Exchange Bank Overstated Bad Assets

The Korea Exchange Bank (KEB) duplicated or overestimated its bad assets by more than 300 billion won when it calculated its BIS capital adequacy ratio at the time of the bank’s sale in 2003, the Board of Audit and Inspection (BAI) said.

An official of the BAI said that the reason why the calculations of the board and the KEB are so different with the eight percent and 6.16 percent, respectively, was the duplicated calculation.

“When the KEB was taken over, it overestimated its BIS ratio by more than 300 billion won in bad assets. It doubled the bad assets of tens of billions of won, increasing the bad assets on the record by a figure larger than the real amount.”

The BAI is conducting an investigation into whether the lender swelled its bad assets intentionally to reduce the BIS ratio. The more bad assets the bank has, the lower the BIS ratio becomes.

“After reviewing the document used to calculate the BIS ratio, we found out that same bad assets were doubly counted. Now the amount is in the tens of billion won, but it is likely to increase. Lee Kang-won, former governor of KEB, admitted the erroneous calculation when he was summoned and interrogated,” said the official.

On April 11, the BAI secured testimony from Lee Dal-yong, former deputy governor of the bank, that former governor Lee was the one who decided to select two companies, Morgan Stanley and Eliot Holdings, as the advisory bodies for the takeover.

The BAI carried out an investigation on working-level officials including former Deputy Governor Lee and Jeong Seong-sun, former director of bank supervision department of the Financial Supervisory Service, to find out whether their superiors were involved or if figures were manipulated when the BIS ratio was calculated.

Min-Hyuk Park mhpark@donga.com