Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/225658 
Authors: 
Year of Publication: 
2020
Series/Report no.: 
KDI Policy Forum No. 280
Publisher: 
Korea Development Institute (KDI), Sejong
Abstract: 
Concerns prevail that a policy rate cut could weaken bank profitability and trigger financial instability. However, banks can sustain relatively high net interest margins with little fluctuation despite a rate cut owing to their dominant position in the deposit market and ability to adjust loan maturity. - By virtue of their market dominance, banks set their deposit rates below the base rate by a fixed percentage, and as such, the former falls within a narrower range than the latter. - Because deposit rates are little exposed to base rate fluctuations, banks are able to increase their share of long-term loans which are unaffected by short-term rate changes. This means that lending rates also fall by a smaller margin. - An empirical analysis found that a 1%p change in the call rate, which moves in line with the base rate, adjusts the deposit and lending rates by 0.53%p and 0.58%p, respectively, indicating that the fluctuation (0.05%p) in the net interest margin is statistically insignificant. Therefore, the possibility of financial instability due to a deterioration in bank profitability on a rate cut by the central bank should not be deemed as a constraint.
Persistent Identifier of the first edition: 
Document Type: 
Research Report

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