FSS Chief "Excessive Interest Rate Hikes Must Stop" vs Banks Association "It's Just a Short-Term Phenomenon"

Bankers Association Data Release
"Deposit Rate Cuts Due to Market Stabilization"
"Loan Rates Also Expected to Decrease After Mid-January"

"In a period of rising interest rates, banks should not excessively raise loan interest rates compared to market interest rates or borrower creditworthiness"
(June 10, Lee Bok-hyun, Governor of the Financial Supervisory Service)

"The interest rate spread between deposits and loans is a short-term phenomenon due to the difference in maturity structures between deposits and loans during the process of declining market interest rates"
(June 11, Korea Federation of Banks)

[Image source=Yonhap News]

As the upper limit of mortgage loan interest rates at commercial banks rose to 8% (variable rate basis) at the beginning of the new year while deposit interest rates fell to the 3% range, widening the interest rate spread between deposits and loans, financial authorities issued a warning about the rise in loan interest rates, prompting the Korea Federation of Banks to respond. On June 11, the Korea Federation of Banks released a report titled 'Recent Trends in Bank Deposit and Loan Interest Rates' to counter the Financial Supervisory Service's criticism.

The Korea Federation of Banks explained, "Since December last year, the Bank of Korea's base rate has remained unchanged, but as the domestic funding market situation stabilized somewhat, market interest rates showed a downward trend. Accordingly, deposit interest rates, which had been rising until November, also reflected this situation and began to decline from the end of last year."

Regarding loan interest rates, it stated, "Most bank mortgage loan interest rates use COFIX (Cost of Funds Index), which is announced monthly. COFIX reflects deposit interest rates from the previous month and is applied from the 15th of the following month, so the decline in market and deposit interest rates inevitably reflects with a time lag."

It added, "Considering this, the decline in deposit interest rates due to the fall in market interest rates since early December is expected to be reflected starting from the COFIX to be announced around mid-January this year, which will also influence changes in mortgage loan interest rates."

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 the loan counter at a commercial bank in downtown Seoul on the 19th. Photo by Kim Hyun-min kimhyun81@

In response to claims that banks intentionally widen the deposit-loan interest rate spread to increase profits, the Federation argued, "In a fiercely competitive environment among banks, if a particular bank widens the interest rate spread, it would lead to rapid customer attrition, making it an unrealistic strategy. Banks with many medium- and low-credit borrowers tend to have larger interest rate spreads, but since these borrowers have a higher probability of default, banks with large spreads do not necessarily earn greater profits."

Regarding controversies over high performance bonuses for bank executives and employees, the Federation stated, "This is a matter autonomously decided through labor-management agreements considering various factors beyond just performance," drawing a clear line.

The previous day, Lee Bok-hyun, Governor of the Financial Supervisory Service, had urged, "The bank performance compensation system is too focused on short-term results, which may lead to neglect of internal controls and risk management in the mid-to-long term and cause financial accidents. We ask the banking sector to continue efforts to improve the performance compensation system."

According to the financial sector, NH Nonghyup Bank set its 2022 performance bonus at 400% of the base salary. Shinhan Bank decided on 361% of the base salary, and KB Kookmin Bank also set performance bonuses at 280% of the base salary.

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