[Q&A] Lee Bok-hyun "Woori Financial M&A Review to be Submitted to FSC in February"

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Lee Bok-hyun, Governor of the Financial Supervisory Service (FSS), emphasized that he has "no intention of rewarding poor internal controls or unhealthy organizational culture" regarding Woori Financial Group and others involved in the improper loan incident related to the former chairman.

At the '2024 Major Inspection Results Briefing for Holding Companies and Banks' held at the FSS on the 4th, Governor Lee stated, "I believe that the financial authorities should not be perceived as treating their relationship with financial companies as one of indulgence rather than a healthy tension."

The FSS announced that it had uncovered improper loans totaling 314.5 billion KRW by senior executives at Woori, KB Kookmin, and NongHyup Banks, including 73 billion KRW related to relatives of former Woori Financial Group Chairman Sohn Tae-seung.

The following is a Q&A session with Lee Bok-hyun, Governor of the FSS, and Park Chung-hyun, Deputy Director of the Banking Division.

▲ You mentioned that the interim inspection announcement would be made with a "spicy tone." What was the main focus of this inspection?

-(Lee Bok-hyun) The regular inspection announcement does not limit the accumulated issues to a specific bank. It reflects on the widespread quantitative growth and external expansion across the entire banking sector, which has focused on short-term results. The inspection content was disclosed to candidly reveal problems and seek improvement directions.

▲ Woori Bank may face difficulties acquiring insurance companies if its management evaluation falls below grade 3. When will the management evaluation results be announced?

-(Lee Bok-hyun) Two factors are important regarding the management evaluation. We aim to promptly address cases of large-scale internal control failures. Also, we cannot ignore the M&A approval review request from Woori Financial Group. The Banking Supervision Department requested necessary materials for subsidiary incorporation review on January 24. We want to handle this according to principles as much as possible. If related materials are sent to the Financial Services Commission (FSC) by February, the FSC can make a decision by March. We are working on deriving the management evaluation separately from sanctions. However, since many experts need to gather opinions on various factors, it is difficult to specify a date.

▲ Why did you specify the current management details related to Woori Bank's improper loans?

-(Lee Bok-hyun) Large-scale monetary dealings related to private interests during the former chairman's tenure hold not only the individuals involved but also everyone who failed to control them responsible. One of the purposes of today's briefing is to point out whether this was caused by a single deviation or a difficult-to-correct organizational culture. I want to believe there is a sincere will to prevent recurrence. However, we need to objectively consider whether will alone can solve the problem. Also, it seems inaccurate to say this only happened while the former chairman was in office.

▲ Improper loans continue to occur in the financial sector. What do you think are the problems with the banking system and financial supervisory system? Please also share your thoughts on improvement methods.

-(Lee Bok-hyun) Cases of performance-based sales and push-selling, such as KIKO, Derivative Linked Funds (DLF), and Equity-Linked Securities (ELS), have been repeated. I have no intention of rewarding poor internal controls or unhealthy organizational culture. From the authorities' standpoint, which must check the internal indulgence of financial companies, the relationship with financial companies should not be perceived as indulgent rather than tense.

▲ The FSS Governor mentioned that materials related to Woori Financial Group's M&A would be submitted by March 15, but realistically, time is tight. How will this proceed?

-(Park Chung-hyun) The licensing review is conducted by the Banking Supervision Department. An important criterion is the soundness of the holding company, which is evaluated through the financial holding company's management evaluation grade. Therefore, the Inspection Department must conduct the management evaluation. The final approval response can only be given after combining the supervision and inspection departments' findings. We are fully aware of the criticism that the timeline is very tight. Our staff are working hard to review the matter thoroughly.

▲ Can you provide examples of cases where bank sanctions and management evaluations were conducted separately?

-(Park Chung-hyun) Regulations allow the FSS Governor to notify separately if necessary. Separate notifications can also be made when it is necessary to quickly inform inspection results.

▲ The amount of improper loans handled after the current Woori Bank management took office is 45.1 billion KRW. The situation may vary depending on whether these are new loans or maturity extensions.

-(Park Chung-hyun) To my knowledge, all are new loans. I do not think there will be any changes. Rollovers (maturity extensions) are also newly reviewed. We judge there is little difference from new loans.

▲ You pointed out the issue of indirect support to affiliates through SPCs. Do you ultimately consider Woori Bank's support for Woori F&I as involving the same borrower? Could this be interpreted as a violation of the Financial Holding Company Act?

-(Park Chung-hyun) Exercising authority or profit distribution in SPCs is related to subsidiaries, so they are considered the same entity. Whether this violates regulations requires a legal interpretation from the FSC. The FSS will conduct its own legal review and then make a judgment.

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