Widening Loan-Deposit Interest Rate Gap Since August Last Year Sparks 'Bank Overprofit' Claims
President-Elect Yoon Seok-yeol Pledges "Will Disclose"
Refuted by Korea Institute of Finance Research
"Loan-Deposit Interest Rate Gap Has Not Significantly Expanded"
President-elect Yoon Suk-yeol holds a plaque ceremony with Ahn Cheol-soo, the chairman of the transition committee, Kwon Young-se, the vice chairman, and other attendees at the transition committee office set up at the Financial Supervisory Service Training Institute in Jongno-gu, Seoul, on the 18th. Photo by Yoon Dong-ju doso7@
[Asia Economy Reporter Shim Nayoung] How accurate is the claim that "during the current period of interest rate hikes, banks are raising loan interest rates more than deposit interest rates to reap excessive profits"? One of President-elect Yoon Seok-yeol's major financial pledges, the 'Disclosure of Banks' Loan-Deposit Interest Rate Spread,' was created based on this claim. It aims to monitor and supervise banks' interest rates through a disclosure system, criticizing banks that earned record-high profits last year through 'interest margin business.'
Recently, it is true that the loan-deposit interest rate spread has been gradually widening. According to the Bank of Korea, the loan-deposit interest rate spread (on a balance basis) increased from 2.12 percentage points in August last year, when the base rate hikes began, to 2.24 percentage points in January this year, rising by 0.12 percentage points over six months. The Financial Supervisory Service is also aware of this issue and plans to report soon to the transition committee on measures regarding banks' loan-deposit interest rate spreads.
Korea Financial Research Institute: "Loan-Deposit Interest Rate Spread Narrows During Interest Rate Decline"
The Korea Financial Research Institute rebutted the claim by presenting long-term interest rate trends, stating that "banks are not predatory lenders unilaterally adjusting the loan-deposit interest rate spread to their advantage." According to the report titled 'Asymmetric Response Analysis of Bank Deposit and Loan Interest Rates and Implications,' released on the 17th, the loan-deposit interest rate spread slightly widens during periods of rising interest rates but decreases relatively more during periods of falling interest rates. This analysis covers market interest rates from October 2004 to September 2021.
The study found that on a balance basis, which is closely related to banks' profitability, during an interest rate rise phase (when the call rate rises by 0.12 percentage points), deposit interest rates increased by 0.010 percentage points and loan interest rates by 0.011 percentage points two months later. This means the loan-deposit interest rate spread widened by 0.001 percentage points. Conversely, during an interest rate decline phase (when the call rate falls by 0.12 percentage points), deposit interest rates decreased by 0.025 percentage points and loan interest rates by 0.042 percentage points after a four-month lag, resulting in a reduction of the loan-deposit interest rate spread by -0.017 percentage points.
The lag refers to the time from the adjustment of the call rate to the point when deposit and loan interest rates rise or fall the most.
On a new transaction basis, during the interest rate rise phase, deposit interest rates rose by 0.031 percentage points and loan interest rates by 0.022 percentage points after a one-month lag, resulting in a narrowing of the loan-deposit interest rate spread by -0.009 percentage points. During the interest rate decline phase, deposit interest rates fell by 0.089 percentage points and loan interest rates by 0.074 percentage points after a two-month lag, causing the loan-deposit interest rate spread to widen by 0.015 percentage points.
Photo by Yonhap News
"Bank Profitability May Decrease During Interest Rate Hikes"
The report stated, "Banks raised deposit and loan interest rates at similar levels during periods of rising interest rates, so the loan-deposit interest rate spread did not significantly widen," adding, "Bank profitability may actually decrease during periods of rising interest rates." It further explained, "During periods of falling interest rates, banks' profits can be maintained through loan expansion, but during periods of rising interest rates, the likelihood of loan contraction increases, which can worsen bank profitability."
In particular, it emphasized, "As seen with the 'extension of loan maturities and principal and interest repayment deferrals for small business owners' after the COVID-19 pandemic, if the credit risks that expanded under the low-interest rate environment materialize due to rising interest rates, banks' profitability is likely to be adversely affected even more," and added, "Therefore, during periods of rising interest rates, it is necessary for banks to build up substantial loan loss provisions."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
