KDB faces multiple sanctions for STX, Dongbu Group crises

The country’s financial regulators are set to punish the state-run Korea Development Bank by holding it responsible for poor loan management as the main creditor of STX Group and Dongbu Group, according to local reports.

The Financial Supervisory Service and Financial Services Commission have recently launched a special audit into the KDB on allegations that the bank fabricated STX Offshore & Shipbuilding’s credit rating and raised the shipbuilder’s credit limit by 300 billion won ($294.6 million) after ignoring inevitable loan risks.

KDB also faces allegations that it offered favors to STX Group in return for the company’s employment of a former KDB official.

The focus now is on whether the financial regulators will go ahead with the sanctions, as the watchdog agencies have so far been dragging their feet in penalizing the local financial sector, which is seen to be responsible for the series of mishaps ― namely data leaks and loan fraud ― that have compromised the security of consumers.

The penalties on KDB, if handed down, would be the first in a belated step to reprimand the local creditors.

The banks, however, said they could not be held entirely accountable.

“We have not received an official notice from the FSS or FSC, but we do not believe the government would attempt to shift the responsibility on us by issuing sanctions,” a KDB official, wishing to stay anonymous, told The Korea Herald. “(If found guilty of the allegations,) it is more important that financial regulators and the KDB solve the problem together, instead of blaming each other.”

Despite such sentiment, financial regulators are expected to further impose heavy punishments on the bank for irregular practices involving the debt-ridden Dongbu Group.

Reports cited a high-ranking official as saying that regulators will seek punitive measures against KDB, Dongbu’s main creditor, for its responsibility in leaving the group in grave jeopardy.

KDB has been the main creditor of Dongbu, the nation’s 18th-largest conglomerate by assets, since 2002.

The bank was under massive pressure to normalize Dongbu, especially after the firm’s self-rescue attempts, such as selling off assets, were found to have been futile. The KDB has been delaying a 20 billion won rescue fund for Dongbu Group but the watchdog criticized it for disrupting the local financial market and causing losses to individual investors.

An official from the FSS said the investigation is being conducted by a special audit team, which is why it is unclear when and how the authorities will deal with the allegations against KDB.

An industry source hinted at the possible scenario of regulators taking severe disciplinary action against KDB chairman and president Hong Ky-ttack, as they did against KB Financial Group chairman Lim Young-rok for a series of scandals ranging from an information leak and loan fraud to leadership conflicts.

By Suk Gee-hyun (monicasuk@heraldcorp.com)