BOK "If Base Rate Rises by 1%p, Loan-Deposit Interest Rate Spread Widens by 0.25%p"

Banner in front of a bank in Seoul [Image source=Yonhap News]

When the benchmark interest rate rises by 1 percentage point, the balance-based loan-deposit interest rate spread of banks increases by about 0.25 percentage points. During periods of rising interest rates, it is necessary to increase fixed-rate loans instead of variable-rate loans to alleviate the burden on borrowers, according to an analysis.

According to the analysis titled "Analysis of Factors Affecting the Loan-Deposit Interest Rate Spread of Banks in Korea and Implications," released by the Bank of Korea (BOK) on the 18th through the BOK Issue Note, during periods of rising interest rates, the balance-based loan-deposit interest rate spread expands by 0.25 percentage points on average when interest rates rise by 1 percentage point. On the other hand, based on new loan issuance amounts, the loan-deposit interest rate spread actually narrowed by about 0.20 percentage points under the same conditions.

The BOK explained that since a significant portion of bank loans are under variable interest rate conditions and more than half of deposits are low-cost deposits such as demand deposits and current accounts with low interest rates, loan interest rates rise faster than deposit interest rates, causing the balance-based loan-deposit interest rate spread to widen.

However, in the case of new loan issuance amounts, the spread is greatly influenced by current interbank loan competition, lending attitudes, and regulations. Unlike the balance-based calculation, low-cost deposits such as demand deposits and current accounts are excluded from the loan-deposit interest rate spread calculation, resulting in a narrowing of the spread.

During the rapid rise in interest rates from the second half of last year to the first half of this year, the proportion of variable-rate loans increased significantly, which contributed to the expansion of the balance-based loan-deposit interest rate spread.

The proportion of variable-rate loans based on balances at domestic banks increased from 63.5% at the end of Q4 2020 to 70.3% at the end of Q2 this year. Based on new loan issuance amounts, it also expanded from 68.0% to 82.6% during the same period.

No Yu-cheol, head of the Stability General Team at the Financial Stability Bureau of the Bank of Korea, explained, "Expanding fixed-rate loans is not always desirable, but at least during periods of significant interest rate increases, it is necessary to consider expansion measures," adding, "Attention should also be paid to creating an environment where appropriate competition among banks is maintained."

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