Despite Lower Interest Rates, Bank Deposits Surge: What’s Behind the Trend?

The amount of deposits continues to surge

Recently, domestic banks in South Korea have been lowering their deposit interest rates, yet the amount of deposits continues to surge. This paradox occurs as depositors flock to secure higher interest rates, even though banks have essentially halted their competition for funds. However, this trend presents challenges for banks in balancing deposits and loans, and could eventually lead to unfavorable conditions for financial consumers.

This year, domestic banks have continuously lowered their deposit interest rates, which are now barely at 3.5%. This rate is nearly the same as the Bank of Korea’s base rate, making it difficult for depositors to expect substantial returns on their investments. The lowering of rates indicates that banks have temporarily stepped back from the competition to attract funds.

Nevertheless, despite these low rates, the total deposits in the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) have increased by over 40 trillion KRW this year alone. Depositors are flocking to secure even slightly higher rates, anticipating that the current rates might be at their peak.

This trend is further fueled by signals from the Federal Reserve (Fed) regarding a potential rate cut. As the Consumer Price Index (CPI) in the United States has shown a decline, there is a widespread expectation that the Fed will soon lower its rates. This has led depositors to believe that now is a good time to lock in their money in deposits.

However, banks are facing challenges due to the surge in deposits and a slowdown in loans, causing a mismatch in their loan-to-deposit ratio. By the end of the first quarter, the loan-to-deposit ratio of the four major banks had dropped to 96.8%, indicating that deposits outweigh loans, potentially harming the banks’ profitability. With the increased burden of paying interest on the deposits, banks may be forced to lower deposit rates further or increase loan interest rates.

A financial industry insider noted, "While the trend in deposit interest rates has already factored in future base rate projections, if the actual base rate cuts begin, the pace will accelerate. If excessive funds continue to flow into deposits, interest rate distortions could worsen, leading to an unfavorable environment for consumers."

The current surge in deposits despite falling interest rates is driven by expectations of interest rate cuts and the desire to secure higher returns. However, this trend poses risks to banks' profitability and balance in their loan-to-deposit ratios, which could eventually lead to negative impacts on financial consumers. Depositors should carefully monitor interest rate fluctuations and make prudent investment decisions.