SMEs get a windfall from KEB

The Financial Supervisory Service has ordered Korea Exchange Bank to return 18.1 billion won ($16.6 million) in interest it collected from SMEs from 2006 and 2008 when the bank was under the control of U.S. private equity fund Lone Star, saying it tricked SME borrowers with higher interest rates by raising spreads, according to the FSS Web site yesterday.

The financial watchdog said KEB set a target profit margin for loans granted to SMEs between 0.5 percentage point and 2 percentage points and pressed bank managers to raise spreads for loans that fell short of the margin.

In the case of foreign exchange loans, the bank illegally raised its target profit margin by as much as 1 percentage point in October 2008.

The bank raised the spreads of 4,309 SME loans 6,308 times during the cited period, according to the financial watchdog.

The FSS imposed an institutional warning on the bank and ordered it to reprimand nine former and incumbent executives.

Among the executives subject to disciplinary action are two former KEB CEOs, Richard Wacker and Larry Klane, who were appointed by Lone Star.

“To raise spreads, a bank needs to meet certain requirements set by financial authorities, and it needs to make additional agreements with borrowers beforehand. But the bank ignored all these required processes,” said an FSS official. “We also found that managers who failed to comply with the bank’s ‘pricing guideline’ were subject to penalties during regular branch performance evaluations.”

By Kim Mi-ju [mijukim@joongang.co.kr]