"Korea's Loan-Deposit Interest Rate Spread Lower Than Major Countries"... Will Disclosure System Reduce Rates?

Interest Rate Spread and Net Interest Margin, Lower Compared to Major Countries
Disclosure of Interest Rate Spread from July

On the 7th, a scene at a bank counter in downtown Seoul shows the ongoing trend among major commercial banks to lower loan interest rates while raising interest rates on regular savings and installment savings products. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Sim Nayoung] South Korea's deposit-loan interest rate spread and net interest margin were found to be lower compared to major countries.

According to the Financial Services Commission's survey results on the 10th, based on data from the International Monetary Fund (IMF), an analysis of the average deposit-loan interest rate spread over the past five years (2017?2021) showed that South Korea's spread was 2.01 percentage points (p), which was 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 spread than South 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%).

Nevertheless, starting this month, the Korea Federation of Banks' website will publish a monthly comparison and disclosure of the deposit-loan interest rate spreads of all banks. The Financial Services Commission has prepared improvement measures for the bank-specific interest rate information disclosure system reflecting this.

Lee Hyung-joo, Director of the Financial Industry Bureau at the Financial Services Commission, explained, "This measure is not so much about correcting banks' wrongdoings but rather about the government and the Financial Supervisory Service cooperating to minimize the financial burden on consumers amid the general market environment of rising interest rates. It is a measure to help consumers make better financial choices."

At the beginning of this year, household loan interest rates (mortgage loans, credit loans, etc.) rose sharply, expanding the deposit-loan interest rate spread in the household sector. This led to increased calls from the political and financial authorities for an interest rate disclosure system. The household sector deposit-loan interest rate spread showed a trend of 1.96%p in December last year, 2.26%p in January this year, 2.23%p in February, 2.18%p in April, and 2.12%p in May.

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

Currently, individual banks disclose the deposit-loan interest rate spread quarterly as one of the management disclosure items under the Banking Act. This is done by publishing quarterly management performance and risk management status, including profitability and liquidity, on the banks' websites. However, since banks disclose individually, it is difficult to compare between banks, and the disclosure cycle (three months) is long. Consumers also face inconvenience as they have to visit each bank's website to compare interest rates.

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

On the 7th, a scene at a bank counter in downtown Seoul shows major commercial banks lowering loan interest rates while raising interest rates on regular savings and installment savings products./Photo by Kang Jin-hyung aymsdream@

The deposit-loan interest rate spread will be disclosed based on both the average loan (household loans + corporate loans) and household loans. The average loan-based spread aims to track monthly changes. In particular, the household loan-based 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 deposit-loan interest rate spread, the spread figures by credit score segments 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 to prevent misunderstandings.

Although monthly loan interest rate information by bank (based on new transaction amounts) has been disclosed 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 (five levels in total), making it difficult for consumers to check interest rate information matching their own credit scores.

Therefore, to allow consumers to easily check interest rate information matching their credit scores, the household loan interest rate disclosure standard has been changed to credit scores from credit rating agencies. Considering the characteristic of a higher proportion of high-credit borrowers compared to other sectors, the disclosure will be divided into nine levels 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, the previous month's average interest rate (new transactions) for each deposit and installment savings product 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 resolve the issue where consumers had difficulty confirming the actual applied interest rate due to differences in preferential interest rate application criteria among banks.

Will the disclosure of the deposit-loan interest rate spread actually reduce the spread? Director Lee said, "The deposit-loan interest rate spread closely reacts to the long- and short-term interest rate spread. When the long- and short-term interest rate spread widens, the deposit-loan interest rate spread also expands. It is expected that the long- and short-term interest rate spread will widen for the time being, so it is difficult to predict that the deposit-loan interest rate spread will decrease in the near future. However, today's measures will play a role in controlling the spread from widening further than it currently is."

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