FSS to begin intense KB Financial, Kookmin Bank inspections

KB Kookmin Bank’s headquarters in Yeouido, Seoul. [Photo by Lee Seung-hwan]

The Financial Supervisory Service (FSS), South Korea’s financial watchdog, will begin a three-year regular inspection of KB Financial Group Inc. and KB Kookmin Bank on Thursday.

According to financial authorities and the banking industry, the FSS will send about 40 FSS personnel to inspect KB Financial Group and KB Kookmin Bank for about six weeks. The FSS conducts regular inspections of banks twice every five years.

This inspection is expected to be intense considering the recent mis-selling scandal involving high-risk equity-linked securities (ELS) products tied to the Hang Seng China Enterprises Index (HSCEI).

“Internal control issues will certainly be reviewed,” an FSS official said, adding that inspectors will also look at general areas. Another FSS official stated that a variety of areas will be reviewed, and added that new issues could emerge, as is often the case during comprehensive inspections.

But an investigation into the mis-selling of high-risk investment products, including HSCEI-linked ELS products, is inevitable. Additionally, a thorough examination of the lending process is also expected considering three breach of trust cases involving loans exceeding 10 billion won ($7.5 million) at KB Kookmin Bank in 2024.

Former FSS Senior Deputy Governor Lee Joon-soo emphasized internal controls during a meeting with the chairpeople of the boards at 18 banks in July 2024. “Recent financial incidents have increasingly been for personal financial gain, particularly in the digitalized loan process at branches. It is crucial to have adequate resources for the operation of internal controls to function properly,” Lee said.

The FSS believes that the shift to digital loan processes has led to inadequate verification of original documents, while the rapidly increasing household debt is another area of focus. The FSS has requested banks to cooperate in managing household debt within the nominal GDP growth rate range. FSS Governor Lee Bok-hyun recently stressed strict measures against illicit loans, examining the debt service ratio screening status and the appropriateness of household loan risk management at banks.

The regular inspection is expected to be completed in early October 2024. However, the results are expected to be available in 2025, a move that takes further reviews on potential disagreements between the FSS and KB Financial Group into account.