Low-Cost Deposits Evaporate by Another 13 Trillion Due to High Interest Rates... Banks' Funding Costs Soar

Last Month Also Saw a 36 Trillion Decrease... Due to Preference for Safe Assets Like Savings Deposits and Bonds

[Asia Economy Reporter Yoo Je-hoon] Low-cost deposits at commercial banks, also known as 'core deposits,' have evaporated by more than 10 trillion won again in just one month. This phenomenon is due to investment standby funds flowing out like a tide from safe assets such as savings and time deposits as the interest rate hike trend continues.

According to the financial sector on the 2nd, the balance of demand deposits (accounts with free deposits and withdrawals) at the five major domestic commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) stood at 659.6808 trillion won as of the end of last month. This is a decrease of 13.6794 trillion won compared to the previous month.

Demand deposits, which depositors can withdraw at any time, have an interest rate level of around 0.1%, so they are also called low-cost deposits. Since deposits and withdrawals are possible at any time, they have a strong nature of investment standby funds. For banks, which secure profits through the interest rate spread between deposits and loans, it is a core deposit as it can be a means to raise funds by paying low interest.

The decrease in demand deposits is because major investment destinations such as securities and real estate have lost their appeal due to the Bank of Korea's continuous base rate hikes. According to the Korea Financial Investment Association, the size of investor deposits stood at 53.0632 trillion won at the end of last month, down about 1.19 trillion won (about 2.1%) from the end of the previous month. Investor deposits have been on a continuous decline since recording 70.3447 trillion won at the end of January.

On the other hand, preference for safe assets such as savings and time deposits is increasing. The balance of time deposits at the five major commercial banks stood at 729.8206 trillion won at the end of last month, increasing by as much as 17.3715 trillion won in one month. In the previous month, while demand deposits decreased by 36 trillion won, the size of time deposits increased by 28 trillion won, showing a similar trend.

As demand deposits, which play a key role in the interest rate spread between deposits and loans at banks, begin to decline, funding conditions are also becoming difficult. Banks have no choice but to raise deposit and savings interest rates to attract market funds or increase demand for bank bond issuance. According to the Bank of Korea, the deposit interest rate based on new acceptance at deposit banks nearly doubled from 1.64% per annum at the beginning of the year to 2.83% in July. As of the previous day, the AAA-rated bank bond interest rate was also 4.331%, more than double the early-year rate of 2.112%.

The resulting increase in loan interest rates is inevitable. Already, the Cost of Funds Index (COFIX) interest rate based on new acceptance in July soared to 2.90%, up 0.52 percentage points from the previous month. This is the largest increase in about 12 years since COFIX statistics based on new acceptance began to be announced in 2010. COFIX represents the weighted average interest rate of funds raised by eight domestic banks, based on interest rates of savings, time deposits, bank bonds, etc.

Seo Young-soo, director at Kiwoom Securities, said in a recent report, "The speed of increase in deposit and loan interest rates and the decline in the interest rate spread are progressing slightly faster than the predicted range due to the excessive outflow of low-cost deposits." He added, "This is a matter to be noted as it means that financial stability risks are increasing more than expected."

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