"Is the interest margin between deposits and loans not wider than in other countries?" President Lee Jae-myung raised the interest margin, a measure of banks' 'interest business,' at the first meeting of the Emergency Economic Inspection Task Force (TF) he held on his inauguration day, 4th. This revealed a concern that domestic banks might be maintaining high loan rates despite the interest rate hike.
At this meeting, the Financial Services Commission reportedly responded that the interest margin between deposits and loans at domestic banks is not high compared to major countries. Financial authorities do not see an issue with the 'absolute level' of the domestic banks' interest margin. A Financial Services Commission official noted, "Compared to major countries, the intensity of financial regulation in Korea is relatively high," adding that "the interest margin between deposits and loans at domestic banks is at a low level."
Experts stated that the issue is the 'relative speed.' They emphasized the need to focus on the banking practice of rapidly lowering deposit rates while keeping loan rates unchanged or even increasing them. They argued that instead of intervening in prices, the government should solve the issue by promoting competition in the banking sector.
◇ Hong Kong, Singapore, and the U.S. at 5% margin… Korea at 1% margin
According to a public announcement by the Korean Bankers Association on the 16th, the interest margin between deposits and household loans handled newly by the five major banks, including KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup Bank, was 1.35-1.53 percentage points in April. Shinhan Bank had the highest margin at 1.53 percentage points, followed by Kookmin Bank (1.44 percentage points), Hana Bank (1.43 percentage points), NH Nonghyup Bank (1.39 percentage points), and Woori Bank (1.35 percentage points).
The interest margin between deposits and loans at domestic banks is low compared to major countries. According to data from the National Assembly Research Service, the average interest margin in Korea was 2.55 percentage points as of 2022, which is low compared to Hong Kong (5.05 percentage points), Singapore (5.13 percentage points as of 2021), and Switzerland (2.94 percentage points). The U.S. and Japan do not officially compile average interest margins, but cases of major U.S. banks show about 5-6 percentage points. As of this month, the average interest rate for 30-year fixed-rate mortgages in the U.S. is 6.8% per year, while the deposit rate is between 0-1% per year. The interest margin in the U.K. was 2.28 percentage points at the end of last year.
Since the net interest margin (NIM), which is the ratio of interest earnings to assets, is primarily used to assess banks' profitability, there are not many statistics on interest margins in major countries. However, experts explain that the trend has not changed significantly. An academic source requesting anonymity stated, "Given that economic conditions, competition in the banking industry, and the structure of financial products differ by country, simply comparing interest margins carries little significance," and added that "domestic banks have a high ratio of household loans, so the average loan interest rate is relatively low. Thus, the interest margin is inevitably lower compared to other countries with lower collateral loan ratios."
◇ "We should promote market competition rather than price intervention"
Experts agreed that caution is needed with the rapidly expanding interest margin. The interest margin between deposits and loans at domestic banks has steeply widened over the past year. At Hana Bank, the interest margin on newly handled household loans jumped from 0.41% last April to 1.43%, a 3.5-fold increase. Shinhan Bank also saw its interest margin rise from 0.78% to 1.53% during the same period, nearly doubling. Deposit rates linked to market interest are typically expected to move similarly, but as banks rapidly lower deposit rates while not decreasing loan rates under the pretext of managing household loans, the interest gap has widened.
The Bank of Korea has lowered the base rate from 3.5% to 2.75% in three phases since last October, causing bank deposit rates to drop from around 3% to the 1% range, while loan rates have stayed in the 4% range. According to the Korean Bankers Association, the average interest rate for household loans at the five major banks in April was 4.07-4.40% per year. A year ago in April, the average interest rate for household loans at the five major banks was 3.98-4.49% per year. While the upper end of the rate has decreased, the lower end has actually increased by 0.09 percentage points. A bank official noted, "We are unable to lower loan rates due to the government's management orders for household loans," adding, "We are following government policy, but there is a feeling of injustice."
Lee Seong-bok, senior researcher at the Capital Market Research Institute, commented that instead of focusing on whether the interest margin is absolutely high or low, there is a need to pay attention to the 'speed difference' where the base rate has been lowered but deposit rates are falling quickly while loan rates are falling slowly. He stated, "The same issue has been repeated for a long time; this is a problem of banking practices rather than prices. Improvement of practices is necessary." Lee Hyo-seop, another senior researcher at the Capital Market Research Institute, noted, "Government intervention in interest rates could appear as controlling prices," adding, "It is right to resolve this through competition in the market. We need to seek ways to promote competition among banks."