Bureaucrats` role in savings banks’ crisis

Hearings held by the National Assembly`s National Policy Committee over the last two days on handling troubled savings banks are disappointing. Opposition lawmakers blamed lax monitoring by financial regulators as the direct cause of the crisis, while ruling party counterparts pointed fingers at the erroneous policies of the previous two administrations. Rather than determining who is responsible for the savings banks` mess and bad loans in project financing, the lawmakers did nothing but point fingers at each other.

The trouble with savings banks began with the previous two administrations’ policy of favoring such banks under the purpose of improving their competitiveness. The Kim Dae-jung administration protected savings bank deposits of up to 50 million won (46,296 U.S. dollars), up from 20 million won (18,518 dollars), and allowed mutual credit banks to change their names to savings banks so that they could take in more deposits. The Roh Moo-hyun administration allowed savings banks to make loans of 8 billion won (7.4 million dollars) or more to a single borrower so that the banks could increase lending to real estate developers. The Lee Myung-bak administration attempted to clean up savings banks through restructuring, but failed to prevent more bad loans and caused the amount to grow further. Nevertheless, financial bureaucrats who wielded great influence over the financial sector did nothing but use sophistry and make excuses at the hearings.

The primary responsibility for the savings banks’ debacle lies in controlling shareholders and managers who abused government policies. They drove their banks to insolvency by making illegal loans. Savings banks whose operations were suspended had inspectors who once worked for the Financial Supervisory Service. Though the banks hired them under the excuse of preventing the banks from making bad loans, they were nothing but puppets. Had the inspectors done their job properly, the banks’ controlling shareholders could not have made illegal loans. The Dong-A Ilbo has repeatedly singled out the evil practice of Financial Supervisory Service officials being employed by financial institutions. The regulatory agency, however, insists that the financial companies are making good use of experts. Such a practice has led to mass insolvencies of savings banks.

According to a representative of the victims of the savings banks’ insolvency in Busan who attended Thursday’s hearing, the victims trusted the supervisory agency. This administration alone has had to inject more than 4.5 trillion won (4.17 billion dollars) in taxpayers’ money to resolve this crisis. After suspending eight savings banks this year, the government is considering setting up a bad bank with 10 trillion won (9.26 billion dollars) in capital to take over bad project financing loans from savings banks. The supervisory failure has cost taxpayers hundreds of billions of won to clean up the savings bank sector. How long must taxpayers keep covering bad loans caused by policy failures and shareholder immorality?