Korea Exchange Bank Losses Exaggerated

Reports confirmed that the Korea Exchange Bank overstated the 2003 losses of its subsidiary KEB Card by more than 800 billion won.

This has been noted as a decisive factor in the lowering of the bank’s BIS capital adequacy ratio in late 2003.

The Board of Audit and Inspection (BAI) is committed to probing the issue on suspicions that KEB Card recorded an excessive amount of allowance for bad debts.

The Dong-A Ilbo obtained official documents and financial statements exchanged between the KEB and KEB Card officials.

On January 2004, KEB Card submitted its 2003 financial statements to KEB that recorded 574.8 billion won in a bad debt provision and a period net loss of 607.3 billion won.

In early February, KEB sent a public statement labeled, “Attached is the BS and PL after debt figure adjustments” to KEB Card.

According to the statement, all records are similar except for the loan loss reserving, recorded as 1.3979 trillion won, and period net losses recorded as 1.4304 trillion won.

A source at KEB Card said, “We estimated the bad debt provision at a more conservative figure than that estimated by the Financial Supervisory Service, but KEB returned the figures that were inflated at twice our rates,” and added, “Up till then the bank had never altered our financial statements as such.”

The final 2003 financial statement for KEB Card was altered according to KEB’s figures. The BIS capital adequacy ratio for KEB was 9.32 percent as of late 2003.

Auditors said, “According to KEB Card estimates, the BIS capital adequacy ratio is over 12 percent, and after subtracting Lone Star’s investment funds of one trillion won, it would still amount to 6.8 percent.”

The financial circles are speculating that KEB overstated its losses considering that it would be problematic should KEB’s year-end BIS ratio be higher than the estimated rate (6.16 percent) which the government based its decision on when Lone Star purchased the KEB.

The BAI is currently investigating KEB authorities on the reasons why the figure of allowance for bad debts was altered, the standards on which the new figures were based on, and who directed the changes.

The KEB stated, “the BAI has asked us to explain the alterations in the figure that were sent to KEB Card, and we are currently preparing for a response. We cannot release the details before sending the response to the BAI.”

Jin-Young Hwang Do-Young Kim buddy@donga.com nirvana1@donga.com