🚨 Analysis of Widening Interest Rate Spread and Concentration on High-Interest Special Deposit Products
Today Korean Economic News | 2025.03.04
📌 "Interest Rate Spread Widens Further... Depositors Flocking to Special Products with 3% Annual Rates"
💬 With the Bank of Korea's base rate cut, commercial bank deposit rates have fallen to the 2% range. However, lending rate cuts have been slower, widening the interest rate spread to its highest level in 30 months. As a result, financial consumers are flocking to special deposit products from community credit cooperatives, credit unions, and savings banks' small installment savings products are also gaining significant popularity.
1️⃣ Easy Understanding
Banks are quickly lowering deposit rates while slowly reducing lending rates, causing the gap between them (interest rate spread) to widen to its largest in two and a half years. As a result, depositors are moving to second-tier financial institutions like community credit cooperatives or credit unions in search of higher rates. I'll explain why this is happening and what it means in simple terms.
When the Bank of Korea lowers the base rate, both deposit and lending rates at commercial banks generally fall. However, recently deposit rates have been falling faster than lending rates. Major commercial banks' time deposit rates have dropped to 2.3-2.7%, while mortgage loan rates remain at 4.5-5.0%.
This phenomenon is related to banks' profit structure. Banks generate their main revenue from the difference between the rates they pay depositors and the rates they charge borrowers (interest rate spread). In an uncertain economic climate with slowing loan growth, banks are quickly lowering deposit rates to defend their profitability.
This disadvantages depositors, as their real returns are further reduced when considering inflation rates. For example, if the current consumer price inflation rate is about 2.5%, a deposit with a 2.3% interest rate actually produces a negative real return. In other words, money deposited in the bank is actually losing value.
As a result, depositors are looking for financial products that offer even slightly higher interest rates. Special deposit products from community credit cooperatives and credit unions offering 3-3.5% interest rates, or savings banks' small installment savings products with rates over 4% are gaining huge popularity. These products are often sold for limited periods or have restrictions on deposit amounts, frequently leading to "first-come, first-served" closures.
From a financial consumer's perspective, utilizing these special products to increase returns may be rational. However, it's important to check the deposit protection limit (50 million won per person) for second-tier financial institutions and consider the stability of the institution. It's also crucial to carefully check the details such as application conditions and penalties for early termination. Meanwhile, financial authorities have expressed concerns about banks' excessive interest rate spreads, suggesting the possibility of policy intervention in the future.
2️⃣ Economic Terms
📕 Interest Rate Spread
The interest rate spread is the difference between the lending rate banks charge and the deposit rate they pay, which is a core indicator of bank profitability.
- It generally tends to widen during economic downturns and narrow during boom periods.
- If the interest rate spread widens excessively, it can increase the burden on financial consumers and become subject to management by financial authorities.
📕 Base Rate
The base rate is the policy rate determined by the central bank, which serves as the benchmark for market interest rates.
- It is a key policy tool for macroeconomic management, such as controlling inflation and stimulating the economy.
- Changes in the base rate affect various financial product rates including deposits, loans, and bonds.
📕 Special Deposit Products
Special deposit products are time-limited deposit products offering higher interest rates.
- They offer preferential rates compared to regular deposits but often have restrictions on application periods, eligible customers, and amounts.
- They are used as marketing tools to expand deposits or attract new customers.
📕 Financial Consumers
Financial consumers refer to individuals or businesses that use financial products and services.
- They participate in financial markets in various forms such as depositors, borrowers, insurance policyholders, and investors.
- Financial consumer protection is one of the important goals of financial policy, with related regulations and systems being continuously strengthened.
3️⃣ Principles and Economic Outlook
💡 Causes and Mechanisms of Widening Interest Rate Spread
Several structural and market factors are at play in the phenomenon of the interest rate spread widening to its highest level in 30 months.
First, banks' strategy to defend profitability is the most crucial factor. In a situation where economic uncertainty is growing and loan demand is slowing, banks are strategically using interest rate adjustments to maintain profitability. They show "downward rigidity" by immediately adjusting deposit rates downward when the base rate is cut, while relatively slowly reducing lending rates. This is a natural strategy for banks to defend their net interest margin (NIM), but it creates an imbalance in interest rate benefits between depositors and borrowers.
