Mirae’s Kim was protected by loophole, lax standards

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Mirae’s Kim was protected by loophole, lax standards

When the major shareholder and CEO of a savings bank is revealed to have personally defaulted on more than 16 billion won ($14.1 million) in outstanding loans since 2006, something is wrong with the legal framework of the banking system and its supervision, analysts said.

Since Mirae Savings Bank Chairman Kim Chan-kyong was caught trying to flee Korea last Thursday before his bank was suspended — and after withdrawing 20 billion won from company funds — his shady past has dominated headlines, including embezzlement and lying about his educational background.

On Monday, news broke that Kim had defaulted on a debt of 16.4 billion won from his stint as the CEO of a defunct construction firm, and had been registered as a “defaulter” at the Korea Federation of Banks since March of last year.

Under current regulations, “a person that has defaulted on a debt for the past five years” cannot be the major shareholder of a savings bank.

After being immediately accused of flawed supervision, the Financial Supervisory Service released a statement late Monday saying it discovered Kim’s credit status during a review in March, but its hands were tied because Kim was not a debt defaulter when he became the major shareholder of Mirae Savings Bank in 2000. Moreover, a periodical review of eligibility for savings banks’ major shareholders was adopted only in September 2010, and the rule specifically states that it cannot be applied retroactively to “a default specified by a 2006 court ruling,” the FSS said.

As a result, a legal vacuum allowed a debt defaulter control of a savings bank with 88,000 depositors for years. Analysts said that the policies that sparked the rapid expansion and subsequent financial troubles of the savings bank sector — such as allowing M&As between savings banks and easing lending caps — were promulgated in 2005 and 2006. However, the rules outlining the eligibilities and responsibilities of savings banks’ major shareholders and officers were only announced in 2008 and enacted in 2010, causing a five- to six-year gap between power and accountability.

There are also criticisms that the newly adopted eligibility reviews for savings banks’ major shareholders are too lax for screening moral hazard. During the first round of reviews on 52 savings banks late last year, major shareholders of only one or two were found to be ineligible; major shareholders of the four banks suspended Sunday, including Kim, were given a clean bill of health.

“Unlike commercial banks where ownership is dispersed among numerous shareholders, savings banks have owners that also run the company, similar to manufacturing firms,” said Lee Si-yeon, research fellow at Korea Institute of Finance.

By Lee Jung-yoon [joyce@joongang.co.kr]

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