Structure of bank groups is called into question

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Structure of bank groups is called into question

Due to a squabble between KB Financial Group and Kookmin Bank, the effectiveness of financial holding groups’ corporate governance is being questioned nearly 15 years after the government adopted the system.

Insiders in the industry and analysts are waking up to fundamental problems in the holding company system for financial institutions in the wake of a fuss at KB over the replacement of Kookmin Bank’s IT network operating system. Conflicts between the chairmen of the groups and CEOs of banks within a group are making the system look ridiculous.

Earlier this week, Kookmin Bank CEO Lee Kun-ho opposed the bank’s board of directors’ decision to switch to a cheaper and open operating system for the bank’s IT network and even brought the issue to the Financial Supervisory Service. KB Financial Group Chairman Lim Young-rok muddled the issue Wednesday by saying, “It is the bank’s internal issue.”

KB is not the first group that has had such a schism. In 2010, the then-CEO of Shinhan Bank sued the CEO of Shinhan Financial Group for embezzlement and breach of trust.

Currently, there are 13 financial groups that have banks as main affiliates. The five largest are Woori Financial Group, KB Financial Group, Shinhan Financial Group, NH Nonghyup Financial Group and Hana Financial Group.

The government introduced the financial holding company system as law in 2000 in order to increase the competitiveness of the industry after the Asian financial crisis of the late 1990s. Having banks, insurance, securities and credit card businesses under one group was supposed to lead to synergy. The government cited the case of the JPMorgan Group in the United States.

Woori Financial Group was launched in 2001 as the first financial group in the country. The government created the group by integrating five struggling banks.

After the promotion of the law, major private banks joined the bandwagon and created holding companies. In 2001, Shinhan Financial Group was formed. In 2005, Hana Financial Group was launched.

But over time, there has been increasing tension whenever a new chairman was nominated, especially when they were related to politicians or presidents.

In 2008, Kookmin Bank re-launched as KB Financial Group, and it has become a hotbed for internal power struggles every time the top management changes. For the past five years, all chairmen of the group have come from outside the bank.

Former Chairman Euh Yoon-dae, a close ally of former President Lee Myung-bak, was the prime example of a so-called parachute appointment by the government. Euh, former dean of Korea University, has never been in the financial industry. He ended up having severe conflicts with the group’s board over attempts to acquire ING Life Insurance.

Incumbent Chairman Lim Young-rok, who served at the Finance Ministry until 2008, is believed to have connections to the Park Geun-hye administration.

Insiders question the actual power of the holding companies.

“The chairmen can be compared to scarecrows,” said an executive at a financial group. “The holding companies don’t really have power compared to the banks, which are larger and make most of the groups’ profits.”

A holding company usually has about 100 employees and executives, who are mostly aides to the chairmen.

Banks under the holding companies are usually the most powerful subsidiaries. A case in point is KB. Kookmin Bank accounts for nearly 70 percent of the group’s net profit. The bank also claims more than 70 percent of the group’s total capital, and has nearly 20,000 employees and executives.

The executive pointed out that the KB case demonstrates that a weak chairman appointed thanks to government influence just leads to trouble within a group.

“It seems like the chairman does not have control over the bank,” he added.

Woori Financial Group, which got its first three chairmen from the outside, had similar conflicts. But current Chairman Lee Soon-woo controls both the holding company and the bank.

“The role of the chairmen seems not so significant,” said a research fellow at a state-run economic think tank. “That’s why the government is now planning to revise measures to enhance the financial industry’s competitiveness.” The Financial Services Commission is preparing measures to be announced next month.

“By artificially creating the financial holding companies, the government has made many unnecessary posts,” an industry insider said. “The groups’ chairmen and banks’ CEOs’ positions have over-elevated and they get unreasonably high salaries.”

BY song su-hyun [ssh@joongang.co.kr]



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