[Shaking Financial Leadership] ③ The Omnipotent Financial Power... The Era of Politics

Back to Shin Gwan-chi? Also Criticized as "Anachronistic"

[Asia Economy Reporter Yoo Je-hoon, Sejong=Reporter Song Seung-seop] "Several years ago, there was a rumor that a CEO of a financial company tried to secure a second term by leveraging the name of the Blue House. At the time, authorities detected this and conducted an internal investigation, but the results showed that this CEO had no connection whatsoever with the higher-ups. Just as they were about to cover it up, the atmosphere from above suddenly changed. (Laughs) Eventually, the authorities abandoned the plan," a source said.

The background behind domestic financial holding company CEOs wielding unchecked power is attributed to the arrival of an era dominated by politics instead of government control (官治) that had long governed Korean finance. Financial companies, which gained financial capacity through annually increasing interest income, formed collusive relationships with political circles, and on this basis, escaped government control to establish 'financial power.' The so-called 'Four Financial Emperors' symbolically represent this shift in the balance of power.

Of course, recently, the influence of government authorities seems to be growing again. The fact that CEOs of financial holding companies, who still had remaining terms or were expected to seek reappointment, have been announcing resignations or mid-term withdrawals one after another also attests to this. However, questions remain as to whether this return to past-style government control is a healthy culture.

The Government Existed to Govern

"Until the early 2000s, the power of government officials was formidable. I still remember an anecdote: a high-ranking financial bureaucrat currently in office once, when he was a section chief, gathered heads of commercial banks and shouted, 'I am from ○○○, so don't even utter a word.' However, as criticism of government control grew and the power of the political circles and the National Assembly strengthened, the power of bureaucrats began to wane from the mid-to-late 2000s. It was around that time that 'National Assembly liaison' organizations, which did not exist in the financial sector, were established in each bank."

This is a recollection from a financial insider who has been active in liaison work for about 20 years. In Korean financial history, until at least before 2000, it was rare for the CEO's unilateral actions to be problematic. This was because the era of 'government control' was in place, where government agencies such as the Ministry of Finance and Economy completely controlled everything from CEO appointments to relatively minor interest rate issues.

A senior financial official with a bureaucratic background said, "Before the liberalization of interest rates in the 1990s, commercial banks did not independently decide their lending and deposit interest rates. The Ministry of Finance decided rates down to decimal points, and the junior staff who handled documents notified the Bank of Korea and the Financial Supervisory Service, which then relayed the decisions back to the banks."

After the 1997 foreign exchange crisis, the 'Mofia' (a term referring to Ministry of Finance officials in the financial sector) responsibility theory surged, but even then, government power remained strong. The government maintained influence by leading public fund injections during the crisis, harsh corporate and financial restructuring, and resolving the subsequent credit card crisis. The phrase "The government exists to govern" by former Financial Services Commission Chairman Kim Seok-dong became popular during this period.

From Government Control to Politics

The influence of government officials began to weaken rapidly from the mid-to-late 2000s as political power grew swiftly. The 'Four Financial Emperors,' a term widely circulated during former President Lee Myung-bak's (MB) administration, vividly illustrates this. The 'Four Financial Emperors' refer to Kang Man-soo, former chairman of the Korea Development Bank; Uh Yoon-dae, former chairman of KB Financial Group; Kim Seung-yu, former chairman of Hana Financial Group; and Lee Pal-seong, former chairman of Woori Financial Group. Among them, Kang Man-soo served as an economic policy brain for Lee Myung-bak since his time as Seoul mayor and was appointed as the first Minister of Strategy and Finance under the MB administration. Kim Seung-yu, Uh Yoon-dae, and Lee Pal-seong were alumni of Korea University alongside the former president. Kim was a key figure in Hana Financial Group's growth and a living witness to its history. Lee had retired after serving as president of Woori Securities but made a comeback as chairman thanks to his academic ties with MB, and Uh, despite having no prior financial sector experience, also became chairman due to MB's influence.

During the MB administration, these figures maintained such close ties with the government that the financial sector nicknamed them 'MB Financial Group.' Rumors circulated that a financial holding company chairman frequently summoned Kim Seok-dong, then chairman of the Financial Services Commission, for discussions, and that they had private meetings with the president at the Blue House. These stories reflect the overwhelming power they wielded, to the extent that even financial authorities (Financial Services Commission, Financial Supervisory Service) had to be cautious.

As political power began to exert influence over the financial sector, various illegal and unethical acts followed. Kang Man-soo was sentenced in 2018 to five years and two months in prison, fined 50 million won, and ordered to pay 88.4 million won in fines for pressuring the CEO of Daewoo Shipbuilding & Marine Engineering, which was under the Korea Development Bank's management, to invest 4.4 billion won in an acquaintance's company.

Lee Pal-seong delivered bribes to the presidential family and recorded them in memoranda. Among the 41 memoranda disclosed by prosecutors were notes such as, "I supported him with about 3 billion won. How much was the clothing expense?" These memoranda became decisive evidence proving the former president's bribery charges in court. Lee also testified in court that he provided funds expecting help in return.

In Kim Seung-yu's case, there was much controversy over the improper support of 14.5 billion won to Mirae Savings Bank. In September 2011, Hana Capital invested 14.5 billion won in a capital increase for Mirae Savings Bank, which was effectively slated for exit due to poor management. Criticism grew that this was improper support after it was revealed that Kim Seung-yu had met with Kim Chan-kyung, former CEO of Mirae Savings Bank. The Financial Supervisory Service issued a disciplinary warning related to this matter.

