[Loan Regulation Conflict] Financial Services Commission Says Interest Rate Rise Not Due to Loan Regulations… Bank of Korea Cites "Impact of Regulation Strengthening"

Bank of Korea "Interest Rate Rise Due to Reduced Preferential Rates from Government Regulations"
Financial Services Commission "Limited Impact from Changes Unfavorable to Borrowers"
Experts "Need to Consider Regulatory Effects Since Last Year"

The Bank of Korea pointed to ‘strengthened government regulations’ as the cause of rising loan interest rates at commercial banks. This contrasts with the explanation released the previous day by financial authorities, which stated that the impact of loan regulations was limited. The statement has drawn attention as loan interest rates continue to rise daily amid strong public criticism of the financial authorities, the main regulatory body.

According to data submitted by the Bank of Korea to Yoon Doo-hyun, a member of the National Assembly’s Political Affairs Committee from the People Power Party, earlier this year, the Bank of Korea cited the rise in long-term market interest rates along with strengthened government regulations as causes in response to a written inquiry requesting analysis of the reasons behind the loan interest rate increase at that time.

The Bank of Korea responded, "The rise in loan interest rates is mainly due to the increase in benchmark interest rates, which are based on the long-term market interest rates, and the increase in the spread rate," adding, "Regarding the spread rate, it rose due to the reduction of preferential interest rates following strengthened government regulations aimed at curbing unsecured loans." It explained that the disappearance of preferential interest rates due to regulations implemented to manage household debt led to the rise in loan interest rates at the end of last year and early this year.

On the other hand, the Financial Services Commission holds the view that the impact of the spread rate or reduction in preferential interest rates is minimal. The day before, the FSC released an explanatory document on ‘recent loan interest rate increases,’ stating, "There have been changes unfavorable to borrowers (reduction of favorable aspects) due to strengthened household loan management," but argued that "the relative impact is limited." It also stated, "The rise in loan interest rates in the second half of the year is largely attributed to the increase in benchmark interest rates, which serve as the basis for various loans," and added, "Interest rates on government bonds and bank bonds have risen sharply since the second half of the year due to global synchronized tightening and concerns over base rate hikes."

Commercial Banks Rapidly Reduced Preferential Interest Rates as Regulations Began

The difference in views between the FSC and the Bank of Korea stems from analyzing different periods of interest rate increases. The FSC argued that the rise in loan interest rates from June to September was not due to regulations. The Bank of Korea, however, sees the rise in loan interest rates at the end of last year and in the first half of this year as resulting from government and financial authorities’ regulations.

This has led to criticism that the FSC underestimated the impact of loan regulations. Since the increase in loan interest rates began early this year and consumer complaints have been steadily raised, there is suspicion that by focusing the analysis on the second half of the year, the regulatory impact was reflected as less significant than it actually was.

Professor Kim Dae-jong of the Department of Business Administration at Sejong University said, "There is a significant aspect of loan interest rates rising due to compliance with financial authorities’ regulations and financial companies’ profit expansion," adding, "The regulatory signals that began last year must be taken into account."

The financial sector began to actively reduce preferential interest rates starting in September last year. At that time, the Financial Supervisory Service requested management of unsecured loans, prompting major banks to start considering reducing the scope of preferential interest rates or lowering limits for high-income earners. In March, banks with relatively low mortgage loan interest rates reduced preferential interest rates by up to 0.3 percentage points.