[Editorial] Banking beyond margins

Korea Herald

30-07-2025

Korean banks reap outsized profits based on a risk-averse model that sidelines vital sectors
South Korea's four largest financial groups — KB, Shinhan, Hana and Woori — posted a combined net profit of 10.33 trillion won ($7.42 billion) in the first half of 2025, setting a new record. What makes this figure striking is not only its magnitude but the underlying composition of these earnings.
Despite four benchmark rate cuts by the Bank of Korea since late 2024, commercial banks promptly lowered deposit rates but were reluctant to reduce lending rates. As a result, the net interest margin — the difference between what banks pay depositors and what they charge borrowers — expanded sharply. Interest income now constitutes more than 75 percent of total bank revenue. Simply put, banks have reaped outsized profits largely by maintaining elevated lending rates and amid falling funding costs.
Typically, lower base rates compress banks' margins as competition forces lenders to cut loan rates more quickly than deposit rates. South Korean banks, however, have defied this norm. The average spread between lending and deposit rates, roughly 0.5 percentage points in 2023, surged to over 1.3 points in the first five months of 2025. This extraordinary divergence reflects a blend of regulatory deference and muted competition, enabling banks to harvest windfall gains with little risk.
Government policy has been complicit in this dynamic. Measures aimed at curbing household debt and cooling the overheated housing market have given banks both political cover and regulatory justification to keep lending rates high. Meanwhile, state-backed mortgage products, which now guarantee up to 90 percent of the principal, dominate new housing loans, sharply reducing the default risk for lenders and ensuring stable, low-volatility returns.
The confluence of regulatory tightening and public guarantees has institutionalized a risk-averse lending model. Banks extend credit with minimal exposure and remain comfortably within regulatory bounds. Yet this model departs from the traditional role of banks as catalysts for economic growth. It encourages caution and disincentivizes the proactive capital deployment essential for innovation and structural transformation.
Meanwhile, the real economy exhibits signs of strain. Growth remains sluggish, corporate investment cautious, and critical sectors like artificial intelligence, green energy and biopharmaceuticals remain undercapitalized. Lending to small and medium-sized enterprises increased by less than 1 percent in the first half of the year, while mortgage lending surged over 4 percent. This pattern signals capital flowing disproportionately into asset accumulation rather than productive enterprise — a troubling trend for South Korea's long-term productivity and competitiveness.
Banks are more than mere custodians of savings. Their fundamental role in the economy is to identify viable opportunities, absorb risks and allocate capital to sectors capable of sustaining growth. South Korea's demographic headwinds and technological imperatives demand precisely this catalytic role. A banking system preoccupied with low-risk, short-term spreads is ill-suited to these challenges.
President Lee Jae Myung has urged banks to move beyond reliance on interest income and play a more active role in supporting the real economy. The Financial Services Commission is reportedly developing guidelines to encourage longer-term investment in venture capital, listed equities and strategic sectors. These signals are welcome but belated. And mere exhortation will not suffice.
What is required is a robust policy framework that rewards measured risk-taking. Instruments such as risk-sharing schemes, differentiated capital requirements and targeted incentives for innovation lending should be prioritized. Without such tools, banks will likely default to the safety and predictability of margin-driven profits.
The stakes go beyond financial-sector efficiency. If banks continue to pocket record earnings while the innovation economy struggles for capital, South Korea could fall behind in the global contest for economic resilience. Banks can no longer afford to be passive observers of macroeconomic forces; their core mission must be to underpin and accelerate sustainable economic progress.