There is an interest rate reversal in deposit products from banks and savings banks. It is common to apply a higher interest rate the longer the money is deposited, but recently, the deposit interest rate has moved contrary to market consensus. As interest rate cuts were announced, the banking sector reduced the interest rate benefits of long-term deposits, and consumers also placed more emphasis on liquidity and showed a clear tendency to prefer short-term deposits or immediate deposit/withdrawal products.
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The shorter the deposit maturity, the higher the interest rate.
According to the Korea Federation of Savings Banks on the 4th, the average interest rate for term deposits in savings banks was 3.59% per year for 12 months and 3.07% per year for 24 months, depending on maturity. In many cases, the interest rate on deposits with a maturity of 6 months is higher than that of deposits with a maturity of 12 months or longer. For example, the 6-month maturity product interest rate for OBS Savings Bank’s ‘Internet Term Deposit’, which has the highest deposit interest rate, is 4.1% per annum, but for 12 months, it is 3.5% per annum. HB Savings Bank’s smart term deposit interest rate is 4% per year for 6 months, 3.5% per year for 12 months, and 3% per year for 24 months. As such, there are 23 savings bank deposit products with 6-month deposit interest rates higher than 12-month deposit rates.
A reversal in short- and long-term interest rates occurred not only in savings banks but also in banks. According to the Korea Federation of Banks, NH Nonghyup Bank’s ‘NH All One e-Deposit’ and Sh Suhyup Bank’s ‘Hey Term Deposit’ have the highest basic interest rates among term deposits with a 12-month maturity, each announced at 3.42% per annum. In the case of NH All One e-deposit, the interest rate at 6-month maturity was 3.45% per annum, which is higher than 12-month maturity.
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Reflecting the outlook for a base interest rate cut
Last September, as the United States implemented a ‘big cut’ (lowering the base interest rate by 0.5 percentage points), monetary policy entered a phase of easing austerity. With the Bank of Korea starting to cut its benchmark interest rate, there is a prevailing view that interest rates will fall in the future. For financial companies, in a situation where interest rates are falling, long-term high-interest products that require high interest payments for a promised period are more burdensome than short-term deposits. An official from a commercial bank said, “In the case of long-term deposit products, adverse margins may occur after the base interest rate cut begins in earnest.” In the case of savings banks, there is a tendency to increase short-term deposits of less than one year in order to spread out deposit maturity dates. After the Legoland incident in October 2022, savings banks significantly raised deposit interest rates to secure liquidity. The interest rate on deposits of less than 12 months was raised to prevent funds from being drained all at once as the deposit maturity period is focused on the end of the year.
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The parking account may exceed the deposit interest rate.
There has also been a situation where parking accounts that allow quick deposits and withdrawals exceed the interest rates on deposits and savings. SC First Bank and Jeonbuk Bank operate parking accounts with the highest interest rates of 4% and 3.51% per year, respectively. The savings bank even launched a parking account that pays up to 8% annual interest (OK Savings Bank) according to the preferential interest rate. Although the requirements are strict, such as a limit on the application of high interest rates, interest rates are higher than deposits with a fixed period, although you can receive interest on a daily basis.
In the case of parking accounts, the purpose of attracting customers is large. This is because it is suitable for attracting new customers with high interest rates. In addition, unlike deposits and savings, which apply the interest rate at the time of contract, the interest rate can be changed at any time, which is said to be advantageous for banks in reducing interest rates. A savings bank official said, “As it is a product that is mainly subscribed to non-face-to-face, we are raising the interest rate on parking accounts to expand customers by targeting demand for using them as salary accounts, etc.” He added, “Recently, the younger generation tends to value liquidity, so demand is also increasing. “There are a lot,” he explained.
There is also a decrease in customer preference for long-term deposit products compared to the past. Recently, as investment sources such as real estate, US stocks, and cryptocurrency have become more diverse, the number of financial consumers who feel the burden of tying up money for more than a year has increased. In fact, the balance of deposits less than one year old is on the rise. According to the Bank of Korea, as of the end of August, the balance of term deposits of less than one year in depository banks was 402.7 trillion won, an increase of 11.6% (41.8 trillion won) from the same month last year (360.9 trillion won). During this period, the overall term deposit balance only increased by 6%. This means that demand was concentrated on short-term deposit products.
Jinho Jeong (jeong.jinho@joongang.co.kr)
