[Initial Insight] 'Nudge Governance' on Bank Interest Rates

[Asia Economy Reporter Sim Nayoung] Among the financial policies to be introduced this year, the one that consumers are most likely to be interested in is the 'Online One-Stop Debt Refinancing Transfer Platform.' The unfamiliar name, which is as long as 15 characters, might not immediately convey its purpose, but to put it simply, it works like this. Step 1: It comprehensively displays the interest rates of loan products from almost all financial institutions we know, including commercial banks, regional banks, foreign banks, internet banks, savings banks, capital companies, and credit-specialized companies. Step 2: It allows you to compare which interest rate is the cheapest based on your credit rating. Step 3: Once you find a suitable loan product, you can directly refinance your loan from that screen.

The financial authorities preparing this system have high expectations. "There are several loan comparison platforms like Finda in Korea and others in the US and Europe, but a system that not only compares interest rates but also allows immediate refinancing on the spot is a unique attempt worldwide." Whether this system, targeted for launch in May, will significantly help the financial consumers' wallets remains to be seen. However, it certainly seems to enable loan interest rates to be adjusted through market competition. In a situation where even a 0.01% point difference is revealed on a scale like online price comparisons, it is hard for any bank to have the nerve to ignore it.

Last year, the financial authorities' direct interest rate control resembled the popular game "Raise the Flag! Lower the Flag!" from a past entertainment program. Because they instructed to raise rates if too low and lower them if too high, by the end of the year, the rates became entangled at an unpredictable level. It started with the order to raise deposit rates and lower loan rates right after the presidential election. However, raising deposit rates increases banks' funding costs, which in turn causes loan rates to rise according to market principles. The COFIX, the benchmark for variable-rate mortgage loans, hitting a 10-year high was one of the results of this interest rate control.

Interest rate control also diminished the effectiveness of the Bank of Korea's monetary policy. When the base rate is raised, market rates should follow naturally, but after the base rate hike in November last year, deposit rates actually fell. This was due to the authorities' order to banks to lower deposit rates. The reason given was that deposit rates at commercial banks were too high, causing severe fund concentration. Even ahead of the Bank of Korea's additional base rate hike scheduled for the 13th, the authorities are signaling that they will watch which banks raise loan rates. The reality is that while the base rate rises, market rates are retreating. At this point, it is excessive to defend this as the government's role. Banks are looking only at the authorities' stance, not the market.

Of course, it is appropriate to refrain from raising loan rates beyond a reasonable level. The 'Online One-Stop Debt Refinancing Transfer Platform' is desirable in that it motivates banks to lower rates through market competition rather than government orders. However, this service is limited to unsecured loans. Mortgage loans and jeonse (key money deposit) loans are excluded because the entire process cannot be computerized until registration is complete. Considering that real estate-related loans account for 70% of total household loans, this is a regrettable half-measure. Instead of "Raise rates! Lower rates!" the priority should be to prepare a system that allows users to compare and transfer mortgage and jeonse loan rates they can receive at a glance. In the market, a 'nudge regulation' that gently prods with elbows could be much more effective.