[Money Flowing into Savings and Deposits]③ Demand Deposits Decline... Increased Funding Pressure on Banks

[Image source=Yonhap News]

The balances of regular savings and time deposits at the five major banks have increased significantly, while demand deposits continue to decline. As low-cost demand deposits decrease, banks are facing higher funding cost burdens.

According to the financial sector on the 4th, as of the end of August, the balance of demand deposits at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?stood at 597.9651 trillion won, down by 2.4841 trillion won from the previous month (600.4492 trillion won). The balance of demand deposits has been declining since June. Compared to June (623.8731 trillion won), it has decreased by 25.908 trillion won.

Demand deposits are deposits that allow free withdrawals and deposits and are considered standby funds that can be invested in real estate or stocks. In particular, more than 23 trillion won was withdrawn from demand deposits between June and July. During this period, it appears that standby funds flowed massively into the stock and bond markets. According to the Korea Financial Investment Association, investor deposits (excluding on-exchange derivative transaction margins) increased from approximately 51.8442 trillion won on June 30 to about 55.9866 trillion won as of July 31.

As commercial banks increase high-interest products, there is also considerable demand for switching from demand deposits to savings and time deposits. The balance of time deposits at the five major commercial banks increased by 11.9859 trillion won as of the end of last month, maintaining a growth trend for five consecutive months, and regular savings also increased by more than 1 trillion won.

Accordingly, banks’ funding cost burdens are expected to rise. From the banks’ perspective, the more time deposits increase, the higher the funding costs. On the other hand, demand deposits, which are low-cost deposits, have interest rates around 0.1%, allowing banks to raise funds at a low cost through demand deposits. When low-cost deposits decrease, banks’ funding cost burdens increase, affecting profitability as well.

Moreover, bond market interest rates continue to soar. According to the Korea Financial Investment Association, as of the 31st of last month, the interest rate on 5-year bank bonds (AAA, unsecured) was 4.301%, up 0.208 percentage points from 4.093% on June 1. Banks raise funds through bank bonds, and when bond interest rates rise, the burden of raising funds through bond issuance also increases. A representative from a commercial bank said, "It seems that the recent active stock market investment has had some influence, and there is also a movement of money into savings and time deposits. From the bank’s perspective, the burden of funding is inevitably increasing."

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