Bank of Korea, Financial and Economic Issue Analysis Report
Despite financial authorities' warnings to refrain from excessive high-interest lending practices, the interest rate spread between loans and deposits has widened compared to the previous month. On the 21st, employees are entering the headquarters of a commercial bank in Seoul. Photo by Yoon Dong-joo doso7@
The Bank of Korea forecasted that deposit and loan interest rates will continue to face downward pressure for the time being. This is the result of a decline in banks' incentives for fund procurement and the delayed impact of falling deposit rates on loan rates from December last year through January this year.
In its ‘Financial and Economic Issue Analysis’ report on the 8th, the Bank of Korea stated, "The recent decline in deposit and loan interest rates is a combined effect of expectations for a slowdown in domestic and international monetary policy, market stabilization measures leading to a drop in short- and long-term market interest rates, as well as banks lowering loan spread rates and reduced incentives for fund procurement."
Loan interest rates fell moderately in January this year following a decline in December last year, while deposit interest rates declined gradually before sharply widening their decline in January.
The Bank of Korea explained, "There is a partial reversal of the excessively high deposit and loan interest rates caused by intensified competition among banks for deposits and instability in the short-term financial and credit bond markets during October to November last year."
From September to November last year, when the base rate rose by 75bp (1bp = 0.01 percentage points), loan rates increased by 112bp and deposit rates by 131bp. However, from September last year to January this year, the increase in deposit and loan interest rates was 94bp and 85bp respectively, slightly below the base rate hike of 100bp.
The Bank of Korea analyzed that during the decline in deposit and loan interest rates, there were characteristics such as ▲differentiated changes in benchmark and spread rates by loan type ▲narrowing interest rate gap between fixed and variable rate mortgage loans ▲a sharper decline in deposit rates compared to loan rates.
Breaking down the factors affecting loan rate changes from December last year to January this year, corporate loans and fixed-rate mortgage loans fell significantly due to declines in benchmark interest rates. For household variable-rate mortgage loans and unsecured loans, although the benchmark rate COFIX (Cost of Funds Index) rose, banks substantially lowered spread rates, resulting in a decline in loan rates.
Additionally, the narrowing of the gap between short- and long-term interest rates reduced the interest rate difference between fixed-rate and variable-rate mortgage loans. While major banks significantly lowered fixed-rate mortgage loan rates compared to variable rates, the impact of the Anshim Jeonhwan Loan (Safe Conversion Loan) contributed to increasing the share of fixed-rate household loans from 17.4% in May last year to 47.2% in January this year.
Since December last year, deposit rates have fallen more sharply than loan rates due to declines in market interest rates, easing deposit competition, and improved conditions for bank bond issuance. Banks lowered time deposit rates due to weakened incentives for fund procurement caused by relaxed regulatory ratios, a slowdown in loan growth, and requests from financial authorities to refrain from deposit competition.
The Bank of Korea added, "deposit and loan interest rates are expected to continue facing downward pressure for the time being due to reduced incentives for banks to procure funds, the delayed impact of falling deposit rates on loan rates from December last year through January, and the handling of fixed-rate policy loans (special Bogeumjari Loan), while gradually becoming more influenced by market interest rate fluctuations."
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