Failure of Supervision in Banking Sector

Most of the 227.4 billion won (203 million U.S. dollars) in loans that Woori Bank lent to C& Group were made from March 2007 to June 2008, when the bank was led by Park Hae-choon. His younger brother Taek-choon was promoted from vice president to president at C& Heavy Industries in March 2007, when the elder Park was appointed the bank’s chief. Because it was in a financial crisis at the time, the group is thus suspected of promoting Park Taek-choon to get a loan from Woori.

Following the Asian financial crisis of the late 1990s, 12.77 trillion won (11.4 billion dollars) in public funds were injected into the bank. Less than half of that figure has been recouped. How can a bank in which the government holds the majority stake lend a huge amount to a financially weak company led by a man whose elder brother is the bank’s president? Even if the elder Park did not receive bribes, he obviously acted unethically. As the chief of the conglomerate’s main creditor bank, he should have blocked C& Group from appointing his brother as president or been stricter in reviewing loan eligibility.

Banks owned by the government are subject to audit by the Board of Audit and Inspection and fall under the scrutiny of the Financial Supervisory Service. So why did neither government watchdog raise questions about the group at the time? The two probably received pressure from the political circle or were lobbied. The Board of Audit and Inspection audited Woori in September 2008, which was nearly seven months after the inauguration of President Lee Myung-bak, but detected no problems. A probe should determine whether the failure to detect irregularities was related to Woori’s appointment of one of the agency’s former staff members to the bank’s audit committee just before the investigation. Critics rightly ask why internal investigations are being done now when they should have been conducted back then.

Following the Asian financial crisis, Korean banks that grew financially weak paid huge sums in consulting fees to fix their lending systems, which was the main cause of the rise in their non-performing loans. The measure sought to prevent banks from collapsing due to reckless lending to poorly managed conglomerates. In light of Woori’s lending to C& Group, reform of the Korean banking sector has proven useless.

Apart from lending to the group, Park Hae-choon was also responsible for 400 billion won (357 million won) in losses Woori suffered through investment in derivatives products. The Financial Supervisory Service warned him by holding him accountable for failed post-management of the investment. Even after the inauguration of the incumbent administration, he survived somehow and was named head of the National Pension Service. He resigned after receiving a warning from the Financial Supervisory Service, and later unsuccessfully ran as the ruling Grand National Party’s candidate for governor of South Chungcheong Province in the June 2 local elections. Probably as compensation for his candidacy, he was appointed head of the Yongsan Rail Station area development project in Seoul. It seems, however, that Park Hae-choon’s rollercoaster ride is approaching its end.