Korean Deposit Shift: Funds Flow from Long-Term to Short-Term Amidst Market Rally
South Korean investors are rapidly shifting funds out of long-term bank deposits and into equities, spurred by a surging stock market and an inverted yield structure. The move, described by some as a “money move,” marks the largest annual decline in long-term deposits on record, according to data released by the Bank of Korea on .
Deposits with maturities of two years or longer at commercial banks fell by 7.71 trillion won (approximately $5.7 billion USD) to 52.99 trillion won at the end of . This decline surpasses the 3.61 trillion won decrease seen during the 1998 Asian financial crisis, representing the steepest drop since record-keeping began in 1991.
The shift coincides with a dramatic rally in the KOSPI index, South Korea’s benchmark stock market. The KOSPI closed at 6,083.86 on , breaching the 6,000 mark for the first time in history with a 1.91% gain. The index has surged more than 1,000 points since crossing 5,000 on .
While long-term deposits are shrinking, short-term deposits are experiencing substantial growth. Deposits with maturities under one year increased by approximately 6 trillion won to 406.33 trillion won last year and those with terms of one to two years rose by 24.48 trillion won to 635.52 trillion won. Total time deposits climbed by roughly 22 trillion won to 1,094.84 trillion won, indicating a reallocation of funds rather than a complete withdrawal from the banking system.
An unusual yield curve is also contributing to the trend. As of , six-month deposits at South Korea’s five major banks – KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup – offered average top rates of around 2.8%, compared to 2.4% for 36-month products. This “inverted yield structure” incentivizes investors to opt for shorter-term deposits.
Investor deposits, specifically funds earmarked for stock purchases, reached 108.29 trillion won as of , jumping more than 10 trillion won in a single month and exceeding 20 trillion won since the end of . This surge in investor deposits reflects the growing appetite for equities.
“With more investment opportunities in stocks, real estate, and crypto assets, people have become reluctant to lock up funds for over two years,” explained a commercial bank official. “They prefer short-term products while monitoring market conditions.” Another bank representative noted that market volatility is also influencing banks’ strategies, making them more cautious about attracting long-term deposits with potentially high, sustained interest rates.
The trend began gaining momentum at the end of 2024, with Korean retail customer deposits for stock trading increasing by 33 trillion won ($22.3 billion USD) since then, reaching nearly 90 trillion won. This represents a 61 percent increase from the end of 2024, and the pace of inflows is accelerating.
While the influx of retail investment is fueling the market rally, some analysts express caution. The Korean stock market’s history of volatility and the potential for a correction remain concerns. However, the current situation may represent a more fundamental shift in investment behavior, driven by a search for alternatives to traditional wealth creators like residential property and a historically low level of financial asset holdings among Korean households.
The Bank of Korea acknowledged the shift in funds, noting that last year saw a movement of capital from longer-term financial products into securities. The central bank also cautioned that fluctuations in deposit balances are subject to seasonal factors.