[Q&A] Lee Bok-hyun "Hana Financial Group Chairman Reappointment, No Violation of Regulations but..."

Revision of Internal Governance Regulations on Reappointment Term
"We Could Have Prevented the Risk in Advance"
Three-Stage DSR Easing Requested by the Ruling Party Will Proceed "As Planned"

Lee Bok-hyun, Governor of the Financial Supervisory Service (FSS), criticized Hana Financial Group on the 10th regarding the controversy over the 3-year reappointment of Chairman Ham Young-joo, citing the 'internal governance regulations,' stating that "the risk could have been prevented by pre-selecting candidates." He emphasized to Chairman Ham and Chairman Lim Jong-ryong of Woori Financial Group that "they need to consider how to establish a future-oriented CEO succession structure and governance." Regarding the ruling party's request to temporarily ease the application of the Debt Service Ratio (DSR) for the purchase of unsold houses in provincial areas, he drew a line by saying, "There is no disagreement that the three-stage stress DSR measures scheduled for July should proceed as planned."

Lee Bok-hyun, Governor of the Financial Supervisory Service, is announcing this year's FSS work plan on the 10th at the Financial Supervisory Service in Yeouido, Yeongdeungpo-gu, Seoul. Photo by Financial Supervisory Service

The following is a Q&A from Governor Lee Bok-hyun's press conference.

▲There has been controversy regarding the reappointment of the next chairman of Hana Financial Group. Do you think there is no problem with the reappointment?

=Changing the reappointment regulations before creating the long list did not violate the governance best practices. The FSS is not in a position to judge whether two or three years is appropriate. However, if the revision had been made a little earlier, it would have looked much better. I regret that a hurdle (brake mechanism) related to the reappointment procedure was not created. Chairman Ham was reappointed without the burden of reappointment. Going forward, there needs to be consideration on how to create a succession structure and whether the financial sector can achieve more future-oriented governance. The same applies to Chairman Lim.

▲What aspects will you focus on in regulating large financial companies involved in improper loan incidents?

=Chairmen of financial holding companies, bank presidents, and heads of each division (at the headquarters level) suffered from short-term performance pressure and lacked consideration for balancing performance with consumer protection. Assuming there is some consensus that financial authorities do not intervene in personnel, performance evaluation, and internal control of major financial companies, we will regulate so that mid- to long-term risk management and internal control strengthening are connected. We will encourage financial sector executives to practically operate the accountability structure to clarify responsibilities and authority. Woori Financial, KB Financial, and NH Nonghyup Financial, all involved in improper loan incidents, are making various efforts, so improvements are expected.

▲According to FSS standards, the acceptance of money by relatives of former Woori Financial Chairman Sohn Tae-seung is considered an improper loan, but the derivative product accident is not. Why is that?

=There are multiple issues, such as whether it was appropriate to handle credit using personal relationships during derivative product operations, whether risks that needed to be checked were examined, and whether the opinions of practitioners who said it should not be executed were ignored. In the case of former Chairman Sohn, it is necessary to consider how society perceives the introduction of people through specific networks at the level of holding company chairman, bank president, and head of credit finance. There is an issue in establishing a code of conduct regarding whether the holding company chairman, bank president, and credit division head can introduce relatives, friends, or family members to branch managers. I believe a culture of strict management is needed to ensure that personal relationships do not influence decision-making such as credit.

▲It has been a week since the announcement of the Woori Financial inspection results. Has there been progress in the management evaluation rating of Woori Financial? When will it be sent to the Financial Services Commission?

=Fundamental risks related to consumer protection and operations, as well as capital adequacy issues, must maintain the existing stance. Since last week, there has been closer communication between FSS executives, directors, working-level staff, and the relevant financial companies regarding major M&A approvals. We are also actively communicating our position to the Financial Services Commission. There are matters regarding the acquisition of Woori Financial's life insurance company and the main approval of the securities company. We will expedite the securities company main approval as much as possible. We must allow the Financial Services Commission time to evaluate by using the full two-month review period.

▲What is your opinion on the ruling party's request for a temporary easing of DSR regulations?

=It is necessary to consider whether stimulating real estate demand helps economic revitalization. There is a severe concentration of household asset portfolios in real estate. There is skepticism about whether financial companies appropriately conduct mid- to long-term risk assessments for loans. Personally, I have no disagreement with the policy direction that the three-stage stress DSR policy should proceed as planned. However, specific details should be communicated with the market. In the first half of the year, we will discuss various technical aspects, including management-purpose DSR, with banks, the financial industry, and the FSS task force (TF). To implement the DSR three-stage in July, the direction must be firmly set by at least June, and we will discuss accordingly.

▲You mentioned in-depth monitoring of large corporate groups and inducing strict management by main creditor banks. How will you regulate syndicated loans by banks and insurance companies?

=Considering financial concentration and instability issues, the FSS analyzes the status of main debtor groups by industry. Since the end of 2022, we have analyzed how real economy risks in industries such as construction and petrochemicals affect finance. I believe the information should be shared with the government through the Financial Services Commission, and we are cooperating with economic and financial authorities on proactive monitoring results. Syndicated loans in construction are somewhat sensitive because we do not want to cause undue concern as if major restructuring is needed in construction. Since the sale of real estate project financing has become a social issue since the end of last year, I think we need to build a consensus to more actively induce the sale of non-performing loans compared to the past two to three years (2022?2024).

▲After Samsung Fire & Marine Insurance's value-up (corporate value enhancement) disclosure, has Samsung conveyed any messages regarding the inclusion of Samsung Fire as a subsidiary of Samsung Life Insurance?

=Even if not disclosed externally (such as by the media), the FSS is conducting various internal reviews. The actual application process is a sensitive issue regarding how the market will perceive it. However, if subsidiary inclusion is possible, we must review it. We are conducting various reviews as a contingency plan.

▲With about four months left in your term as governor, what are your priorities for the remaining period?

=Since the burden that real economy issues in the first half of the year place on the financial sector is very significant, I will focus on raising awareness of these issues in upcoming industry meetings. The banking sector will find it difficult to compete in scale as before, such as in mortgage loans. How to manage funds and supply them to manufacturers will become a practical issue. Whoever becomes the chairman of financial holding companies or CEOs of financial companies, I believe my last role is to earnestly persuade them to share the authorities' awareness of problems and participate in the resolution process.