Ruling Party Also Pressures "Make Interest Rate Cuts Felt"... Banks Have No Sharp Countermeasures [Why&Next]

Following the financial authorities, even the ruling party is pressuring banks to lower interest rates, stating that "the public should be able to feel the effects of the base rate cut." However, banks are struggling to find effective measures as the authorities' household debt management stance remains unchanged.

According to the Bond Information System of the Korea Financial Investment Association on the 2nd, the 5-year bank bond yield stood at 2.965% as of the 29th of last month. This is the first time since March 2022, and also this year, that the 5-year bank bond yield, which serves as the benchmark rate for fixed (mixed) mortgage loans, has fallen below 3%.

Major commercial banks are also adjusting loan interest rates in response to the decline in market rates, but the pace is slow. As of the previous day, the fixed (mixed) mortgage loan rates of the five major commercial banks (KB, Shinhan, Hana, Woori, NH Nonghyup) were recorded between 3.50% and 5.90%. Compared to the day of the base rate cut in October (3.71% to 6.15%), both the upper and lower bounds have only decreased by about 0.20 percentage points. This fails to reflect not only the base rate cut of 0.25% during the same period but also the 0.33% decrease in bank bond yields.

As a result, the spread between deposit and loan interest rates, which had been decreasing, is now widening again. The household deposit-loan interest rate spread excluding policy low-income financial products of the five major commercial banks was about 0.43 percentage points as of July but expanded by 0.60 percentage points to 1.03 percentage points in October, within just three months.

With loan interest rates barely moving and the deposit-loan interest rate spread widening, not only the financial authorities but also the ruling party are pressuring banks to lower loan interest rates. They argue that the reduction is not significant enough to be felt. On the 28th of last month, after the Bank of Korea's base rate cut, Han Dong-hoon, leader of the People Power Party, stated on social media that "although there have been various reasons to refrain from lowering loan interest rates, considering the excessively large interest margin and the resulting burden on the public, a reduction in loan interest rates is necessary."

Kim Sang-hoon, chairman of the party's Policy Committee, also warned at a party floor meeting the following day, saying, "The effects of the Bank of Korea's base rate cut must be fully passed on to households, businesses, and small business owners," and added, "There should be no cases where commercial banks raise household loan interest rates, and we will monitor the interest rate situation through the financial authorities."

However, banks themselves are struggling to find effective solutions. Since the financial authorities continue their household debt management policy, banks have been responding to loan demand by raising additional interest rates and reducing loan limits. Lowering rates again could instead lead to an expansion of household debt.

In particular, major banks have already exceeded the annual household loan growth targets they submitted at the beginning of the year. According to the Financial Supervisory Service, the annual household loan increase of the four major banks reached 150.3% of their management plans.

This stance is expected to continue into the new year. The financial authorities maintain the existing goal of managing household loan growth within the nominal gross domestic product (GDP) growth rate and have required banks to set and submit monthly and quarterly targets during negotiations on next year's annual household loan management plans. This means household debt management will continue next year as well.

A representative from a commercial bank said, "Lowering the additional interest rate now is tantamount to saying we want to increase household debt," adding, "Loan regulations will continue in the new year, and banks will actively manage various loan asset increases for risk management, so it is true that there are no clear solutions for the time being."

However, there is some expectation that banks may respond more flexibly to lowering deposit interest rates. As of the previous day, the base interest rates for major deposit products at the five major banks remain largely unchanged at a maximum of 3.35% to 3.42% per annum. A financial industry insider said, "Since the growth rate of loan assets has significantly decreased, deposit interest rates should also be lowered, but the pace will be somewhat slower than the last rate cut," adding, "Given the rapidly widening deposit-loan interest rate spread, banks have no choice but to be cautious."