Second, the divergence between market rates and the base rate is also an important factor. Even if the Bank of Korea cuts the base rate, actual rate formation in the market is influenced by various factors. Recently, increased volatility in global financial markets, inflation concerns, and domestic and international economic outlooks have combined to keep long-term market rates relatively high. This is a factor limiting the decline in long-term loan rates, particularly for mortgage loans.
Third, changes in competitive structures among banks and funding strategies are also having an impact. As the low interest rate trend becomes prolonged, banks are adopting funding strategies that expand the proportion of low-cost deposits (such as demand deposits) and reduce the proportion of relatively high-interest time deposits. These changes have accelerated the decline in deposit rates. Additionally, when major banks preemptively lower deposit rates, other banks follow in a "synchronization" phenomenon, weakening depositors' bargaining power.
Fourth, the financial regulatory environment and strengthened risk management must also be considered. Financial authorities' household debt management policies and strengthened financial institution soundness regulations are influencing banks' loan rate setting. Particularly in a situation of high economic uncertainty following COVID-19, banks tend to maintain high loan risk premiums. This acts as a factor limiting the speed of loan rate reductions.
The widening of the interest rate spread is occurring due to these various factors acting in combination. This can be seen not as a simple temporary phenomenon, but as a result reflecting banks' management strategies during a period of falling interest rates and the structure of financial markets. However, if this situation continues, the burden on financial consumers may increase and financial market efficiency may decline, raising the possibility of monitoring and policy intervention by financial authorities.
💡 Concentration on Second-Tier Financial Institutions' Special Products and Impact on Financial Markets
With deposit rates falling, funds are flowing into high-interest special products from community credit cooperatives, credit unions, and savings banks, which is having various impacts on financial markets.
First, there is an expansion of fund inflows to second-tier financial institutions and changes in competitive structures. While commercial banks' deposit rates have fallen to the 2% range, community credit cooperatives and credit unions are attracting depositors by launching special products offering 3-3.5% interest rates, and savings banks with rates over 4%. This has led to active fund movement to second-tier financial institutions in recent months. Short-term funds under one year and small amounts under 50 million won are particularly notable in this movement. This shows that financial consumers are actively moving to improve returns while considering deposit protection limits and safety.
Second, the conditions and strategies for special products are diversifying. Rather than simply offering high interest rates, they are employing differentiated strategies by setting various application channels (mobile-only), eligible customers (new customers only), and preferential conditions (when setting up automatic transfers). Additionally, marketing that emphasizes "scarcity" by limiting sales periods and total amounts is also active. These strategies further promote movement among financial consumers and intensify competition among financial institutions.
Third, there are changes in financial institutions' profitability and risks due to fund movements. Commercial banks may face rising funding costs due to the outflow of low-cost deposits, which could be a factor degrading profitability in the long term. On the other hand, second-tier financial institutions can expand operations in the short term due to fund inflows, but may face increased interest burdens on high-interest deposits and pressure to secure profitable assets. Particularly in a situation of high economic uncertainty, excessive investment in risky assets in pursuit of returns could potentially undermine financial stability.
Fourth, changes in financial consumer behavior and financial literacy are also noteworthy. With the development of digital finance, financial consumers can easily access information on various financial products and move between financial institutions more conveniently. This has led to active "rate shopping" and increased financial literacy and bargaining power among financial consumers. Particularly centered around the MZ generation, the sharing of information through SNS or financial communities has led to rapidly spreading interest and participation in special products.
While this fund concentration phenomenon has positive aspects in the short term, such as providing opportunities for financial consumers to improve returns and promoting competition in financial markets, there are also concerns about long-term side effects such as deteriorating profitability and increased risks due to excessive interest rate competition among financial institutions. Additionally, fund movements exceeding deposit protection limits or concentration in financial institutions whose stability has not been verified could be risk factors in terms of financial stability.
💡 Interest Rate Outlook and Financial Consumer Strategies
Let's examine future changes in the interest rate environment and financial consumers' fund management strategies in response to these changes.
