Last Saturday, we called for drastic reform of the Financial Supervisory Services as the powerful regulatory agency exuded the stench of corruption. We were not alone in smelling the odor. President Lee Myung-bak did as well.
On Wednesday, Lee made a surprise visit to the FSS to express his fury and disappointment over the regulator’s failure to prevent irregularities at financial companies and FSS inspectors’ connivance with corrupt financiers.
Lee’s visit to the FSS was prompted by the prosecution’s announcement on Monday of the outcome of its investigation into Busan Savings Bank, one of the eight insolvent savings banks whose operations were suspended in February.
Prosecutors found that the savings bank’s largest shareholder and executives took out 4.6 trillion won in illegal loans from the troubled bank and its five affiliates over several years. The unscrupulous officials were also charged with falsifying financial statements and engaging in other wrongdoing.
The prosecutors said they were also zeroing in on FSS officials for their possible collusion with the savings bank officials, given that they had inspected the savings bank numerous times during the period but failed to detect any illicit activities.
Referring to the Busan Savings Bank case, Lee publicly chastised FSS officials for their failure to preempt the problems. He attributed the regulatory failure to chronic corruption at the FSS that has been handed down from its predecessors.
Lee said it might not be fair to tar all FSS officials with the same brush. But he stressed none of them could avoid responsibility for the present crisis facing the FSS. To reform it, Lee said, it was necessary to use a sledgehammer.
Lee’s intervention in FSS reform was timely and his decision to have the Prime Minister’s Office oversee a planned task force was a step in the right direction. Since what needs to be reformed is not just the FSS but the governance of financial regulation, the task cannot be left to the FSS alone.
Regarding the overhaul of the FSS itself, the agency’s besieged chairman, Kwon Hyuk-se, has come up with a set of bold measures. They included an outright ban on FSS inspectors from working for private financial companies after retirement.
Thus far, the FSS has recommended its retiring officials for the post of auditor at financial firms on the grounds that FSS experts are better qualified than anyone else for the job.
But this controversial practice can no longer be justified, as former FSS officials who work as auditors at the troubled savings banks were found to have done nothing to prevent them from running into trouble. If anything, they only worsened the problems by delaying the day of reckoning.
The planned ban is welcome as it will help FSS officials stay away from developing incestuous relationships with financial companies. This in turn may push financial companies toward reforming their business practices.
Another measure called for regular corruption tests on all FSS staff to ensure that poorly rated officials are excluded from positions prone to bribery. The package also included a plan to oblige a wider range of FSS officials to disclose their personal wealth, a requirement currently imposed only on high-ranking officials. These steps will help curb a tradition of graft at the FSS.
As for governance reform, it is necessary to give the Bank of Korea and Korea Deposit Insurance Corp. the right to inspect financial companies. Thus far, the FSS has adamantly refused to give up its monopoly on this power. But it can no longer stick to its stance.
As every cloud has a silver lining, the ongoing crisis of the savings bank industry provides a rare opportunity to reform the regulatory culture of the financial industry. The task force should grab it and usher in a new culture to spur the growth of the financial market.
