🚨 Savings Banks Go Against the Trend with High Interest Rates
Today Korean Economic News for Beginners | 2025.08.03
0️⃣ Money Moving to Second-Tier Banks as Deposit Protection Expands, People Seeking High Interest Rates
📌 While Major Banks Lower Rates, Savings Banks Offer 3%+ Interest as Game-Changer, September Deposit Protection Expansion to 100 Million Won
💬 As deposit protection limits expand from the current 50 million won to 100 million won starting in September, savings banks are getting serious about high interest rate competition. While major banks are lowering deposit rates to around 2% following the Bank of Korea's base rate cuts, some savings banks are offering time deposits above 3% and savings accounts up to 10% to attract customers. With government policy signals asking financial institutions to hold back on rate cuts, money movement to second-tier financial institutions is expected to accelerate. However, we must also consider the profitability pressure and soundness risks of savings banks behind these high interest rates.
1️⃣ Easy Explanation
People who put money in banks are starting to move to places that pay higher interest. This is because starting in September, the amount of money protected for depositors will double, making savings banks a safe choice too.
Let me explain the situation first. Until now, even if a bank failed, depositors could only get back up to 50 million won. So even if savings banks offered high interest rates, many people chose major banks because they worried "what if the bank fails?"
But starting in September, people can get back up to 100 million won. This means most ordinary people can safely put their money in savings banks. So people start thinking "why not go to a place that pays more interest?"
The interest rate difference is quite big. Major bank time deposit rates are falling to around 2%, while savings banks are offering 3% or more. If you put 10 million won in for one year, you'd get 200,000 won from a major bank but over 300,000 won from a savings bank.
This phenomenon is called "money move." It means money flows from places with low interest rates to places with high interest rates. Just like water flows from high places to low places, money flows to places with high interest rates.
The government is also supporting this trend. Recently, financial authorities asked banks "don't lower interest rates too quickly," which was meant to protect ordinary people's interest income.
But there are things to be careful about. Savings banks offer high interest because they need money, which could also signal that their business situation might be difficult. Also, high interest rate products are mostly special sale products, so there might be limits on time or amount.
In the end, depositors have more choices now, but they need to carefully consider both safety and profitability when making decisions.
2️⃣ Economic Terms
📕 Deposit Protection System
The deposit protection system is a national guarantee system that pays back depositors up to a certain amount even if a financial company goes bankrupt.
- Currently protects up to 50 million won per person, but will expand to 100 million won starting September 2025.
- Run by the Korea Deposit Insurance Corporation, funded by insurance premiums paid by financial companies.
- Covers deposits, savings, deposit-type insurance, but not stocks or funds.
📕 Money Move
Money move means the phenomenon where funds move from one place to another due to changes in interest rates or market conditions.
- Recently refers to deposits moving from major banks to savings banks.
- Money move becomes more active when interest rate differences are big and safety concerns decrease.
- Large-scale money movement can also affect the stability of the entire financial market.
📕 Second-Tier Financial Institutions
Second-tier financial institutions refer to savings banks, credit unions, community credit cooperatives, etc., excluding major banks.
- They are smaller than first-tier institutions (major banks) and typically offer higher interest rates.
- In the past, there were safety concerns, but perception is improving with expanded deposit protection.
- They specialize in community-based services and financing for small businesses and ordinary people.
📕 Deposit-Loan Imbalance
Deposits mean receiving money from customers, and loans mean lending that money out.
- When savings banks receive many deposits with high interest rates, deposits increase.
- But if there aren't enough places to lend that money at equally high rates, profitability can worsen.
- If this imbalance continues, the financial institution's soundness can be problematic.
3️⃣ Principles and Economic Outlook
✅ Game-Changer Effect of Expanded Deposit Protection
Let's analyze the structural changes that expanding deposit protection limits will have on the financial market.
First, there's a fundamental change in perception about savings banks. Until now, many people saw savings banks as "risky but high interest rate places." This was because in the past, when troubled savings banks failed one after another, depositors with more than 50 million won suffered losses. But with expansion to 100 million won protection, ordinary people's average deposit amounts can be fully protected. Considering Statistics Korea data showing average household financial assets are around 70 million won, most ordinary people can now use savings banks with peace of mind.
Second, the competitive structure between financial institutions is being completely reorganized. In the past, major banks could keep customers even with low interest rates by emphasizing safety. But now that there's little difference in safety, they have to compete purely on interest rates. While major banks find it hard to raise deposit rates as loan margins shrink, savings banks can offer higher deposit rates based on their relatively higher lending rates. This will likely lead to major banks losing market share and savings banks growing.
Third, the speed of overall financial market interest rate decline is expected to be controlled. Even if the Bank of Korea cuts base rates, if savings banks maintain high deposit rates, the decline in overall market rates could be limited. This is good for depositors but means borrowers may get limited benefits from rate cuts. The government's request for financial institutions to hold back on rate cuts can be understood in this context.
