Regulator steps up probe into banks’ irregularities

The chief of the nation’s top financial watchdog on Wednesday admitted a supervision failure in his comments on a series of irregularities revealed in the local financial sector over the past few months.

In his policy briefing to the National Assembly, Financial Supervisory Service Gov. Choi Soo-hyun mentioned the recent string of financial mishaps and scandals including illicit lending and massive data leaks.

In addition to ethical misconduct on the part of the employees and lax internal control at the firms involved, the FSS has been negligent in conducting preliminary oversight into the market, Choi told the lawmakers from the National Policy Committee of the Assembly.

“We had been lax in preventive supervision, and instead were focusing on making amends after an irregular practice was committed,” he said.

Choi vowed to revamp the supervisory structure and manpower of the FSS, reiterating that authorities could lose credibility from the public and market if such efforts turn out to be “insufficient.”

Concerning the competitiveness of the local financial market, the top regulator said overall profitability has continued to worsen since 2011 due mainly to weakness in securing profit-taking sources.

Choi pledged to induce a voluntary shutdown of uncompetitive financial firms based on the principle of “market rules.”

He also stressed that Korean financial firms could not expect to see an improvement in profitability without actively tapping the overseas market.

The FSS has widened the scope of its inquiry into the first-tier banking industry in the wake of the latest scandals and misconduct.

Most recently, inspectors have launched probes into Korea Exchange Bank and Daegu Bank for alleged irregularities including embezzlement and issuing unauthorized loans. “We recently conducted on-site inspections at KEB and Daegu Bank,” said an FSS official.

The regulator has also been in discussions with Japan’s Financial Services Agency on cooperative steps in looking into allegations that Tokyo branches of Woori Bank and Industrial Bank of Korea engaged in illicit lending and creating slush funds.

The FSS is also taking follow-up measures on KB Kookmin Bank, which has been under regulatory inquiry on suspicion of issuing about 400 billion won ($370 million) worth of illegal loans to Japan-based firms.

There are suspicions that some of the money was used to create slush funds in Korea.

By Kim Yon-se (kys@heraldcorp.com)