Korean banking sector faces moral hazard issues: data

[Photo by MK DB]

South Korean commercial lenders are under fire for their lack of internal control and moral hazard that have led to more than 300 cases of disciplinary actions over the past five years.

According to data obtained from the Financial Supervisory Service by lawmaker Yang Jung-suk on Wednesday, a total 331 disciplinary actions were taken against the executives and employees at Korea’s five major banks KB Kookmin, Shinhan, Hana, Woori, and NongHyup between 2018 and 2022.

The number of cases dropped slightly last year to 64 from 70 in 2021 and 69 in 2020 but it still means an action was taken once every week.

KB Kookmin Bank lacked internal discipline the most as the number of disciplinary cases reached the highest at 97, followed by Woori Bank at 71, Hana Bank at 70, NongHyup Bank at 59, and Shinhan Bank at 34.

Violations of internal code of ethics take two forms-a “financial accident” that causes financial damage to customers and the company such as embezzlement and misappropriation and “disruption of financial order” that involves private financial transactions with customers and bribery that do not incur financial damage.

Last year, the number of disciplinary actions for financial accidents fell to 11 from 17 in 2020 and 2021, but they involved a series of severe embezzlement and misappropriation of funds exceeding 10 billion won ($7.6 million), resulting in severe punishment including criminal action and dismissal.

A total of 38 disciplinary actions were taken for disrupting financial order, which is three times higher than financial accidents. Private money lending accounted for a dominant share of disruption of financial disorder with 72 cases.

Financial authorities are mulling various measures to improve internal control of banks as social controversy intensifies on code of ethics violations in the banking sector. What draws most attention is the measure to amend laws to hold chief executive officers or chairmen of financial holding companies accountable for major financial accidents such as the Lime fund fiasco and embezzlement at Woori Bank. Senior executives remain free from disciplinary actions if working-level staff is designated as the person responsible for internal control under the current system, which gives little incentive for financial companies to strengthen internal control.