Soaring Savings Bank Deposit and Savings Interest Rates... Financial Supervisory Service Urges "Restraint in Overheated Competition"

"Deposit Volatility Expands... Authorities Needed to Step In"
Savings Bank Deposit Rates Surge from 2.51% to 5.42%
Industry's Highest Rate Title Changes in One Day
Marketing Strategies Amid Crisis Fears of 'Losing Customers'

[Asia Economy Reporter Song Seung-seop] Financial authorities have put the brakes on the deposit interest rate competition within the savings bank industry. As commercial banks absorbed funds in line with the base interest rate hike, savings banks, feeling a sense of crisis, rushed to launch high-interest special deposit products. Seeing signs of overheating competition, such as the industry’s highest interest rate company changing within a day, the authorities took preemptive measures.

According to financial authorities and the savings bank industry on the 7th, the Financial Supervisory Service (FSS) recently advised the Korea Federation of Savings Banks to refrain from excessive competition in deposit and savings interest rates. The intention was to caution against recklessly raising deposit interest rates under the influence of the interest rate hike trend. A financial authority official explained, "This message was intended to ensure timely responses to the increased volatility in deposits and the funding needs of financial companies," adding, "It was not a special measure but rather a discussion frequently exchanged with the industry."

The message to "refrain from excessive deposit competition" was conveyed during the financial authorities’ market stabilization measures announced on the 27th of last month. At that time, the authorities announced a six-month relaxation of the loan-to-deposit ratio regulation for savings banks. Savings banks must maintain the ratio of loan balances to deposit balances within 100%. Savings banks that had issued many loans earlier this year were rapidly raising deposit interest rates to gather deposits and comply with the regulatory ratio. The financial authorities’ goal was to ease deposit competition by increasing this ratio to 110%.

The deposit interest rate competition in the savings bank industry has shown signs of overheating since last month. This was due to the successive launches of high-interest special deposit products not only by large savings banks but also by small and medium-sized firms. At the end of the first quarter this year, the one-year fixed deposit interest rate in the savings bank industry was 2.51%. It rose to 3.07% in the second quarter and 3.86% in the third quarter, accelerating the pace of interest rate increases, reaching 5.42% on this day.

Fired-up Competitive Spirit... Interest Rates Changed Dozens of Times in a Few Months

The rapid interest rate hikes by savings banks are due to the base interest rate increase and commercial banks absorbing market funds. The domestic base interest rate rose from 1.25% in January to the current 3%. Commercial banks competitively launched deposit and savings products with interest rates reaching 4-5%. At one point, some commercial banks offered deposit interest rates higher than those of savings banks. As liquidity began moving from the secondary financial sector to the primary financial sector, savings banks, fearing the loss of deposit customers, quickly started raising their interest rates.

The marketing strategies of savings banks also fueled the deposit interest rate competition. As savings banks offering high deposit interest rates gained word-of-mouth popularity among financial consumers, a competitive spirit spread within the industry to "set the highest interest rate in the industry by raising rates a bit more." Last month, the title of "industry’s highest deposit interest rate" changed hands within a single day. Some companies changed their deposit interest rates more than 10 times in the past three months.

The problem is that excessive deposit interest rate competition ultimately leads to higher loan interest rates for consumers. Savings banks’ funding methods are practically limited to deposits and savings. If funds are raised at high interest rates, there is a high possibility that loan interest rates will also be set higher to cover losses. If a large amount of deposits is collected but loans do not proceed as expected, the loss could increase significantly.

With the financial authorities’ intervention, savings banks appear to be taking a breather from deposit competition. An FSS official analyzed, "The flow of funds to banks and the frequent launches of higher interest deposit products by savings banks have subsided," adding, "The trend of interest rate hikes in the banking sector has calmed down, and the interest rate gap in the savings bank sector has found a balance point."

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