Savings banks dangle 4% deposit rates to lure money back from stocks

Savings banks are rapidly raising deposit rates to stem a "money move" — the mass migration of funds into the stock market. Time deposits offering annual rates of 4 percent or more, which had all but vanished from the market, have surpassed 100 products in a single month, drawing in consumers hunting for higher returns.

According to the Korea Federation of Savings Banks' consumer portal Wednesday, the average annual interest rate on one-year time deposits across 79 savings banks nationwide stood at 3.79 percent. That marks a jump of 0.24 percentage points in just two weeks from the 3.55 percent recorded on June 17, when a product offering a top rate of 4.5 percent appeared for the first time this year.

By far the biggest draw for retail investors is the growing lineup of high-yield products offering more than 4 percent annually. A month ago, not a single time deposit in that range existed; now there are 105, offered by 32 savings banks.

Institutions currently offering base rates of 4.5 percent or higher include OSB Savings Bank, OK Savings Bank and Acuon Savings Bank. Signs of market overheating are already apparent. On June 18, Raon Savings Bank launched a special deposit product at 4.6 percent annually, only to pull it after just one day when demand overwhelmed supply.

<style ref="s1">For consumers, this is a rare opportunity to lock in high savings rates after a long dry spell — but experts agree that a few precautions are in order.</style> Their concern is that an excessive rate war among savings banks could eventually erode the financial health of these institutions.

The savings bank sector has been down this road before. During the 2022 Legoland crisis, savings banks flooded the market with special high-yield deposits at around 6 percent annually to shore up liquidity, only to suffer massive losses and deteriorating financial health afterward as they struggled to cover the resulting interest costs. More recently, government lending regulations — including a 50 percent debt service ratio cap applied to the second-tier financial sector — have made it difficult for savings banks to generate profit from loans even when they successfully attract deposits. If benchmark interest rate volatility picks up in the second half of the year, the risk of insolvency could grow.

Experts advise consumers to take advantage of the high rates while spreading deposits across institutions to stay within the deposit protection limit.

The deposit protection limit guarantees up to 100 million won ($64,900) per depositor — principal and interest combined — in the event of a financial institution's bankruptcy. Even if a depositor holds multiple accounts at the same institution, all eligible deposits there are aggregated, with protection capped at 100 million won per person.

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