Time for watchdogs to wake up

As was the case with Busan Savings Bank, illegality, recklessness and malpractice led to the recent suspension of seven savings banks. One was even found to have issued a loan worth 97.8 billion won ($82.9 million) using 1.2 billion won as collateral. Another, which had a total net worth of 100 billion won, lent a whopping 640 billion won to finance construction projects.

These undersecured loans were issued using fabricated names and documents. The banks were naturally rewarded for their generosity with charges of graft. As the prosecution continues its investigation, more irregularities will likely be uncovered in time. But from what we already know, it is fair to say the major shareholders and top executives of these banks used their customers’ money for fraudulent schemes.

What is lamentable is that the authorities completely failed to supervise and restrain these financial institutions. Tomato Savings Bank - the industry’s second-largest lender - reported a capital-adequacy ratio of 8.62 percent, above the benchmark 8 percent that is considered safe by the Bank for International Settlements. But few consumers would have had any clue about this when they entrusted the bank with their savings or purchased its corporate bonds. A private accounting firm also apparently found no irregularities when it ran an audit in May.

But the Financial Supervisory Service could hardly agree with this assessment when it conducted a due-diligence investigation of Tomato recently. It turned up a solvency ratio of negative 11.47 percent, and Tomato was suspended.

However, the FSS is also guilty of being remiss. Last year, it put five savings banks under the microscope - in a joint inspection with the Korea Deposit Insurance Corporation - and deemed one of them, Parangsae Savings Bank, financially sound. That same bank was on the recent list of suspensions.

This suggests a serious flaw in the nation’s financial supervisory system. Such massive irregularities could not have escaped detection unless the system is a complete mess.

Savings banks underwent multiple evaluations by public authorities, accountants, corporations and auditors, yet none of these uncovered their wrongdoings. The outside board members rubber-stamped whatever was put in front of them, collecting their fat paychecks and helping to fool the authorities rather than bring the issue to light. Public authorities and outside accountants were equally incompetent. Clearly, reform is needed, and large stakeholders and bank executives should be penalized.