Promotion of Credit Loan Product Development Based on Low Volatility 'KOFIX' Standard

Plans to Further Subdivide Loan Interest Rate Disclosure Items Also Underway

Kim So-young, Vice Chairman of the Financial Services Commission, is attending the Financial Industry Globalization Task Force meeting held on the 13th at the Government Seoul Office in Jongno-gu, Seoul. Photo by Dongju Yoon doso7@

The financial authorities are promoting the development of credit loan products based on the Cost of Funds Index (COFIX), which has relatively low volatility. Additionally, they are considering measures to subdivide the disclosure items of loan interest rates.

On the 3rd, the Financial Services Commission held the 7th Task Force (TF) working group meeting on banking sector management and business practice improvements at the Government Seoul Office in Jongno-gu, Seoul, chaired by Vice Chairman Kim So-young. On the 4th, it announced that the meeting discussed the direction for reorganizing the banking sector’s interest rate calculation system and the current status and activation plans for win-win finance in the banking sector.

During the meeting, discussions were held regarding financial consumers’ concerns that loan interest rates surge sharply when rates rise but do not decrease significantly when rates fall. The FSC saw the need to manage and inspect the consistency and rationality of loan interest rate adjustments and fluctuations during each bank’s self-assessment of interest rate calculations.

Accordingly, the FSC, the Financial Supervisory Service, and the Korea Federation of Banks agreed to jointly review and analyze the inspection results by bank, and to consider subdividing disclosure items so that the base, spread, and preferential interest rates of loans handled by banks during rate hikes and cuts can be compared and analyzed over time.

They also decided to promote the development and expansion of credit loan products based on COFIX, which has relatively low volatility. This is in response to criticism that about 85% of credit loan products are based on short-term market interest rates such as bank bonds or Certificates of Deposit (CDs), causing interest rate increases to directly burden borrowers. In fact, the increase in credit loan interest rates based on new loan amounts from 2021 to November last year was found to be about 410 basis points (1bp = 0.01%).

The meeting also decided to review the basis for calculating the spread, a detailed component of loan interest rates. They will check whether there are excessive deviations among banks and, if necessary, revise the “Model Code for Bank Loan Interest Rates.”

Vice Chairman Kim said, “It is important to actively disclose that interest rate calculations are conducted rationally and consistently within the scope that does not excessively infringe on banks’ autonomy in interest rate calculation,” adding, “Since current loan products are relatively exposed to interest rate fluctuation risks, efforts are needed to develop various financial products that can mitigate the amplitude of interest rate fluctuations.”

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