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Bank Deposits Drop for the First Time

Posted January. 06, 2005 22:31,   


As the real interest rate, which takes into consideration the inflation rate, dropped to negative, last year’s bank deposits have decreased for the first time ever.

According to the Bank of Korea on Thursday, January 6, as of the end of last year, the total balance of banking institutions (excluding the Korea Development Bank) amounted to some 510.1001 trillion won, decreasing by 5.3851 trillion won from the late of 2003.

This is the first time ever that annual bank deposits have dropped.

A decline in bank deposits resulted from the real interest rate changing to negative when the Bank of Korea (BOK)’s monetary policy committee dropped the call rate two times last year to boost the economy.

The average deposit rate for savings accounts last November was at an annual 3.42 percent, and considering the inflation rate (3.3 percent) and interest income tax, the real interest rate dropped to -0.42 percent. This means that if 0.1 billion won was put into a fixed time deposit account, there would be an annual loss of 420,000 won.

Deposits withdrawn from banks have been diverted to money market funds by investment and trust companies via bond beneficiary certificates, where a relatively high profit can be expected.

Money market funds increased by 16.6656 trillion won, and bond beneficiary certificates increased by 21.9244 trillion won last year.

In the meanwhile, the balance from private loans to households and companies amounted to 549.6083 trillion won as of the end of last year, increasing by a mere 28 trillion won. The BOK said, “In the middle of a situation where large enterprises are hesitating to invest, and middle and small-sized enterprises cannot borrow money due to a credit crunch, households have not finished adjusting their debts, and so the increase in the loan rate has slowed down.”

Kang-Woon Lee kwoon90@donga.com