, lower than Singapore (5.11 p), Hong Kong (4.98 p), Switzerland (2.98 p), and Norway (2.18 p). The only country with a lower rate than Korea was Hungary (1.59 p). The net interest margin (NIM) of domestic banks was 1.45% last year, lower than U.S. banks (2.52%) but higher than European banks (1.26%).

Lee Hyung-joo, Director of the Financial Industry Bureau at the Financial Services Commission, said, "This measure is not so much about correcting what banks are doing wrong, but rather about the government and supervisory authorities cooperating to create ways to minimize the financial burden on consumers as the general market environment changes with rising interest rates," adding, "It is a measure to help consumers make better financial choices."

Will the disclosure of the interest rate spread actually reduce the spread? Director Lee said, "The interest rate spread closely reacts to the difference between long-term and short-term interest rates. When the gap between long-term and short-term rates widens and rises, the interest rate spread also expands," adding, "The long-term and short-term interest rate gap is expected to widen for the time being, so it is difficult to predict that the interest rate spread will decrease in the near future, but today's measure will play a role in controlling it from widening further than now."

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