South Korean banks are facing increasing pressure on their net interest margins as a surge in the stock market and the introduction of comprehensive asset management accounts (IMAs) drive a decline in low-cost demand deposits, a core funding source. The proportion of demand deposits within total deposits at four major commercial banks – KB National, Shinhan, Hana, and Woori – fell below 30% as of February 6, according to financial sector data.
Demand deposits, which include checking and savings accounts with no fixed maturity, traditionally comprised over 40% of total deposits following the onset of the COVID-19 pandemic. However, a shift in investor behavior is solidifying a trend toward a 20%-range share, according to sources within the financial sector.
Total deposits at the four banks reached 1,799.4645 trillion won as of February 6, with demand deposits accounting for 29.77%, a decrease of 1.17 percentage points from year-end figures. This decline is attributed to funds moving into higher-yielding investments, particularly the booming stock market, and the increasing popularity of IMAs.
The benchmark KOSPI index has surpassed 5,300 points, and the potential legalization of a won-denominated stablecoin could trigger a significant outflow of funds from bank deposits. According to Korea Credit Rating, the introduction of a won-denominated stablecoin could lead to a decrease of 244.7 trillion won in demand deposits over the next decade.
“We haven’t had to worry about securing deposits for a long time, but now is the time to start,” said a senior official at one of the four major financial groups. The shift is raising concerns about banks’ funding costs and potential upward pressure on interest rates.
Demand deposit levels peaked in March 2022, reaching 592.4472 trillion won, coinciding with a period of relatively low interest rates and a fluctuating stock market. The Bank of Korea began raising its base rate from 0.5% in August 2021, gradually increasing it to 3.5% by January 2023, where it remained frozen. The central bank began lowering rates in September 2024 amid economic slowdown, bringing the rate to 2.5% as of February 10, 2026.
The recent surge in the stock market, coupled with stable interest rates, has prompted investors to withdraw funds from banks. This has particularly impacted demand deposits. A senior official at a major financial group stated on February 10, “Low-cost deposits are decreasing. We’ve been told to start worrying about securing deposits, as a shortage will ultimately force us to issue bank bonds, which will drive up interest rates.”
The decline in demand deposits is not merely a fluctuation in deposit levels but directly impacts lending rates. Demand deposits carry minimal interest, serving as a key source of low-cost funding for banks. As their proportion decreases, banks are increasingly reliant on more expensive funding sources like fixed deposits and bank bonds, leading to higher borrowing costs. A recent analysis suggests that if banks fully replace departing demand deposits with bank bonds, their average return on assets (ROA) could decrease by 0.12 percentage points.
Smaller banks are expected to be disproportionately affected by the potential introduction of a won-denominated stablecoin. The Korea Deposit Insurance Corporation’s research institute noted in a recent report that while the total deposit base might remain stable if stablecoin issuers deposit their reserves in banks, the shift from individual retail deposits to wholesale deposits held by issuers could increase banks’ funding costs and liquidity risks. This could weaken the lending capacity of smaller banks.
Financial sector observers suggest the decline in demand deposits signals a structural shift in the financial landscape, rather than a temporary fluctuation. A financial sector source indicated the need to assess the impact of this change on banks’ liquidity management and long-term funding cost structures, and its subsequent effect on lending rates and profitability.
