Artificial interest rate adjustments are a deceptive trick... Ultimately, market distortion becomes a 'boomerang'

Banks Immediately Raise Deposit Rates as Base Rate Rises
Meanwhile, They Promise to Cut or Lower Loan Rates
Financial Sector: "Raising Deposit Rates Eventually Means Loan Rates Also ↑"
Lowering Loan Rates Further Seen as "Market Distortion and Breach of Duty"

On the 7th, a scene at a bank counter in downtown Seoul shows a continuing 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 Song Seung-seop] Banks are quickly raising deposit interest rates while refraining from increasing loan interest rates due to repeated pressure from financial authorities. From the perspective of financial consumers, the banking sector's policy, which goes against the trend of raising the base interest rate, seems advantageous, but concerns are emerging that it will ultimately become a market distortion phenomenon that imposes a burden. There are also criticisms that banks' interest rate adjustment policies are merely "deceptive" and provide no real benefits to consumers.

According to the financial sector on the 18th, major domestic banks immediately raised deposit interest rates after the Bank of Korea's Monetary Policy Committee raised the base interest rate by 0.5 percentage points (p) from 1.75% to 2.25% on the 13th. Hana Bank raised interest rates on 22 installment savings products by 0.25?0.80%p starting from the 14th, and Woori Bank also raised deposit interest rates by 0.25?0.50%p and installment savings rates by 0.20?0.80%p on the same day. Shinhan Bank proactively raised interest rates on 25 deposit and installment savings products by 0.70%p as early as the 8th.

The speed at which banks raise deposit interest rates has become noticeably faster than before. Typically, banks took at least a week to raise deposit and installment savings rates after a change in the base interest rate. This is because discussions are needed regarding the impact on loan interest rates, potential profit deterioration due to increased deposit rates, and business strategies. When the Bank of Korea raised the base rate on May 26, NH Nonghyup Bank was the only one to announce deposit and installment savings rate hikes on the same day.

On the other hand, loan interest rates were lowered despite the base rate increase. Shinhan Bank uniformly lowered the interest rate for mortgage borrowers who were paying over 5% annually to 5% for one year at the end of last month. Hana Bank reduced interest rates by up to 1%p for individual business owners who had loans with rates exceeding 7% annually, and Woori Bank lowered the highest mortgage loan interest rate from the 7% range to the 5% range. KB Kookmin Bank extended its temporary interest rate reduction measures for mortgage and jeonse deposit loans in April.

These moves are closely related to messages from financial authorities. On the 21st of last month, Lee Bok-hyun, Governor of the Financial Supervisory Service, warned at a meeting with domestic bank representatives that “interest rate spreads tend to widen during periods of rising interest rates,” and “there is growing criticism and misunderstanding regarding banks’ excessive profit-seeking.” Following this statement, K Bank immediately announced it would lower loan interest rates by up to 0.41%p.

Is it good that deposit interest rates rise? ... "Ultimately a boomerang effect on loan interest rates"

The problem is that rapid increases in deposit and installment savings rates eventually return to financial consumers as higher loan interest rates. A banking sector official explained, “If deposit interest rates are raised quickly and significantly, the interest rate spread narrows, which seems beneficial to financial consumers, but that is not necessarily the case,” adding, “Looking at the loan interest rate calculation structure, there is a component related to funding costs, which includes deposits and installment savings, so ultimately (the increase in deposit rates) is reflected in loan interest rates.”

A representative example is when former Financial Supervisory Service Governor Jung Eun-bo pointed out excessive interest rate spreads in the banking sector last November. Lee Chan-woo, Senior Deputy Governor, even instructed deputy heads in charge of loans at banks to “check whether the calculation and operation of loan interest rates, especially additional and preferential rates, are being faithfully conducted according to model regulations.” In response, banks made gestures to slow down loan interest rate hikes. However, the difference between deposit interest rates (time deposits) and loan interest rates (households) increased from 2.04% to 2.12% in May.

There is also criticism that loan interest rate adjustments are limited to some borrowers and are merely deceptive. For example, Shinhan Bank, which was the first to lower loan interest rates, benefited about 3,000 borrowers. Compared to the total number of borrowers, the beneficiaries are only about 1%. Even if the bank bears 1%p of the interest, it amounts to only about 3 billion KRW. Most other banks’ interest rate reduction policies are also limited to some borrowers or apply mainly to new loans, so the burden on existing borrowers is not eased.

Banks argue that it is impossible to suppress overall loan interest rate increases. Although the political sector has demanded banks share the burden, leading to some interest rate reductions for certain borrowers, banks maintain that they cannot deviate from the major trend of base rate hikes. Another banking sector official lamented, “Even though banking is a regulated industry, actions that violate market principles are problematic,” adding, “Because many people are struggling, banks are told to make a little profit, but that constitutes a breach of fiduciary duty to shareholders.”

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