Banks cut dollar deposit rates amid gov't push to defend won

gettyimagesbank

Banks are slashing foreign currency deposit rates to near-zero levels in a bid to disincentivise dollar deposits, in line with the government’s efforts to curb the won's weakness, industry officials said Monday.

The move is already driving a sharp pullback in dollar deposit balances, they said.

Shinhan Bank will cut its special foreign currency deposit rates starting Friday, lowering the annual interest rate on dollar deposits to 0.1 percent from 1.5 percent.

Hana Bank is set to follow suit the same day, reducing the interest rate on its U.S. dollar deposits to 0.05 percent from 2 percent.

Woori Bank moved earlier, trimming its dollar deposit rate to 0.1 percent from 1 percent on Jan. 15.

Dollar deposit rates are typically tied to the U.S. federal reserve rate and have traditionally exceeded those on won-denominated time deposits, reflecting the interest rate gap between Korea and the United States.

Despite this structure, commercial banks have pushed rates down to near-zero territory, a step widely seen as a response to government pressure to curb dollar demand. At such low rates, holding dollars in bank deposits offers little appeal for either individuals or corporations.

“This is part of a coordinated effort to suppress dollar demand. We believe the inflow of foreign currency deposits needs to be carefully managed under current conditions,” an official at a major bank said.

The won has been under sustained pressure since September last year, with the won-dollar exchange rate at times exceeding the 1,480-won level. Prolonged dollar strength has heightened concerns over rising import costs and heavier external debt servicing burdens.

The government has intensified efforts to stabilize the currency, including tax incentives aimed at attracting overseas equity investment funds back to Korea.

As part of the initiative, the Financial Supervisory Service, the country’s financial watchdog, summoned senior bank executives on Jan. 19, urging them to scale back the promotion of dollar deposit products and devise measures to boost demand for won conversion.

In response, Shinhan Bank launched a program offering a 90 percent exchange rate fee discount to individuals and sole proprietors who convert foreign currency deposits into won by Feb. 25.

Reflecting these policy-driven efforts, dollar deposit balances have fallen sharply in recent weeks.

Data from the five major banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — show outstanding dollar deposits totaled $63.2 billion as of Thursday, down by about $2.5 billion since the previous month.

Most of the decline came from corporate accounts, which hold around 80 percent of all dollar deposits. Corporate holdings fell by $2.59 billion to $49.83 billion as of Thursday, from $52.4 billion last month.

In Seoul’s foreign exchange market, the won-dollar exchange rate closed at 1,440.6 won, down 25.2 won from the previous session.

The won has seen some relief since President Lee Jae Myung said at his New Year press conference last Wednesday that the exchange rate could fall back to around the 1,400-won level within the next month or two.