Higher CMA Rates to Worsen Bank Fund Shortage
By Park Hyong-ki
Staff Reporter
Woori Investment & Securities and other securities firms are raising interest rates on cash management accounts (CMAs), a move most likely to further aggravate fund shortage problems at banks.
With brokerage houses moving to raise their CMA interest rates and providing more services such as CMA check cards, stock trading and equity fund consulting, banks are facing greater challenges in improving their bottom lines.
Account holdings at securities companies grew one trillion won to 26 trillion won last month. Brokerage houses such as Woori and Tongyang Investment Bank started offering CMA interest rates of up to around 5.5 percent. NH Investment & Securities and Dongbu Securities upped their interest rates to 5 percent as well.
To counter this, banks have opted to raise interest rates on savings accounts, and introduced new products such as swing accounts in which banks move adequate deposits to high-interest accounts to offer higher rates for customers.
But they along with banks' money market deposit accounts (MMDA) failed to edge out securities firms' CMAs. MMDAs allow banks to invest depositors' funds in bonds and certificates of deposits for stable and short-term interest gains.
Market analysts say banks need to hurriedly find their edge by developing innovative products as the shift of money to CMAs and other attractive instruments are going to speed up.
``It's troublesome for banks,'' said Lim Il-sung, an analyst at Meritz Securities. ``They either need to go global or boost non-interest income by seeking alternative business models.''
Lim said given that banks' overseas businesses account for a mere 2 percent, now is the time to consider taking risks and expanding abroad.
Banks are suffering an extreme fund shortage as they are having difficulty attracting funds to their accounts that offer lower interest rates than their non-banking rivals and they see no particular countermeasures.
To make up for fund shortage, banks have issued more CDs and bank bonds. They have issued CDs worth over 11 trillion won in the four months to October.
Due to weak demand for CDs and bonds against increased supply, CD rates have risen to as high as 5.6 percent. This means more burdens on borrowers as continued rises in benchmark CD rates point to interest rate hikes on floating-rate mortgages.
Issuances of bank bonds at home and abroad have also been an alternative way to finance. But that ran into a speed bump as financial markets had been hit by subprime defaults worldwide.
Analysts said that rising interest rates will further delay the recovery of the sluggish real estate market. They also expressed concern that banks' recent increases of loans to small-to medium-size firms will increase the risk of defaults.
``The CD interest rate hike is bound to slow down the recovery of the real estate market, while SME loans increase credit risks on both sides,'' said Daniel Baek, an analyst of Woori Investment & Securities.