KDB's moral hazard

By Nam Hyun-woo

The recent shambles over the prosecution's investigation over Daewoo Shipbuilding and Marine Engineering (DSME) and Korea Development Bank (KDB) reminds many of how seriously the state-run bank was morally slack over using taxpayers' money.

For the past 16 years, KDB has been the largest shareholder of the troubled shipbuilder with approximately a 50 percent stake. During the period, ranking officials from KDB took posts at DSME, such as chief financial officer, but failed to rein in the company's snowballing debt and poor management, while the bank continued to pour blind money into the company.

Before KDB's bad decisions, there have been signs showing that aid would be tantamount to pouring water into a bottomless pit. In January last year, the OECD released a report about the Korean shipbuilding industry and expressed concerns that "the financial difficulties of the industry appear to be the most immediate challenge."

"Signaling that large shipbuilding companies have a ‘safety net' may result in moral hazard issues and discourage companies from making needed structural changes," the report warned.

Despite the warning, the bank lent some 2.6 trillion won in October last year, Also, another state-run bank, Export-Import Bank Korea, also extended 1.6 trillion won to the ailing company. At then, KDB said: "DSME is the top 3 shipbuilder in the world with fundamentals and technologies. Should it carry out a good self-rescue plan and improve its productivity, its management would become normalized."

And OECD's concern was realized as DSME in April corrected its financial statements after allegedly hiding losses in 2013 and 2014. The prosecution suspects that the state-run bank was involved in the alleged accounting fraud. The company posted losses worth 2 trillion won last year.

KDB is thought to be one of the most powerful financial institutions in Korea, given its control over companies in which it has large stakes. According to Rep. Oh Shin-hwan of Saenuri Party, all 43 officials quit the KDB in the past five years and got jobs in companies involved in transactions with KDB, and the bank made additional investments in those companies amid their former officials' reemployments.

Timely move

Despite the moral laxities, the key figure that should be held responsible is not in his position. Former KDB Chairman Hong Ky-ttack, who stressed the necessity for the support of DSME, left his post in February this year, months before his term was to expire.

The now-vice chairman of the Asian Infrastructure Investment Bank said in an interview with a local newspaper that "KDB could not take the key role in making decisions over supporting DSME and the bank has no option but to follow a decision from the government."

As the Ministry of Strategy and Finance and the Financial Services Commission lambasted the remark, saying "KDB was also involved in the debate," two days later, Hong said through the KDB that "the interview is far from the fact."

Amid confusions over who is responsible, the Board of Audit and Inspection of Korea (BAI) will announce its report showing whether KDB is liable in DSME's poor management this week. The report will reveal whether KDB was aware of DSME's ill management before heavily supporting the shipbuilder.

Despite the significance of the report, it will not directly affect the bank, because the BAI's report is non-binding. "Should there be a criminal problem, the BAI will refer the institution to the prosecution," said the BAI official.

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