"The Interest Rate Spread Between Bank Deposits and Loans Continues to Widen"

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

As the U.S. central bank, the Federal Reserve (Fed), hinted at additional interest rate hikes, attention is increasing on whether the Bank of Korea's Monetary Policy Committee will raise rates at its meeting scheduled for the 25th. The photo shows a loan counter at a commercial bank in downtown Seoul on the 19th. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Sim Nayoung] Over the past two years, the interest rate spread between deposits and loans at domestic banks has continued to widen. The interest rate spread is the difference between a bank's loan interest rate and deposit interest rate, directly linked to the bank's profits.

According to data received from the Financial Supervisory Service by Kim Sung-joo, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea (Jeonbuk Jeonju-si Byeong), the interest rate spread of domestic banks was 2.03 percentage points (p) in the third quarter of 2020 (loan interest rate 2.87%, deposit interest rate 0.84%) and steadily expanded to 2.40 p in the second quarter of this year (loan interest rate 3.57%, deposit interest rate 1.17%).

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 spread. In the third quarter, banks have been raising loan interest rate premiums and also increasing deposit interest rates one after another.

Assemblyman Kim Sung-joo stated, "There are criticisms that banks are profiting from interest by adjusting loan interest rates sharply and deposit interest rates slightly according to interest rate fluctuations," adding, "For the recently implemented interest rate spread disclosure system to be effective, it is necessary to more precisely review and supervise how banks apply interest rates in response to rate changes."

Furthermore, over the past two years, domestic banks have raised loan interest rates more than deposit interest rates during periods of rising rates. Conversely, during periods of falling rates, they lowered deposit interest rates more than loan interest rates. Banks adjusted the magnitude of interest rate changes in a way that maximizes their profits depending on whether rates were rising or falling. The interest rate spread, the difference between loan and deposit interest rates, has continuously increased over the past two years.

In the third to fourth quarters of 2020, the deposit interest rate at domestic banks changed by -0.09 p (3Q 0.84% → 4Q 0.75%). Meanwhile, the loan interest rate changed by -0.07 p (3Q 2.87% → 4Q 2.80%).

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

In the third to fourth quarters of last year and the first to second quarters of this year, when the Bank of Korea began to raise the base rate in earnest, banks showed a different pattern than during the falling rate period. From August last year to August this year, the Bank of Korea raised the base rate by 2 percentage points. During this period, deposit banks raised loan interest rates more sharply than deposit interest rates.

In the third to fourth quarters of 2021, the loan interest rate at domestic banks changed by +0.21 p (3Q 2.83% → 4Q 3.04%), while the deposit interest rate changed by +0.14 p (3Q 0.69% → 4Q 0.83%).

This trend continued in the first to second quarters of this year. The loan interest rate change was +0.29 p (1Q 3.28% → 2Q 3.57%), whereas the deposit interest rate change was +0.21 p (1Q 0.96% → 2Q 1.17%).

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