First, the low interest rate trend is likely to continue in the short term. Considering concerns about global economic slowdown, declining domestic economic growth rate, and easing inflationary pressures, the Bank of Korea is likely to further cut the base rate. The market expects 1-2 additional cuts within this year. Accordingly, commercial banks' deposit rates are also likely to fall further, possibly from the current mid to low 2% range to the low 2% range or below. However, uncertainty exists depending on global financial market volatility and the U.S. Federal Reserve's monetary policy direction.
Second, the interest rate spread is expected to remain widened for the time being. Considering banks' strategies to defend profitability and strengthened loan risk management, the speed of loan rate declines is expected to be limited despite base rate cuts. Particularly for mortgage loans, which are greatly affected by long-term market rates, the decline is likely to be smaller compared to deposit rates. However, as financial authorities continue to monitor banks' excessive interest rate spreads, loan rate cuts may accelerate if pressure intensifies.
Third, diversified investment and portfolio management become more important for financial consumers. In a low interest rate environment, it's difficult to obtain sufficient returns from simple deposits, making diversified investment and risk management even more important. For safe assets like deposits, strategies such as utilizing special products, diversifying maturities, and using multiple financial institutions can be effective. Additionally, it's necessary to construct a portfolio considering various financial products such as government bonds, corporate bonds, funds, and ETFs. However, caution should be exercised not to take excessive risks in pursuit of returns.
Fourth, financial consumer protection and information provision are expected to be strengthened. Financial authorities are expected to pursue various policies to enable financial consumers to make rational financial decisions based on accurate information. Particularly, strengthening deposit rate comparison disclosures, mandating the provision of important financial product information, and expanding financial consumer education are expected to be emphasized. It's important for financial consumers to utilize this information and educational opportunities to improve their financial literacy.
Fifth, the development of digital finance will have an even greater impact on financial consumer behavior. As financial product subscription and management through mobile banking and fintech apps becomes more convenient, financial consumers' "rate shopping" and movement between financial institutions are expected to become even more active. In particular, digital channel-exclusive special products are expected to increase, and AI-based asset management services are expected to expand. Financial consumers will be able to manage funds more efficiently by utilizing these digital innovations.
In this changing interest rate environment and financial market, financial consumers need to establish customized fund management strategies that comprehensively consider their financial goals, risk tolerance, and investment periods. Stable asset formation and management from a long-term perspective will become more important than pursuing short-term interest rates.
4️⃣ In Conclusion
The widening of interest rate spreads and the concentration of funds in second-tier financial institutions' special products are important phenomena showing structural changes in the financial market during a transition to low interest rates and changes in financial consumer behavior. This can be seen as a result of complex interactions among financial institutions' management strategies, market competitive structures, and financial consumer decision-making, rather than a simple temporary issue.
In the short term, financial consumers can improve returns by utilizing high-interest special products from community credit cooperatives, credit unions, and savings banks. However, it's important to carefully check deposit protection limits, financial institution stability, product application conditions, and restrictions in this process. In particular, a balanced approach matching one's financial situation and goals is needed, rather than indiscriminately moving funds in pursuit of "high interest rates."
Financial institutions need to focus on sustainable revenue models and providing differentiated customer value beyond short-term fund attraction competition. They should recognize that defending short-term profitability through widening interest rate spreads could lead to customer defection and weakened competitiveness in the long term, and should put more effort into building trust relationships with financial consumers.
Financial authorities need to find balance among various policy objectives such as financial market efficiency and stability, and financial consumer protection. It's important to strengthen monitoring and management of excessive interest rate spreads while designing policies that don't hinder financial institutions' autonomous management and innovation. Additionally, expanding information provision and education to help financial consumers make rational financial decisions is necessary.
In conclusion, the current interest rate environment and financial market changes present both challenges and opportunities. Financial consumers should actively utilize this environment to enhance their asset management capabilities, financial institutions should strengthen their competitiveness through providing true customer value, and financial authorities should strengthen policy support for the development of a sound and efficient financial market. Through the balanced approach and cooperation of these various actors, the financial market can contribute more significantly to economic growth and improvement of national welfare.