Savings bank scandal and bank ownership rule

According to the interim results of a criminal probe into Busan Savings Bank, the bank`s chairman Park Yeon-ho and others received illegal loans worth a combined 4.59 trillion won (4.24 U.S. billion dollars) from five affiliate banks of Busan Savings Bank Group. They allegedly set up 120 special purpose companies to run real estate businesses, making them appear like independent entities having nothing to do with the majority shareholder of the bank. These companies were set up for development of charnel houses and resorts, shipbuilding investment, and the construction of a new city in Cambodia, but just 21 of them are in development.

The key to corruption is that people with no ability to run a financial institution ran a real estate development business and used illegal loans from savings banks. To avoid restrictions by the Financial Supervisory Service, they committed accounting fraud, bribed executives at the financial watchdog, and placed them in auditor posts. Financial industry sources say such corrupt activities might also be rampant at other savings banks. With the credibility of financial institutions having fallen, many say the easing of bank ownership rules, or restricting non-financial entities from owning banks, should be reconsidered.

The easing of the rule was Lee Myung-bak’s pledge in his presidential election campaign in 2007. Bank laws were revised in 2009 to raise the ceiling of non-financial companies’ ownership of bank shares from 4 percent to 9 percent. The government is now trying to revise fair trade law to allow non-financial entities to own a 100-percent stake in the affiliates of financial institutions. The Busan Savings Bank scandal has shown, however, how corporate executives can control the lending, screening and supervision of financial institutions. An easing of bank ownership rules will only lead to complete chaos in the financial sector.

With the savings bank scandal jolting the nation, whether the proposed revision of fair trade law can pass provisional parliamentary session this month remains uncertain. The government should reexamine whether there are proper tools to prevent moral hazard by majority shareholders of financial institutions after bank ownership rules are eased. Strengthening the supervisory role of employees at the financial watchdog is also crucial. Soundness of the financial industry should be ensured by strengthening the supervisory function so majority shareholders are given no safe harbor. A breakdown or absence of a tool to control shareholder greed will only lead to bigger financial risks. Certain experts suggest allowing domestic pension funds acquiring banks or cross-ownership of shares between banks and holding companies.