Expanding deposit protection is playing a game-changer role that fundamentally changes the competitive structure of the financial market, beyond just a simple system change.
✅ Sustainability of Savings Banks' High Interest Rate Strategy
Let's analyze how long savings banks' high interest rate policies can last.
First, there are limits to high interest rate policies due to savings banks' profit structure. If savings banks offer deposit rates above 3%, loan rates need to be at least 5-6% to make profit. But it's questionable whether there's enough demand for loans at those rates in the current market situation. Especially since good companies can get loans at lower rates from major banks, savings banks have to rely on customers with relatively lower credit ratings. This could lead to increased default risk, making it hard to sustain long-term.
Second, if high interest rate competition intensifies, the soundness of the entire savings bank industry could worsen. When one savings bank offers high rates, other savings banks have to follow. This excessive competition eventually pressures the entire industry's profitability. Some savings banks are already experiencing profitability decline, and their asset soundness indicators are considerably lower than major banks. Financial authorities are aware of these concerns and may put brakes on excessive high interest rate competition.
Third, current high interest rates are likely temporary, focused on special promotion products. The 10%+ savings accounts or 3%+ time deposits that savings banks offer are mostly special products with time or amount limits. For example, they're often short-term products of 6 months or less, or limited to 10 million won or less per person. Therefore, general deposit rates may still not differ much from major banks, and this could be a temporary phenomenon aimed at marketing effects.
Savings banks' high interest rate strategy is effective short-term, but securing profitability and soundness will be key long-term.
✅ Smart Choice Strategies for Depositors
Let's suggest points that depositors should consider in the money move era.
First, don't just look at interest rates but also check the stability of financial institutions. Even though deposit protection expands to 100 million won, if a financial institution fails, you might temporarily not be able to withdraw deposits and have to go through complex procedures. So when choosing savings banks, it's good to check management indicators like capital adequacy ratio, delinquency rate, and profitability. You can find this information on the Financial Supervisory Service website or each financial institution's disclosure materials. It's safe to choose institutions with BIS ratios above 8% and fixed-or-below credit ratios under 5%.
Second, apply diversification principles to reduce risk. Just because you're protected up to 100 million won doesn't mean it's safe to put all your money in one place. It's better to divide deposits among several financial institutions or properly combine deposits and savings. Also, you need to carefully check the conditions of high interest rate products. There are often big penalties for early withdrawal, or you can only get high rates by meeting specific conditions. Read the terms carefully and check if it fits your fund management plan.
Third, consider the possibility of interest rate changes from a long-term perspective. Don't expect current high interest rates to continue forever. If economic conditions change or the financial institution's situation changes, interest rates can change too. So for variable rate products, check interest rate change conditions, and even for fixed rate products, plan ahead for re-deposit after maturity. Also calculate real interest rates considering inflation. If deposit rates are 3% but inflation is 2%, real returns are only 1%.
In the money move era, wise asset allocation that balances profitability and stability has become more important.
4️⃣ In Conclusion
The money move that started with expanded deposit protection limits is bringing new winds of change to Korea's financial market. The 100 million won protection system starting in September is playing a game-changer role that fundamentally changes the competitive structure between financial institutions, beyond just a simple number change.
The biggest change is the shift in perception about savings banks. Savings banks that were once seen as "risky but high interest rate" places have now secured new positioning as "safe and high interest rate" places. This means new competitors have emerged in the deposit market that major banks had monopolized.
The interest rate difference is quite significant. While major banks offer deposit rates around 2%, savings banks are offering time deposits above 3% and even savings products up to 10%. With 10 million won as a basis, there can be over 100,000 won difference in annual interest, giving depositors enough motivation to move.
But there are cautions to these changes too. There are questions about whether savings banks' high interest rate policies are truly sustainable. To give high deposit rates, they need to receive even higher loan rates, which could lead to increased default risk.
Also, the high interest rate products currently offered are mostly special promotion products with time or amount limits. It could be a temporary phenomenon aimed at marketing effects.
From depositors' perspective, having more choices is definitely positive. But rather than moving blindly just looking at interest rates, they should comprehensively consider the financial institution's stability, product conditions, and long-term interest rate outlook.
The government's policy direction is also an important variable. Asking financial institutions to hold back on rate cuts is intended to protect ordinary people's interest income, but financial market stability must also be considered together.
In the end, this money move phenomenon can be seen as a process where Korea's financial market is developing into a more competitive and efficient structure. It can be evaluated as a positive change that provides depositors with more choices and higher profit opportunities, and encourages financial institutions to develop better services and products. However, it will be important to minimize side effects that may occur during rapid change and ensure stable transition.
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