"When Interest Rates Rise, Loan Interest Increases More; When Interest Rates Fall, Deposit Interest Decreases More"

Democratic Party Lawmaker Kim Sung-joo Analyzes Bank Interest Rates Over the Past Two Years

Banks Show Different Behaviors During Interest Rate Rise and Fall Periods

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 Shim Nayoung] Over the past two years, domestic banks in South Korea have raised loan interest rates more than deposit interest rates during periods of rising interest rates. Conversely, during periods of falling interest rates, they lowered deposit interest rates more than loan interest rates. Banks adjusted the range of interest rate changes in a way that allowed them to earn more profits depending on whether interest rates were rising or falling. The interest rate spread, which is the difference between loan interest rates and deposit interest rates, has continuously increased over the past two years.

According to data received from the Financial Supervisory Service by Kim Sungjoo, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea (Jeonbuk Jeonju-si Byeong), the fluctuation in deposit interest rates of domestic banks in the 3rd to 4th quarters of 2020 was -0.09 percentage points (p) (3rd quarter 0.84% → 4th quarter 0.75%). In contrast, the fluctuation in loan interest rates during the same period was -0.07 p (3rd quarter 2.87% → 4th quarter 2.80%).

The 3rd to 4th quarters of 2020 were a period of falling interest rates when the Bank of Korea lowered the base interest rate to a historic low of 0.5% due to the economic recession caused by COVID-19. At this time, domestic banks adjusted deposit interest rates more significantly than loan interest rates.

During the 3rd to 4th quarters of last year and the 1st to 2nd quarters of this year, when the Bank of Korea began to raise the base interest rate in earnest, banks showed a different pattern compared to the falling interest rate period. The Bank of Korea raised the base interest rate by 2 percentage points over one year from August last year to August this year. During this period, deposit banks raised loan interest rates more significantly than deposit interest rates.

In the 3rd to 4th quarters of 2021, the fluctuation in loan interest rates of domestic banks was +0.21 p (3rd quarter 2.83% → 4th quarter 3.04%), while the fluctuation in deposit interest rates was +0.14 p (3rd quarter 0.69% → 4th quarter 0.83%).

This phenomenon continued in the 1st to 2nd quarters of this year as well. The fluctuation in loan interest rates of domestic banks was +0.29 p (1st quarter 3.28% → 4th quarter 3.57%), whereas the fluctuation in deposit interest rates was +0.21 p (1st quarter 0.96% → 4th quarter 1.17%).

Over the past two years, the interest rate spread of domestic banks has continuously widened. It steadily expanded from 2.03 p in the 3rd quarter of 2020 (loan interest rate 2.87%, deposit interest rate 0.84%) to 2.40 p in the 2nd quarter of this year (loan interest rate 3.57%, deposit interest rate 1.17%).

Kim Sung-joo, Member of the National Assembly (Democratic Party of Korea)

The Financial Services Commission and the Financial Supervisory Service have been requiring the Korea Federation of Banks to disclose the interest rate spreads of 15 domestic banks since August, aiming to reduce the interest rate spread of banks. Since the 3rd quarter, banks have been successively raising loan margin rates and also increasing deposit interest rates.

Assemblyman Kim Sungjoo stated, "There is criticism that banks are engaging in interest margin business by adjusting loan interest rates sharply and deposit interest rates slightly according to interest rate changes," and he emphasized, "For the recently implemented interest rate spread disclosure system to be effective, it is necessary to more precisely review and supervise the application of interest rates by banks in response to interest rate fluctuations."

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