Lax financial supervision blamed for savings bank scandal

The Financial Supervisory Service is under pressure to assume responsibility for its lax supervision of Busan Savings Bank Group, which is at the center of the country’s worst financial scandal over the past decade.

Critics blast the financial regulator for failing to play its proper supervisory role to stabilize the financial market. The bank fiasco cost a combined 288 billion won (269 million U.S. dollars) in losses to the more than 30,000 customers of the group.

A high-ranking financial source said, “To a certain extent, (the financial watchdog) committed dereliction of duty comparable to that of foreign exchange authorities who failed to protect our foreign currency repository and helped cause the financial crisis (in the late 1990s).”

“If we don’t get to the bottom of the matter this time, a second and a third Busan Savings Bank Group debacle will occur, so we have to hold the financial regulator responsible.”

For their part, prosecutors made it clear that additional probes will focus on those guilty of poor supervision at the watchdog.

○ 10 years of poor performance

Many say “blinded inspection” of the financial watchdog is to blame for the collapse of the bank group. Though the group violated a law on mutual savings banks from 2001 to directly carry out real estate development projects, the financial regulator failed to identify the violation.

Given the financial watchdog`s launch in January 1999, weak supervision over the past 10 years effectively caused the Busan bank to perform poorly.

In particular, Financial Services Commission Chairman Jin Dong-soo and Financial Supervisory Service Gov. Kim Jong-chang are under growing criticism for having been reluctant to get savings banks to restructure.

One government official said, “After seeing Spain suffer a fiscal crisis due to savings banks that hid their poor performances in the wake of the global financial crisis, the heads of the two financial regulators have gotten cold feet and taken a passive attitude.”

In addition, the power of the right to inspection of the regulators has been rendered useless. Though several inspections of Busan Savings Bank were conducted by the Financial Supervisory Service, inspectors failed to discover illegal practices of the bank’s major shareholders.

According to aides to Democratic Party Rep. Park Seon-sook, the Financial Supervisory Service conducted eight inspections on the bank between 2009 and last year, including prior inspections and a joint probe with Korea Deposit Insurance Corp. at the request of the Board of Audit and Inspection. The inspection period was 138 days last year alone.

Despite this, the bank committed accounting fraud worth 1.31 trillion won (1.22 billion dollars) and its parent group did so to the tune of 2.45 trillion won (2.29 billion dollars) from July 2008 through June last year. This means the bank committed fraud while inspections by the financial regulator were underway.

At the joint inspection conducted at the request of the Board of Audit and Inspection, inspectors probed major shareholders and companies that took out real estate project financing loans but failed to discover illegal practices.

An aide to Rep. Park said, “It’s a mystery why a long inspection that even involved the Board of Audit and Inspection failed to identify corruption by major shareholders, accounting fraud, and the size of non-performing loans,” adding, “Financial authorities must confess to either lax supervision or concealment.”

○ Policy failure of Financial Services Commission also a factor

Deregulatory measures on savings banks introduced by the commission also stoked poor performance of the Busan bank. In particular, deregulation aimed at enlarging savings banks was the worst.

After then Financial Supervisory Service Gov. Yoon Jeung-hyun allowed mergers and acquisitions of savings banks in 2005 and then Financial Services Commission Chairman Jun Kwang-woo offered incentives to financial institutions to take over non-performing savings banks in 2008, the Busan bank rushed to acquire other savings banks.

After taking over New Busan Deposit Bank (the predecessor of Busan II Savings Bank), it acquired Central Busan Savings Bank in June 2006 and Daejeon Savings Bank and Korea Mutual Savings Bank (the predecessor of Jeonju Savings Bank) in November 2008.

The age-old practice of sending retired officials of the Financial Supervisory Service to private financial institutions as auditors and external boards of directors also caused the debacle of the Busan bank group.

According to prosecutors, former bureau and deputy bureau directors and chief inspectors at the financial watchdog who audited Busan II, Central Busan, Daejeon and Jeonju savings banks were accomplices in illegal practices done by major shareholders of the banks.

Poor audits were caused by the "strategic" appointments of senior managers who were about to retire from the financial watchdog as auditors by financial institutions, experts said.

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