Although not among the 'Four Emperors,' Shinhan Financial Group also experienced the so-called 'Namsan 30 million won incident' in 2008 during the tenure of former chairman Ra Eung-chan, where 30 million won was given to the former president's side as a congratulatory gift for election victory. This connection with political circles later became a prelude to the 'Shinhan Incident (2010),' a scandal that plunged Shinhan Financial Group into its biggest crisis since its founding.

During the subsequent Park Geun-hye administration, the 'Seogeumhoe,' a group of financial figures from Sogang University, was identified as a powerful faction in the financial sector, further deepening collusion with political power. Industry insiders attribute this collusion between political and financial power to the enormous financial capacity of 'mega banks.' According to the Bank of Korea and the Financial Supervisory Service, the combined net income of domestic banks was 846.8 billion won in 1996, before the foreign exchange crisis. However, 25 years later, in 2021, the combined net income of eight domestic bank-affiliated financial holding companies (KB, Shinhan, Hana, Woori, BNK, JB, DGB) reached 19.6137 trillion won, an increase of about 22 times.

The Legislature Also Played a Role

During the same period, the legislature (National Assembly) emerged as a new power. After the June Democratic Uprising in 1987, democratization progressed, and the previously unbalanced relationship between the executive and legislative branches began to stabilize, with active activities such as audits and legislative work. Previously, the ruling party mostly sided with the government, acting as a rubber stamp for passing bills or defending against opposition attacks, but after regime changes in the 2000s, the legislature began to perform its role properly.

Liaison work with the National Assembly became an important task for banks starting in the mid-to-late 2000s. This was due to the legislature demonstrating its expertise on various contentious issues such as the Financial Holding Company Act. The first appearance of National Assembly liaison teams in banks was in the mid-2000s. At that time, KB Kookmin Bank attempted to acquire Korea Exchange Bank (which was eventually merged into Hana Financial Group), but amid controversy and media scrutiny over helping the seller Lone Star's exit and causing national wealth outflow, the bank established a liaison team.

An insider familiar with the banking sector at the time recalled, "It was rumored that the team spent 180 million won, a large sum at the time, just on business expenses. Later, Shinhan Bank, which was struggling with the 'Shinhan Incident,' established a liaison team and reportedly spent double that amount. Subsequently, Hana Bank and Woori Bank also formed liaison teams, marking the heyday of bank liaison activities." He added, "In situations where conflicts with supervisory authorities arose, banks used the National Assembly and political circles, which had gained power, as alternative channels. However, recently, with no major (institutional) issues in the banking sector, liaison activities have been relatively quiet."

Although quiet, the shadow of banks in the legislature remains strong. A representative example was the National Assembly audit held last October. Despite numerous issues such as Woori Bank's embezzlement case involving about 70 billion won, a 7 trillion won virtual asset remittance case, and long-term tenures of major financial company CEOs, the chairmen of the five major financial holding companies all avoided attending the National Assembly's Political Affairs Committee audit. Instead, bank presidents attended in their place.

A financial sector insider said, "Before the Kim Young-ran Act (Act on the Prohibition of Improper Solicitation and Graft), it was customary for financial company officials to bring bundles of gift certificates as presents when visiting the National Assembly. There was even a story about a state-run bank president who was embarrassed because he was unaware of this 'custom.'"

During this period, financial holding companies experienced various financial accidents such as the overseas interest rate-linked derivative-linked securities (DLF) incident, Lime incident, and Optimus incident, but CEOs often sought reappointment, third terms, or even fourth terms despite controversies.

Backsliding to Government Control?

Recently, there are signs of backsliding toward 'government control.' In November last year, Lee Bok-hyun, governor of the Financial Supervisory Service, convened a meeting with chairpersons of the boards of eight financial holding companies at the Bankers' Hall in Jung-gu, Seoul. This was ahead of the appointment of new chairpersons for Shinhan, Woori, NH Nonghyup, and BNK Financial Groups. At the meeting, Lee emphasized, "Appointing competent management with both expertise and morality is the most important authority and responsibility of the board."

The signal for the shake-up was fired by Shinhan Financial Group. Chairman Cho Yong-byeong unexpectedly announced his retirement, breaking expectations that he would seek a third term. Although it was widely assumed inside and outside Shinhan Financial Group that Cho's third term was a foregone conclusion, he suddenly decided to retire during the final interview of the chairman candidate recommendation committee.

Regarding rumors of external pressure, Chairman Cho emphasized that his retirement was voluntary, explaining, "Although I received a 'caution' disposition in the Financial Supervisory Service's re-examination, I believe someone must take overall responsibility for the Lime Asset Management fund mis-selling incident." Governor Lee immediately praised Cho's retirement, saying it was "respectable."

Subsequently, the reshuffling of financial company CEOs became apparent. At NH Nonghyup Financial Group, Lee Seok-jun, a former presidential transition team member for President Yoon Seok-yeol and former head of the Office for Government Policy Coordination, was appointed as the new chairman. At Woori Financial Group, Chairman Sohn Tae-seung decided to retire after a tug-of-war with authorities. BNK Financial Group also saw former chairman Kim Ji-wan fall mid-term amid various allegations including nepotism, with Byeon Dae-in, former president of Busan Bank, appointed as the new chairman.