FSS to Focus on 'Bank Governance' in Second Half ... Preventing Recurrence of Financial Accidents

18 Domestic Banks' Board Chairpersons Meeting
Focused Review on Governance Improvement Efforts through Management Performance Evaluation
Call for Proactive Soundness Management amid Rising Delinquency Rates
Loan Business Process Enhancement to Prevent Recurrence of Financial Accidents

The Financial Supervisory Service (FSS) will focus on thoroughly inspecting banks' efforts to improve governance through management evaluations starting from the second half regular inspections, and will supplement credit business procedures to prevent the recurrence of recent frequent branch loan incidents.

On the 12th, the FSS held a regular meeting chaired by Lee Junsu, Deputy Governor of Banking and Small Finance, with the chairpersons of the boards of directors of 18 domestic banks, announcing this policy. The meeting involved in-depth discussions on current issues in the banking industry, including establishing sound governance, proactive soundness management, and building robust internal controls.

In his opening remarks, Deputy Governor Lee stated, "There is a need to respond to structural trend changes such as intensified competition in the banking industry, digital transformation, climate finance, and demographic changes," adding, "Recently, the banking sector has suffered considerable losses due to large-scale mis-selling and ongoing financial accidents, making the role of the board of directors?setting management strategies at the top of governance and establishing internal control and risk management policies?extremely important."

Accordingly, the FSS plans to focus on inspecting efforts to improve governance through management evaluations starting from the second half regular inspections. This is based on the judgment that some items still require many improvements due to delayed implementation or lack of specificity.

Deputy Governor Lee said, "For the CEO and outside director appointment procedures to proceed smoothly according to best practices, it is necessary to finalize standards related to management succession procedures, board composition, and evaluation at an early stage."

Financial Supervisory Service, Yeouido, Seoul. Photo by Younghan Heo younghan@

He also emphasized the need for proactive soundness management as delinquency rates are rising mainly among individual business owners and small and medium-sized enterprises (SMEs) due to sustained high interest rates and delayed economic recovery. The delinquency rate for individual business owners increased from 0.48% at the end of last year to 0.61% in April, and the SME delinquency rate rose from 0.48% to 0.66% during the same period.

Deputy Governor Lee urged, "Even if unexpected shocks occur in the economic and financial markets, faithful capital management is necessary to maintain resilience," and requested, "Please ensure that household debt, one of the potential risks in the domestic financial system, is managed stably within the range of nominal growth rates."

In particular, he announced plans to supplement the credit business process to prevent recurrence related to recent frequent branch loan incidents. Recent financial accidents have increasingly involved private misuse such as personal monetary acquisition and have occurred frequently in the digitized branch loan process, showing changing patterns. Accordingly, the FSS plans to enhance the internal control system for credit to verify documents and collateral items, which have become vulnerable due to the digitization of the credit process.

Deputy Governor Lee explained, "For internal controls to function properly, appropriate human and material resources to operate internal controls are important," adding, "We plan to gather opinions from the banking sector to prepare institutional improvement measures and, if necessary, revise best practice standards to supplement the credit process."

Meanwhile, regarding the creation of a healthy risk culture, Deputy Governor Lee stated, "For governance best practices, strengthened internal controls, and accountability structures to be effectively implemented, fostering a risk culture is necessary," adding, "Establishing a clear and consistent risk culture and setting incentive systems aligned with compliance management are important." The FSS plans to prepare measures to improve banks' risk culture by referencing overseas cases and conducting diagnostics and opinion gathering on the banking sector's risk culture.