[Inside Chodong] Why Bank Interest Rate Cuts Fail to Be Felt

It is rare for government agencies to use extreme and radical expressions in press releases. However, an unusual event occurred on the 18th. Let’s take a brief look at the first paragraph of the materials from the meeting between financial authorities and financial holding company chairpersons.

"There is concern over the collapse of neighborhood businesses, which have supported our economy from the bottom, due to the rapidly increased interest burden in a short period," "The record-high increase in interest income for the financial sector means a record-high increase in burden for the public," "The desperate situation of self-employed people bearing high interest rates," "We are devising tangible measures that can directly reduce the interest burden to some extent." Reading these sentences connected by gradation, one feels not just dissatisfaction but anger.

It’s not that banks haven’t lowered interest rates before. One of the main tasks of the Financial Services Commission chairman and the Financial Supervisory Service chief, who took office last year, was to pressure banks to reduce interest rates. Yet, they are now suddenly asking to create "tangible measures." This can be interpreted as meaning that the previous interest rate reduction measures by banks were not felt by the public. Why did this happen? For interest rate cuts to become a reality for me, the target cannot be a minority. This is also the trap of the bank support measures introduced so far.

Whenever the authorities blew the whistle, banks lowered interest rates by as little as 0.1 percentage points and up to 0.5 percentage points. But this only applied to those taking out new loans. Existing borrowers bore the full shock of rising base rates and bond yields. Only new borrowers in the past year received the benefits of interest rate cuts, meaning it did not apply to previous borrowers who had borrowed to the limit. Small business owners fared even worse. A representative from a commercial bank said, "Mainly for household loans, interest rates were lowered only within a set range. In fact, even self-employed people with new loans were not eligible for interest rate reductions."

There are criticisms that interest support for small business owners is "populism" or "pouring water into a bottomless barrel." These are not wrong. But stepping back, there are sufficient reasons to provide support. We live in a world where a single word from Jerome Powell affects the principal and interest that the owner of a local chicken restaurant has to repay the next day. Interest rates suddenly rose to keep pace with the U.S., the period of rate hikes lasted longer than expected, and external shocks like war worsened the economy. Small business owners, who were already struggling, became even more burdened by interest costs.

On the other hand, banks have ample capacity to lower interest rates. Korean banks mainly provide loans based on variable interest rates that change every six months. In a period of rising interest rates, the risk is borne not by banks but by the public. As loan assets grow and interest rates rise, banks gather money with a hook. Although the additional interest rates are not higher than those in advanced countries, the variable rate basis makes fund management much more stable. It is no exaggeration to say they "make easy profits until maturity."

"Although the additional interest rate per borrower is not much, when aggregated, it becomes an enormous interest profit. Banks only stagger or falter when large corporations collapse, like during the foreign exchange crisis; they can defend against delinquency rates on business or credit loans. Domestic banks have the ability to lower additional interest rates," said a senior official from the authorities.

Although it was started under pressure, the interest support plan for small business owners to be announced next month should give the impression that "banks are also making efforts." A proper balance between coexistence and private interests is necessary for sustainable bank management. Now, rather than criticism like "Are banks the country?" performing cardiopulmonary resuscitation on the self-employed should be the priority.