South Korea’s financial watchdog will crack down on any unfair practices by banks when calculating spreads for household loans and establish a system enabling consumers to compare loan rates by bank, it said Tuesday.
The Financial Supervisory Service convened a meeting with vice presidents of major commercial banks in order to discuss measures to improve the spread calculating system for household loans.
The meeting was held a day after Korea’s top financial regulator Yim Jong-yong vowed to make all-out efforts to reduce the risks of the country’s record high household debt in light of high anticipation of a rate increase by the US Federal Reserve this week.
Although Korea’s benchmark borrowing rate remains at an all-time-low of 1.25 percent, consumer complaints about higher interest rates for mortgages and other household loans have been rising since early November, after Donald Trump won the US presidential election.
At the time, commercial banks took higher prices of bank debentures as an excuse for growth in mortgage and loan rates.
Interest rates for fixed-rate loans combine the rate of bank debenture and spread that is set autonomously by each bank. Rates for floating loans add up bank spreads and the Cofix rate.
Banks estimate operational costs, risk premiums, target profit ratios and adjustable ratios when they set their spreads. If a bank sets its target profit ratio at a higher level than before, it should raise its spread for loans.
Due to the growing consumer complaints, the FSS recently checked and found out that major banks are not aligned in their details of spread calculation.
“The biggest difference was seen in target profit ratios aimed by the banks,” said an FSS official. “The FSS is planning to apply additional standards and factors to the calculation of spreads in order to help reduce the burden of high interest rates on consumers.”
The watchdog will also revise the current rate disclosure system run by the Korea Federation of Banks. Currently, every bank is required to disclose interest rates of all products on their homepages and the homepage of the KFB. But the system has been less used by consumers due to inconvenience of access when they actually consult with bank clerks about borrowing loans.
“The watchdog and banks are discussing measures to establish a system where consumers can find and compare interest rates of all loans and mortgages by bank on the same conditions,” the official said.
However, the banking industry does not welcome the FSS move, describing it as “aggravating banks’ profitability.”
“Such a move is interpreted as the authority intervening in the price policy of banks,” said a spokesman at a major commercial bank, who asked for anonymity. “It is against the free interest rate market, which can add to the worsening margins of banks amid prolonged low growth and rates.”
