[Column] Banks' Unnecessary Worries About Being Criticized for Interest Business

"I'm worried people might say we're just profiteering from interest rates." This is a concern circulating within the banking sector regarding the recent successive increases in loan interest rates. It is understandable, as major commercial banks have raised mortgage loan rates up to twice this month alone, despite market interest rates falling amid expectations of a base rate cut.

Take the cases of KB Kookmin Bank and Shinhan Bank, which both claim to be 'leading banks.' KB Kookmin Bank raised mortgage and jeonse loan rates by 0.2 percentage points starting from the 18th, while Shinhan Bank decided to increase loan product rates based on 3-year and 5-year bank bonds by 0.05 percentage points from the 22nd. KB Kookmin Bank made an additional hike in about two weeks, and Shinhan Bank did so in just one week.

The rush among banks to raise rates again is because the government's 'emergency brake' on the rapid increase in household debt has not been effective. Looking at the lower bound trend of mixed (fixed) mortgage loan rates from the five major commercial banks, last week the fixed mortgage loan rate bottomed out at 2.86%. However, after banks raised rates, it climbed to 2.91% on the 15th but reverted to 2.89% just one day later on the 16th.

This is due to growing expectations of base rate cuts by the Bank of Korea and other central banks worldwide, causing market interest rates to decline. On the 16th, the 3-year government bond yield hit 3.035%, the lowest in 1 year and 11 months since August 2022. Since bank bonds (5-year), which serve as the benchmark for fixed mortgage loan rates, are linked to market rates, the reversion was inevitable.

The authorities stepped in with the emergency brake because of the exploding debt. Financial authorities summoned banks to urge them to slow down as household debt surged by about 20.5 trillion KRW over six months (according to the Bank of Korea). Separately, the Financial Supervisory Service is investigating compliance with the Debt Service Ratio (DSR) regulations among the five major commercial banks and KakaoBank. This explains why banks are raising loan rates again despite not seeing the desired effects.

One concern raised is the widening gap between market interest rates and loan interest rates. In other words, banks' interest income is likely to expand. While market rates continue to fall amid expectations of a base rate cut, pressure to raise loan rates to control household debt has caused this gap. What the government has consistently criticized since last year as 'profiteering from interest' is happening not by choice but by circumstance.

The upcoming second-quarter earnings announcement from banks is expected to show improved performance due to loan growth. According to financial information provider FnGuide, the estimated net income for the second quarter of the four major financial holding companies is projected to increase by 5.7% year-on-year. Corporate loan expansion had a significant impact, but household loans are also expected to support this growth at around 2%. The larger the gap, the more likely bank earnings will improve in the second half of the year.

In fact, it is hard to blame banks alone for the surge in household debt. While the government has adopted 'household debt stabilization' as a policy direction, it has simultaneously released various policy financial products supplying liquidity to the real estate market and delayed the application of the second phase of the stress DSR regulation, which reduces loan limits, by two months. Many point out that this inconsistency in government policy has caused problems.

This is not the first time. Just a year ago, after introducing a 50-year mortgage loan product modeled on government long-term mortgage products like the Special Bogeumjari Loan, the product was criticized as a 'main culprit of household debt increase' and had to be discontinued.

Although banks have followed government policies, they hope that concerns about being accused of profiteering from interest will remain unfounded.