Banks' Demand Deposits Decrease by 23 Trillion Won in One Month... Shifted to Time Deposits

Idle Funds Move in Search of Investment Destinations
Deposit Competition Among Banks Due to Normalization of Liquidity Regulations

Demand deposits at the five major commercial banks decreased by 23 trillion won in one month, returning to a downward trend. This is interpreted as a large amount of idle funds moving to time deposits as these banks competitively raised their time deposit interest rates last month.

'Money Move' Due to Time Deposit Interest Rate Hikes

According to the banking sector on the 4th, the balance of demand deposits at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?stood at 581.6415 trillion won at the end of July this year. This is about 23 trillion won less compared to the previous month (667.53 trillion won). Demand deposits at the five major banks, which had surged by about 19 trillion won in June due to the Saemaeul Geumgo insolvency incident, are now decreasing again.

Demand deposits are deposits that allow free withdrawals and deposits and are often used as temporary storage of funds before investment. Typical examples include regular checking accounts, salary accounts, and MMDAs. A decrease in demand deposits means that more funds have found investment destinations.

A significant portion of the withdrawn demand deposits appears to have moved into bank time deposits. The balance of time deposits at the five major commercial banks increased by nearly 11 trillion won, from 822.2742 trillion won at the end of June to 832.9812 trillion won at the end of July. A representative from a commercial bank said, “As time deposit interest rates rose last month, funds seem to have flowed in that direction.”

For example, KB Kookmin Bank raised the interest rate on its representative time deposit product, ‘KB Star Time Deposit’ (12-month basis), from an average of 3.57% in June to a maximum of 3.75% last month, and NH Nonghyup Bank also increased the interest rate on ‘NH Waltz Revolving Deposit’ from 3.15% to a maximum of 3.6% during the same period.

Liquidity Regulations Prompt Banks to Secure Deposits

The reason banks have raised time deposit interest rates is due to the increased need to attract deposits. As financial authorities normalized liquidity regulations that had been temporarily eased last month, banks now need to secure more deposits than before. For example, the loan-to-deposit ratio (LDR), which had been raised to 105% last October to prevent a credit crunch caused by the Legoland incident, was reverted back to 100%. The LDR is the ratio of loan balances to deposit balances and serves as an indicator for managing bank liquidity.

Similarly, the Liquidity Coverage Ratio (LCR), which serves a similar purpose, was also strengthened again from the end of last month. The financial authorities plan to raise the LCR, which had been lowered to 85% during the COVID-19 pandemic, to 95% by the end of this year starting from the end of July, with plans for gradual further increases. The LCR is the minimum mandatory holding ratio of easily liquidated assets, and banks had previously been subject to a 100% requirement. A banking sector official explained, “With the end of the two liquidity regulation easing measures, competition for deposit interest rates has emerged in the banking sector.”