Regulator plans new guidelines for loan spreads

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Regulator plans new guidelines for loan spreads

The country’s financial watchdog will introduce new bank guidelines for calculating mortgage loan spreads amid concerns that banks are raising interest rates to make up for their falling profit at the disadvantage of average borrowers.

The Financial Supervisory Service said Tuesday that financial institutions are unfairly calculating interest rates on home loans. Banks deliberately set higher target return ratio so that they can have grounds to raise interest rates, the FSS said. Financial authorities are monitoring the rate setting practice as interest rates for mortgages have spiked recently.

The interest rate on mortgages is composed of the base rate plus an added rate, called the spread, which banks determine based on borrowers’ credit risks. The base rate is the standard rate set by the central bank. The spread is based on the banks’ target returns, profit requirements, operating costs and risk and credit loss.

The FSS suspected that the banks overestimate their target return on assets to have a basis to raise their spread.

For instance, some banks set target rates of about 2 percent, though the current average return on assets stood at a 0.3 to 0.4 percent.

The FSS vowed to come up with specific guidelines in calculating the spreads since current regulations are “vague”.

The FSS watchdog will consult with the Korea Federation of Banks, an association representing the country’s banking industry and local major banks, to devise new rules.

Financial authorities warned of the rising lending rates for mortgages.

Fixed interest rates on mortgages at the country’s four major banks - KB Kookmin, Shinhan, KEB Hana and Woori - ranged from 2.74 to 4.7 percent at the end of September, but were 3.3 to 4.8 percent as of the end of November, according to the data released by the Financial Services Commission.

Interest on adjustable rate loans were between 2.57 percent and 4.35 percent but rose to 2.8 to 4.5 percent at the end of November, according to the FSC. The increase indicates that the banks adjusted the spreads, given that the benchmark interest rate remains at a record low of 1.25 percent.

The FSS said that it will also change the notification system of banks’ interest rate.

Currently, banks announce their interest rates on the website of the Korea Federation of Banks, but the figure is not in real time. It is based on data from a month earlier.

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