Bank Demand Deposits Drop as Funds Flow to Stock Market | Korea Economy News

South Korea’s robust stock market is drawing funds away from traditional bank deposits, with demand deposit turnover reaching its highest level in a decade. This shift, observed at the close of last year, suggests investors are increasingly seeking opportunities in equities, particularly as the KOSPI index continues its upward trajectory.

According to data from the Bank of Korea’s economic statistics system, the demand deposit turnover rate for depository banks in December reached 23.6. This represents the highest rate since December 2015 (24.6), a period coinciding with the historical low point of the base interest rate falling into the 1% range. Demand deposits, encompassing readily accessible funds like checking and regular savings accounts, are being actively reallocated.

The deposit turnover rate is a key indicator of financial activity, reflecting the frequency with which deposits are withdrawn or transferred. A high turnover rate signals a movement of funds from bank accounts into alternative investments, including stocks, bonds, and precious metals. The current trend is driven, in part, by declining bank deposit interest rates.

As of this writing, the interest rate on one-year term deposits at South Korea’s five major banks – KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup – ranges from 2.05% to 2.90% annually, falling below the 3% threshold. This diminishing return on traditional savings is prompting investors to explore potentially higher-yield options.

The stock market appears to be a primary beneficiary of this capital shift. Investor deposits in securities accounts reached 106.57 trillion won as of February 19th, according to the Korea Financial Investment Association. These deposits represent funds held by investors for stock purchases or remaining after sales. The 100 trillion won mark was first surpassed on January 27th and has been consistently maintained since.

The outflow of funds from banks is demonstrably accelerating. The combined demand deposit balance of the five major banks decreased by 22.4705 trillion won in January, reaching 651.5379 trillion won. Term deposit balances also experienced a decline, decreasing by 2.4133 trillion won over the same period. The balance of term deposits also decreased by 48.2 billion won compared to the end of last year.

The KOSPI’s continued strong performance is fueling these trends. With the index exceeding 5,300 and approaching the 6,000 level, expectations are growing that it could potentially reach 7,000. This optimistic outlook is likely to further incentivize the “money move” from bank deposits into the stock market.

The Bank of Korea recently adjusted its 2025 growth outlook upwards to 0.9%, citing the positive impact of government fiscal stimulus. However, the central bank also cautioned that the economic recovery remains fragile. This nuanced assessment underscores the complex interplay of factors influencing the South Korean economy, including investor sentiment and capital flows.

recent analysis suggests that Nvidia’s CEO, Jensen Huang, believes that investment in artificial intelligence is only beginning and could ultimately total tens of trillions of dollars. While not directly linked to the Korean market, this global trend in AI investment could indirectly influence capital allocation decisions and further drive demand for growth-oriented assets like stocks.

The observed shift in funds from bank deposits to the stock market reflects a broader pattern of investor behavior in a low-interest-rate environment. As traditional savings options offer limited returns, investors are increasingly willing to assume greater risk in pursuit of higher yields. This dynamic has implications for both the financial sector and the overall economy, requiring careful monitoring and analysis by policymakers and financial institutions.