South Korea's Second-Tier Banks Raise Deposit Rates to 16-Month High Amid 'Money Move'

South Korea's second-tier financial sector, encompassing savings banks and mutual finance companies, is actively responding to market dynamics by significantly increasing fixed deposit interest rates. This strategic shift, pushing rates to a 16-month high of nearly 4%, is a clear indication of their efforts to shore up dwindling deposit balances. The move comes as these institutions face a dual challenge: rising market interest rates that make other investments more attractive, and a persistent 'money move' towards the stock market, drawing funds away from traditional savings vehicles.

The data reveals a notable trend: the average one-year fixed deposit rate across 79 savings banks has climbed to 3.24%, a level not seen since January of the previous year. More strikingly, a considerable number of products now offer rates above 3.5%, with some even reaching the high 3% range. This aggressive rate hike strategy is primarily aimed at retaining existing customers who prioritize safety and attracting new depositors who might be hesitant about the volatility of the stock market. Industry insiders suggest that a differential of at least 0.5% compared to commercial banks is necessary to effectively draw in funds.

This rate competition is not limited to savings banks. Mutual finance companies, including credit unions and Saemaul Undong (SMU) cooperatives, are also joining the fray. For instance, some SMU branches are offering a 'MG The Banking Fixed Deposit' product at 3.8%, while credit unions are introducing products with rates in the high 3% range. This collective action underscores the urgency felt across the sector to stabilize their funding base, which has seen a consistent decline since the latter half of last year. The total deposits in savings banks, credit unions, and SMU cooperatives have shrunk considerably, reaching lows not seen in over a year for some.

From a South Korean financial perspective, as reported by Hankyoreh, this situation reflects a broader economic strategy. While the stock market offers potentially higher returns, the current interest rate environment in the second-tier banking sector provides a more secure, albeit lower, yield. This is a crucial strategy for financial stability, particularly for institutions that rely heavily on deposits. The challenge remains to balance attracting safe-asset investors without becoming overly exposed to interest rate risks, especially as the market continues to fluctuate. The 'money move' to stocks is a powerful force, but the renewed attractiveness of fixed deposits offers a vital counter-balance for savers.

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This is a strategy to minimize the outflow of funds to retain customers who prefer safe assets. It will be difficult to attract aggressive stock market investment demand, but it is intended to slow the pace of decrease in deposit balances.