Commercial banks are reluctant to warn of interest income on loans, Lee Bok-hyun, head of the Financial Supervisory Service

Financial Supervisory Service Chairman Lee Bok-hyeon ordered that the interest burden of the vulnerable class be reduced during a period of rising interest rates. This is because, in effect, it is a kind of ‘warning’ to the banks to reduce the loan-to-deposit margin and refrain from dividends by lowering the loan interest rate. Concerns arise that public pressure from the authorities could lead to ‘government finance’ of private banks once again, given the improvement in domestic bank profits.

According to FnGuide, a financial information company on the 21st, the combined net profit of the four major financial holding companies – KB, Shinhan, Hana and Woori – was estimated at 4.308.4 trillion won in the second quarter. It is expected to be an all-time high. The loan-to-deposit interest rate difference between banks also soared to 2.35 percentage points (based on the balance) as of the end of April, the highest level in three years and ten months.



In a meeting with bank presidents for the first time on the 20th, President Lee pointed out, targeting the performance of the banking sector, “As interest rates rise, the difference between loan-to-deposit interest rates (the difference between loan rates and deposit rates) widens, and criticism of banks’ excessive pursuit of profits is growing.” This shows concerns about the situation in which banks raise deposit rates lower than lending rates during interest rate hikes to increase loan-to-deposit margins for customers.

The banking sector accepted the financial authorities’ order and began preparations for lowering the loan interest rate, but showed a sign of discomfort when criticized that the bank was only making profits through ‘interest trading’. In particular, they expressed concerns about excessive intervention by the financial authorities. An official from a commercial bank said, “It is a situation where we cannot but make an effort as it is a remark that came from a meeting,” but “However, interest rates are determined by market movements, and if the financial authorities forcefully touch them, they may commit the mistake of distorting the market. there,” he said.

Commercial banks cited the disclosure of the loan-to-deposit interest rate difference as a typical expected side effect. The government is also planning to introduce a method of disclosing the difference between the loan-to-deposit interest rate by bank and credit score section every month starting next month. The idea is to induce competition by raising the deposit rate and lowering the loan rate. However, in the industry, if the financial authorities intervene in the interest rate differential and the additional interest rate, the difference in interest rates between banks will almost disappear, so banks may become more risk-averse. It is predicted that there may be more cases that follow.



There is also an objection that an understanding of the structural problem of changing interest rates is necessary. The rate of increase in interest rates is inevitably slow due to the fact that the deposit rate is not small, which is about 0.1% per year, which is excluded from the deposit rate hike. Structural limitations reflected in loan interest rates should also be considered.

Some say that banks are already taking measures to minimize the increase in loan interest rates by adjusting the additional interest rate. The bank loan interest rate is determined by adding the additional interest rate set by the bank to the Cofix (financing cost index) or bank bond interest rate. Last year, banks raised additional interest rates to curb the growth of household loans. However, this year, as the rate of bank bond yields soared, the growth of household loans has slowed.



Kim Do-ha, a researcher at Hanwha Investment & Securities, said, “If the debt suppression policy in 2021 produced a higher-than-average spread, then household loan demand in 2022 is leading the normalization of the spread. It is expected that the extent of the spread of the loan-to-deposit interest rate gap in the second half of the year will be significantly reduced, as it will not keep pace with the rise in market interest rates.”