Domestic Banks' Loan-Deposit Interest Rate Spread Hits 8-Year High in Q3 This Year

Average Interest Rate Spread Between Loans and Deposits at Domestic Banks Based on Balance 2.46 Percentage Points
Highest Level in 8 Years Since Q2 2014 (2.49 Percentage Points)

[Asia Economy Reporter Sim Nayoung] As of the third quarter of this year, the interest rate spread between loans and deposits (the difference between loan interest rates and deposit interest rates) of banks reached the highest level in 8 years. This means that banks earned higher margins due to the widening gap between loan and deposit interest rates amid ongoing rate hikes this year.

According to data submitted by the Financial Supervisory Service to the office of Kim Sung-joo of the Democratic Party and the Bank of Korea as of the end of the third quarter this year, the average interest rate spread of domestic banks based on outstanding balances was recorded at 2.46 percentage points. This is the highest level in 8 years since the second quarter of 2014 (2.49 percentage points).

Looking at the past two years, the interest rate spread of domestic banks has continuously increased. It went from 2.03 percentage points at the end of the third quarter of 2020 → 2.05 percentage points at the end of the fourth quarter of 2020 → 2.12 percentage points at the end of the first quarter of 2021 → 2.12 percentage points at the end of the second quarter of 2021 → 2.14 percentage points at the end of the third quarter of 2021 → 2.21 percentage points at the end of the fourth quarter of 2021 → 2.32 percentage points at the end of the first quarter of 2022 → 2.40 percentage points at the end of the second quarter of 2022, widening further.

Regarding the interest rate changes of domestic banks this year, deposit interest rates rose by 0.21 percentage points at the end of the second quarter compared to the end of the first quarter. However, during the same period, loan interest rates increased by 0.29 percentage points.

At the end of the third quarter this year, deposit interest rates rose by 0.49 percentage points compared to the end of the second quarter, while loan interest rates increased by 0.55 percentage points during the same period. This indicates that banks raised loan interest rates more than deposit interest rates amid the rate hike trend.

According to the Bank of Korea’s report released last month titled "Factors Affecting the Interest Rate Spread of Banks in Korea," when the base interest rate rises by 1 percentage point, the interest rate spread based on outstanding balances increases by about 0.25 percentage points. It explains that the widening of the interest rate spread during rate hike periods is a natural structural phenomenon, but there is a reason behind it.

A significant portion of bank loans are under variable interest rate conditions, and more than half of deposits are low-cost types such as demand deposits and checking accounts with low interest rates. Therefore, loan interest rates rise faster than deposit interest rates, causing the interest rate spread to widen.

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