Bank federation chief blasts regulator

By Kim Tong-hyung

HANOI ― Shin Dong-kyu, the chairman of the Korea Federation of Banks, blasted the Financial Supervisory Service (FSS) over its supposed ineptitude in monitoring risk-taking at the country’s secondary banks.

Financial authorities have been forced to suspend the business operations of eight savings banks since early this year to prevent them from being toppled by their distressed real-estate assets.

But critics question whether the FSS can be trusted to prevent the savings bank crisis from poisoning the financial system when a slew of corruption allegations suggest a murky relationship between regulators and the wayward lenders.

Shin’s thorny comments came just hours after Korean President Lee Myung-bak made a rare visit to the FSS’ head office in Youido, Seoul, Wednesday, and pointed out that complacency has pushed the agency into the ``greatest crisis of its existence.’’

``The FSS badly needs an internal reform. Their investigative authorities are soaked with power and it’s debatable whether they are doing their jobs properly when they fail to display any resemblance of consistency (in their decisions),’’ Shin told Korean journalists on the sidelines of the annual Asian Development Bank (ADB) conference at the Vietnamese capital of Hanoi.

Shin, never the type to mince his words, shared some of his unpleasant experiences involving the FSS when he headed the Export-Import Bank of Korea between 2003 and 2006.

``One year we made adjustments demanded by the FSS after their annual investigation. The very next year, the FSS accused us of the exact same problem, which of course, had long been taken care of. You have to wonder whether they really care about doing their job properly,’’ he said.

The criticism of the FSS hit a fever pitch Tuesday when a Busan-based FSS employee, identified only as Kim, committed suicide after it became known that he had withdrew 53 million won from his Busan Savings Bank account although the bank had been closed by authorities two days earlier.

Kim’s death came on the same day when prosecutors in Gwangju claimed that a former high-ranking FSS official, who is currently on the run, had received kickbacks worth hundreds of millions of won from Bohae Bank, a South Jeolla Province-based savings bank, in 2009.

The most vocal critics of the FSS, who include Democratic Party lawmaker Woo Che-chang, are beginning to question whether the agency is even worth keeping in existence as they argue that its functions could be absorbed by the Bank of Korea (BOK) or the Financial Services Commission (FSC).

While Shin refuses to endorse the regulator’s raison d etre, he was critical of suggestions that the country needs another financial watchdog, hypothetically the BOK, to complement the FSS.

``No country in the world has financial institutions probed by multiple regulators. The United States has a number of regulators, but the regulator of each state is designated,’’ he said.

``However, it’s hard to deny that there is a need for a legal framework to ensure better information exchange between the Bank of Korea and the FSS, which is actually something we can learn from the U.S. system.’’

Observers are concerned that savings banks, which account for just under 3 percent of Korea’s financial services industry, are looking increasingly like a time bomb for the country’s economy.

The secondary banks indulged in a lending spree over the past decade, principally funding property investments to exploit speculative demand.

This all came tumbling down in the economic turmoil that erupted in 2008, which had banks running for cover and calling in loans. The fact that many borrowers were unable to repay led to crises at most of these banks before the regulators mercifully pushed them to the sidelines.

At the end of last year, savings banks held more than 12 trillion won in real estate project financing loans, of which a significant proportion have soured.