[Their Own League, Regional Banks]④ "Regional Banks Also Deal with People... Must Develop Talent and Invest in Internal Controls"

Interview with Four Experts on Financial Law and Financial Crime
Measures to Restore Trust in Regional Banks and Strengthen Internal Controls

This year marks the 56th anniversary of the establishment of regional banks in South Korea. Over the years, regional banks have served as a reliable source of funding for local businesses that struggle to borrow due to lack of credit, under the motto of "community-based finance." They have also provided convenient banking services to local residents through an extensive network of branches across neighborhoods.

However, public perception of regional banks is far from favorable. This year’s consecutive scandals, including the embezzlement of approximately 300 billion KRW at Gyeongnam Bank and the illegal account opening incident at Daegu Bank, have exposed the fundamental regulatory lapses within regional banks. These banks have solidified their "own league" culture under relatively lax supervision and a regionalism-based culture rooted in local sentiments.

Considering the unique role of regional banks in revitalizing local economies, their existence still holds significant value. Asia Economy asked four domestic experts about ways to restore trust and strengthen internal controls in regional banks. The experts include financial law specialists Professor Ko Dong-won from Sungkyunkwan University School of Law, Professor Ahn Soo-hyun from Hankuk University of Foreign Studies School of Law, Professor Jung Dae from Korea Maritime and Ocean University’s Department of Maritime Law, and anti-money laundering expert and adjunct professor Jung Ji-yeol from Hanyang University, who has a banking background. They unanimously agreed that a two-track innovation approach is needed: regional banks must devise self-help measures, and supervisory authorities must enhance their capabilities.

"Internal control depends most on executives' will... Active talent development is essential"

The experts diagnosed that vulnerabilities in internal controls stem from the physical and cultural characteristics of regional banks. Compared to commercial banks, regional banks have weaker financial power and receive relatively less supervision, leading to internal controls not being prioritized. Professor Jung Dae noted in a phone interview, "Commercial banks, being larger and under stricter supervision, invest heavily in enhancing audit systems and recruiting high-level personnel to strengthen internal controls. In contrast, regional banks tend to invest less time and money in this area," adding, "Especially due to their non-metropolitan location and wage differences, there are difficulties in securing high-quality personnel."

In this regard, expanding human resources is an indispensable task. Since personnel costs constitute a significant portion of expenses, banks must put more effort into talent acquisition. Professor Jung emphasized, "Specialized personnel should be recruited to ensure smooth handovers of duties. If necessary, higher wages can be offered, and talent can be discovered and nurtured through university partnerships," adding, "This is also a crucial personnel capability for bank presidents and financial holding company chairpersons." He further suggested, "Merging Busan Bank and Gyeongnam Bank, which are under the same holding company, would increase financial power and scale, thereby enhancing competitiveness and raising the level of internal controls."

Jeong Dae, Professor, Department of Maritime Law, Korea Maritime University.

Professor Jung Ji-yeol also stated, "Even just one year of training using in-house training centers or external institutions like the Financial Training Institute can sufficiently cultivate excellent personnel," and assessed, "The reluctance to work in regional areas is no longer a constraint since remote work, including telecommuting, has become possible post-endemic. Additionally, the recent fintech investment downturn has released many idle IT professionals into the market, improving manpower supply."

They also agreed that cultural factors such as regionalism cannot serve as an "excuse" for internal control failures. Professor Ahn said, "The Gyeongnam Bank embezzlement incident could have been prevented if proper personnel standards for long-term employees had been established, approved, and supervised," emphasizing, "The will of CEOs and executives to prioritize internal controls and foster a culture where members share its importance is more critical."

Professor Jung Ji-yeol advised, "Ethics education for employees, rotation of long-term staff, and continuous monitoring of regulatory compliance should be institutionalized. The bank’s core performance indicators (KPIs), which currently focus on profit-seeking, should be revised to emphasize ethical and compliance management." He also mentioned the need for incentives such as an ombudsman system and special promotion programs for whistleblowers.

Jiyeol Jeong, Adjunct Professor, Department of Computer Software, Hanyang University

"Regional Financial Supervisory Service offices only handle simple complaints... Work coordination is needed"

Experts also stressed the importance of strengthening external supervisory capabilities. Currently, supervision of three regional financial holding companies and five regional banks (Jeju Bank falls under the Bank Inspection Division 1) is handled by two teams within the Bank Inspection Division 2 of the Financial Supervisory Service (FSS). Due to limited personnel, time, and physical distance from regional areas, inspection cycles are about 1 to 2 years longer than those for commercial banks. Professor Ahn advised, "If on-site inspections are realistically difficult to conduct frequently, starting with document-based inspections to check internal control operations, followed by on-site inspections to verify consistency with document inspections, could reduce the burden."

Professor An Suhyeon, Hankuk University of Foreign Studies Law School.

Professor Ko said, "Although there are FSS branch offices in major regional cities, their role is limited to handling financial complaints," and added, "They should be actively utilized for regular and periodic on-site inspections through personnel reinforcement and functional enhancement." Professor Jung Ji-yeol emphasized, "Simple financial complaint tasks should be handled using RegTech (innovative technology that utilizes information and communication technology (ICT) to streamline regulatory compliance tasks such as compliance monitoring and internal controls), allowing support staff to focus on inspection duties by adjusting workloads."

Professor Jung Dae explained, "If supervision of regional banks is strengthened, these banks will prepare more thoroughly. The more attention supervisory authorities pay, the more the chairpersons and bank presidents will inevitably take interest."