[On-site Snapshot] Why Didn't We Realize the Rosy Private Equity Fund Development Theory Back Then?

[Asia Economy Reporter Kangwook Cho] "The root cause lies in prioritizing profits while neglecting risk management and weakening internal controls." (Hana Bank Labor Union)

"This is a face-saving strategy obsessed only with sanctioning financial companies while ignoring the fundamental problem of the incident." (Woori Bank Labor Union)

These were statements from the labor unions of Hana Bank and Woori Bank around the Financial Supervisory Service's (FSS) disciplinary committee meeting held on the 30th of last month regarding the overseas interest rate-linked derivative-linked fund (DLF) incident that caused massive principal losses. On the day before the final disciplinary hearing, Hana Bank's union urged severe punishment, stating that "the bank president, who was the highest decision-maker at the time, is responsible." When the committee concluded with a heavy penalty the next day, Woori Bank's union immediately demanded the withdrawal of what they called "an irresponsible and complacent abuse of authority that avoids taking responsibility."

Why do the two bank unions show such differing positions on the same issue? The disciplinary committee based its sanctions on evidence that the DLF incident occurred across the entire banking sector and that despite being fully aware of the interest rate decline, there was continuous encouragement of sales. Although the top management claims ignorance, the logic is that this stems from poor internal controls, making them inevitably responsible. On the opposing side, there is an argument questioning whether this incident can be solely condemned as the financial companies' responsibility. They claim that the FSS is merely trying to evade responsibility for its own supervisory failures, having failed to detect problems through ongoing audits and management inspections of banks.

In conclusion, both sides have valid points. The banks were overly focused on meeting sales targets and neglected proper consumer damage prevention, while the FSS also faced criticism for lax oversight, such as failing to take any action despite being aware of banks' inadequate protection of elderly customers, which exacerbated the problem.

Furthermore, when fundamentally examining a series of incidents including the DLF and Lime cases, they ultimately boil down to issues with private equity funds. The government, which had accelerated deregulation of private equity funds to promote venture capital supply, is also not free from responsibility. Private equity funds have rapidly grown, backed by government deregulation. Investors flocked in with rosy expectations when the government declared its intention to foster "Korean-style hedge funds," and the private equity fund market reached a staggering 420 trillion won, surpassing half of the total fund market (680 trillion won). However, recent incidents have clearly revealed various problems such as weak operational structures and poor risk management, leading to raised entry barriers and strengthened regulations.

In the domestic financial market, there has been a recurring pattern of deregulation to promote Korea's financial sector globally, followed by regulatory tightening whenever accidents occur. It is said that human greed is endless and mistakes are repeated. However, if financial accidents become frequent mistakes, it will end not only as a failure of financial companies but also as a failure of financial supervision.

This content was produced with the assistance of AI translation services.