September Bank Deposits Under 6 Months at 191 Trillion Won
Highest Since February... Four Consecutive Months of Increase
Preference for Short-Term Bank Funding Amid Interest Rate Decline Outlook
Customers Also Choose Short-Term High-Interest Products
#Mr. Lee, a worker in his 20s, signed up for a 6-month fixed deposit at a commercial bank this month. The interest rate was an annual 4.1%, consisting of a base rate of 3.9% (for non-face-to-face transactions) plus a preferential rate of 0.2%, which was only 0.1 percentage points lower than the 1-year product (4.2% per annum). Mr. Lee explained, “The fixed deposit interest rates have been changing frequently recently, so I looked for deposit products with shorter maturities.”
#Ms. Joo, a 28-year-old office worker, recently signed up consecutively for deposit products with maturities of 3 months and 4 months at an internet-only bank. The interest rates were around 3.8% per annum, slightly higher than those of commercial banks’ fixed deposits, and there were various short-term deposit products to choose from.
Funds are flocking to short-term fixed deposits in the banking sector. This is the result of aligned interests between investors who prefer “high interest rates with short maturities” and banks seeking to reduce funding burdens.
According to the Bank of Korea on the 15th, the balance of fixed deposits with maturities under 6 months in the banking sector reached 191.0158 trillion KRW in September, marking the highest level since February (195.1948 trillion KRW). This figure has been increasing since hitting a low of 168.5531 trillion KRW in May this year, rising to 169.3338 trillion KRW in June, 178.7816 trillion KRW in July, and 189.7606 trillion KRW in August.
On the other hand, the balance of fixed deposits with maturities between 6 months and less than 1 year gradually decreased from 185.5158 trillion KRW in February to 164.1384 trillion KRW last month, while the balance of long-term fixed deposits of 1 year or more showed little fluctuation. For deposits with maturities between 1 and less than 2 years, the balance was 590.0892 trillion KRW in August and 591.9366 trillion KRW in September; for 2 to less than 3 years, it was 30.0018 trillion KRW to 30.3046 trillion KRW; and for 3 years or more, it was 26.6881 trillion KRW to 26.0216 trillion KRW, remaining almost unchanged.
The increase in short-term fixed deposits is the result of aligned calculations between banks and customers. Banks, which have many deposits and savings maturing in the second half of this year, need to raise funds to cover deposits, but with the possibility of interest rates declining next year, it is burdensome to raise funds long-term. In fact, if interest rates fall, banks can reduce interest expenses accordingly. From the customers’ perspective, with high uncertainty in the financial market, there is a growing preference for short-term fund management.
For these reasons, banks are applying higher interest rates to short-term deposits than to long-term deposits. For example, KB Kookmin Bank’s representative fixed deposit product, “KB Star Fixed Deposit,” offers a maximum annual interest rate of 4.0% for maturities between 6 and less than 9 months, while the 36-month maturity offers a lower rate of 3.02% per annum. Shinhan Bank’s “Solpyeonhan Fixed Deposit” also offers a 6-month interest rate of 4.05% (non-face-to-face basis), which is higher than the rate for 24 months or more (3.45%). Generally, longer maturities come with higher interest rates, but an inversion of long- and short-term interest rates is occurring.
However, the industry expects this phenomenon will not last long. Once banks secure sufficient funds, they will lower short-term deposit rates again to restore balance. A representative from a commercial bank explained, “The interest rate inversion phenomenon is a temporary occurrence that happens when future interest rates are expected to be lower than current rates.”
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