Lee Bok-hyun "Outdated Bank Governance Causes Large-scale Financial Accidents"

Lee Bok-hyun, Governor of the Financial Supervisory Service. Photo by Jo Yong-jun jun21@

원본보기 아이콘

Lee Bok-hyun, Governor of the Financial Supervisory Service (FSS), argued that the outdated governance structure centered on holding company chairpersons in the banking sector is causing large-scale financial accidents, emphasizing the need for a thorough overhaul of organizational culture.

On the morning of the 4th, Lee held a briefing session on the "2024 Inspection Results of Holding Companies and Banks" at the FSS office in Yeouido, Seoul, stating, "The outdated governance structure in the banking sector and serious internal control failures, including large-scale financial accidents, have been reconfirmed."

The FSS announced that its inspections of major financial holding companies and banks such as Woori Financial Group, KB Financial Group, and NH Nonghyup Financial Group revealed improper loans amounting to several hundred billion won.

He said, "The inspection results confirmed that the banking sector has a decision-making system firmly centered on holding company chairpersons, and a hierarchical, obedient organizational culture is widespread, making it difficult for internal controls and other checks and balances to function properly." He added, "Due to this culture, the board of directors was unable to receive necessary information for important decisions such as mergers and acquisitions (M&A), limiting the management's oversight and monitoring functions."

He continued, "Employees either blindly followed the growth targets set by management or used bank resources as tools for personal or specific group interests, engaging in illegal activities such as improper loans and illicit business practices without hesitation." He criticized, "Financial companies attempted to downplay financial accidents or dealt with those responsible with leniency, creating an environment where large-scale financial accidents could recur."

Governor Lee also criticized the banking sector's organizational culture that neglects soundness and risk management. He stated, "Incentive structures were designed to encourage management to pursue short-term high profits and high risks, making it difficult for soundness and risk management mechanisms to operate effectively." He added, "Holding companies neglected their fundamental role of managing and controlling latent risks within the group, leading to an overestimation of the financial group's crisis response capability (capital ratio)."

Furthermore, he noted, "Subsidiaries such as banks failed to prevent various inappropriate high-risk behaviors, including the illicit handling of prohibited bridge loans and indirect support of affiliated companies through special purpose companies."

Internal control failures also weakened financial consumer protection. Lee emphasized, "Due to insufficient efforts to improve consumer protection systems in the financial sector and unhealthy sales practices by employees driven by short-term performance pressures, consumer damages continue to occur." He highlighted, "Cases of consumer rights violations were found, including incomplete sales of Hong Kong H-Share Index (HSCEI) equity-linked securities (ELS), delinquent loans, and offsetting of minimum living expenses prohibited under civil law."

Governor Lee announced, "Under the recognition that a thorough organizational culture reform by the financial sector itself and systematic supervisory measures by authorities are necessary, we plan to establish and implement detailed measures to realize effective internal controls, strengthen soundness and risk management, and improve organizational culture through autonomous reform." He added, "Through this, we will encourage financial companies to avoid short-term performance orientation and pursue sustainable growth based on governance advancement, soundness and risk management-centered operations, and strict organizational culture establishment."

원본보기 아이콘

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.