Banks scramble for new funds ahead of maturing high-interest deposits

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South Korea’s commercial banks are looking to stay ahead of the maturation of their high-interest deposits by competing for new funds. In the wake of the “Legoland” crisis that led to a money market crash in September 2022, banks aggressively attracted deposits by offering the highest interest rates since the financial crisis. As a chunk of these deposits begin maturing this month, banks are racing to raise funds by offering high deposit rates and issuing more bank bonds to keep the money from running away.

According to the Korea Federation of Banks (KFB), which represents major commercial banks in Korea, Woori Bank increased the interest rate on its key one-year maturity deposit product, “WON Plus Deposit,” from an annual 3.73 percent to an annual 3.83 percent on Thursday. Hana Bank also raised the interest rate on its “Hana Fixed Deposit” product from an annual 3.7 percent to an annual 3.75 percent. The one-year maturity fixed deposit interest rates at the four major banks now range from 3.75 percent to 3.83 percent annually, up 0.08 percentage points on the upper end and 0.07 percentage points on the lower end compared to last week.

Bank time deposits have increased by more than 116 trillion won ($87 billion) in a three-month period since September last year, with the four largest commercial banks offering deposit products in the 4-5 percent per annum range attracting a whopping 82 trillion won. The increase is nearly four times as large as the recent three-month (June-August) increase of 22.4 trillion won in savings deposits.

As there are usually many subscribers to one-year maturity products, it is expected to be a big money movement in the trillions of won. “The maturity of high-interest savings products sold in the second half of last year will return at the end of this month, and we are preemptively raising interest rates to prevent a large outflow of funds,” an official from a commercial bank said.

Some commercial banks reportedly considered special promotions and products to encourage customers to reinvest their maturing deposits but decided against the move due to concerns that intense competition for new deposits could lead to rising lending rates.

Pressure to secure new funds could increase if a large-scale outflow of funds occurs, leading to higher issuance of bank bonds in the banking industry. In August, the net issuance of bank bonds hit 3.78 trillion won, a record high last seen in September 2022.