Deposit Competition and Depository Institution Risk: Do Interest Margins Matter?

Jaeweon You and Beomseok Seo

Emerging Markets Finance and Trade, 2025, vol. 61, issue 15, 4893-4913

Abstract: We investigate how intensified deposit competition affects the stability of depository institutions in South Korea. Using novel and granular institution-level data on deposit interest rate spreads from 2016 to 2023, we find that elevated deposit competition significantly reduces profitability and exacerbates earnings volatility, particularly during periods of financial market instability amid the monetary tightening phase between 2021 and 2023. Importantly, the adverse effects are more pronounced among depository institutions with narrower interest margins, which also experience declines in capital adequacy. Our findings provide stronger support for the competition-fragility hypothesis over the competition-stability view, indicating that intensified deposit competition under market stress disproportionately undermines the stability of institutions with limited pricing power. The results underscore the necessity of closer integration of deposit competition metrics into liquidity risk surveillance, alongside enhanced liquidity management and funding diversification by depository institutions.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:61:y:2025:i:15:p:4893-4913

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DOI: 10.1080/1540496X.2025.2520886

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