[Why&next] The Reemerging Discussion on the Banking Sector's '10-Year Accident Cycle Theory'

The '10-year cycle theory of financial accidents' in the banking sector is being talked about again. It is said that major issues shaking the financial market and companies repeat every 10 years in each bank. Recently, the possibility of large-scale losses from Hong Kong H-Index-linked equity-linked securities (ELS) has emerged, bringing renewed attention to the '10-year cycle theory.'

According to the financial sector on the 11th, KB Kookmin Bank is anxiously watching as the maturities of Hong Kong H-Index-linked ELS products are approaching one after another. It is facing a crisis of great difficulty for the first time in 10 years since the internal strife over the mainframe replacement issue in 2014. KB Kookmin Bank has the largest sales volume of Hong Kong H-Index-linked ELS products among commercial banks.

The industry expects losses to occur from these products sold by KB Kookmin Bank starting around the second week of January next year. It is also anticipated that the number of customers who will suffer losses will exceed about 50,000. Considering the sales volume of commercial banks including KB Kookmin Bank, there are predictions that losses will reach an all-time high.

For KB Financial Group, a significant blow is inevitable after 10 years. In 2014, during the mainframe replacement process, former President Lee Geon-ho and former Chairman Lim Young-rok engaged in internal conflicts, leading to a crisis of declining trust both internally and externally. This time, with large-scale losses expected on customers' assets, concerns are raised that the external image and trust of KB Kookmin Bank as a 'leading bank' built over the years will be significantly damaged.

Although the nature of the incident is different, the reality faced this time is also not easy. Among the Hong Kong H-Index-linked ELS sold by the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup), the outstanding balance maturing in the first half of next year amounts to a total of 8.41 trillion won, with KB Kookmin Bank holding the largest portion at 4.7726 trillion won. As large-scale principal losses are expected next year, product subscribers are agitated, and KB Kookmin Bank is struggling with on-site investigations by the Financial Supervisory Service.

The 10-year cycle theory of financial accidents in the banking sector is not limited to KB Financial Group. In the case of Shinhan Financial Group, it suffered from the 'Shinhan incident' in 2009 when former Chairman Ra Eung-chan reported former President Shin Sang-hoon to the prosecution on embezzlement charges. A series of lawsuits and counter-lawsuits over the so-called 'Namsan 300 million won incident' ensued, revealing the true face of Shinhan Financial Group's governance, which was considered solid compared to other financial holding companies. Although this case was settled recently with reconciliation between Shinhan Financial Group and former President Shin's side, civil lawsuits continue.

In 2019, 10 years later, Shinhan Financial Group again faced turmoil due to the Lime Asset Management fund redemption suspension incident. Industry insiders have pointed out that the background of Shinhan Investment Corp.'s name change from Shinhan Investment Securities might be related to the aftermath of this incident. Additionally, former Chairman Cho Yong-byeong received a 'cautionary warning' disciplinary action and retired without seeking a third term.

Woori Bank suffered losses of about 1.6 trillion won after aggressively investing in U.S. collateralized debt obligations (CDO) and credit default swaps (CDS) when the 2008 global financial crisis broke out. As a result, Hwang Young-gi, who was chairman of KB Financial Group and president of Woori Bank at the time of the investment, received a heavy disciplinary action equivalent to suspension from duty.

Woori Bank also faced various incidents about 10 years later. In 2019, the overseas interest rate-linked derivative-linked fund (DLF) incident occurred, causing customer losses amounting to about 50 billion won. There was controversy over incomplete sales during the product sales process, and former Chairman Sohn Tae-seung was once heavily disciplined by financial authorities because of this. Although he won a lawsuit to cancel the disciplinary action, he ultimately failed to be reappointed. In 2022, a 70 billion won embezzlement incident occurred, leading to criticism of poor internal controls.

BNK Gyeongnam Bank also experienced a financial accident worth 413.6 billion won in 2010. At that time, employees (managers and section chiefs) of the Structured Finance Department (disbanded) personally invested customers' trust funds in acquiring shares of unlisted companies. When losses occurred, they forged payment guarantees in the name of the bank president and raised funds from secondary financial institutions and companies to cover up, which was eventually uncovered.

About 10 years later, this year, Gyeongnam Bank is also struggling with a case where Lee, the head of the real estate investment finance department (age 50), embezzled about 300 billion won over approximately 15 years from December 2007 to April 2023 while handling real estate project financing (PF) work. The causes of the incident are considered similar, including weak mutual monitoring and checks among employees and the fact that the employee who caused the accident was in charge of the same work for a long time and held full authority.

A financial authority official said, "The banking sector experiences incidents and accidents in turn, and coincidentally, the cycle repeats roughly every 10 years. After a major accident, internal reorganization is done, and things are fine for a while, but after about 10 years, another incident occurs again." He added, "After Woori Bank experienced internal strife last year and started internal control, things quieted down, but this year, a series of incidents have occurred from employees at KB Kookmin Bank gaining unfair profits through insider information to the recent ELS incident."

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