KDB under fire for 'irresponsible handling' of derivatives compensation

A worker passes by the headquarters of Korea Development Bank on Yeouido, Seoul on June 10. Yonhap

By Lee Min-hyung

KDB Chairman Lee Dong-gull

Korea Development Bank (KDB) is under fire for failing to take moral responsibility for compensation on currency derivatives sales.

The issue centers on the currency-linked financial derivatives options ― called knock-in-knock-out (KIKO) ― that commercial and state-run lenders sold to about 700 export-driven small- and medium-sized enterprises (SMEs) here mostly in 2007. The banks promoted the sales, saying the derivatives would help buyers hedge their foreign exchange risks.

But with the 2008 global financial crisis erupting, the investors suffered losses worth more than 3 trillion won ($2.51 billion) after purchasing the KIKO options. But the dispute surrounding the options has not been completely resolved even more than a decade later.

To put an end to the unceasing controversy, a consultative body ― led by 10 banks involved in the dispute ― is expected to be established no later than the end of this week. The banks will discuss how to compensate the 145 companies that have not been properly compensated by the banks.

KDB was also mired in the controversy by selling KIKO options worth 12.3 billion won to Ilsung Hisco, a manufacturer of oil and gas processing equipment. But as the Supreme Court ruled the KIKO option sales were not financial fraud, the lender is in a position to not join the consultation group, and not take any actions to compensate for any losses incurred from its KIKO sales.

"For now, we do not have any plans to join the body in line with the top court's decision," a spokesman at KDB said. "Chances are KDB will be suspected of breach of trust if the lender provides compensation for the KIKO sales."

But KDB's stance is drawing backfire from local financial circles, as KDB is the only lender not joining the consultative body among the 11 KIKO option sellers here.

"KDB is displaying a two-faced attitude by refusing to compensate the KIKO sales, while at the same time underlining the need to support SMEs," said a joint taskforce to support victims of the KIKO dispute.

In December 2019, KDB rejected an arbitration proposal from the Financial Supervisory Service (FSS) over the compensation. Under the proposal, the financial authority urged KDB to pay 2.8 billion won in compensation for Ilsung Hisco. But as this is simply a recommendation, the FSS call is not legally binding.

"KDB even rejected the proposal from the authority, and this is an intention by KDB Chairman Lee Dong-gull to reinforce his position against the Moon Jae-in administration and policies by the ruling party," the statement said.

The ruling Democratic Party of Korea pressed banks to compensate properly for the KIKO fiasco, expressing its willingness to reinvestigate the case. The FSS has since played a mediating role between the banks and the victims.

Officials from the industry argue KDB is not completely to blame for its recent decision.

"The Supreme Court handed down the ruling that the KIKO sales were not fraud in 2013, so KDB does not have to take additional compensatory steps according to the law," said an official from one of the major lenders which participated in the consultative group.

"Aside from KDB's absence in the group, the dispute is still a hot potato even among the existing lenders," the official said. "Some banks may have been de facto forced to join the group due to pressure from the FSS."

Industrial Bank of Korea (IBK) is the only state-run lender to have joined the group along with nine other commercial lenders.

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