South Korea PM slams regulator’s slack monitoring of banks

Nation’s ruling party motions to investigate savings banks on FSS’ speculated negligence on lender’s illegal activities.

South Korea’s financial watchdog came under increased scrutiny over its monitoring of savings banks after Prime Minister Kim Hwang Sik said it resisted probes by the state auditor into the lenders last year.

The Financial Supervisory Service tried to dissuade the Board of Audit and Inspection from examining savings banks between January and April 2010 for suspicion of improper lending, Kim told lawmakers on Thursday in Seoul. Kim was chairman of the state auditor at the time, prior to taking his current post in October.

“Our inspection faced very strong resistance from the FSS, which said they will do it on their own,” according to Kim. “They said a stringent probe will turn up too many problems, which may cause bank runs.”

The ruling Grand National Party on Wednesday proposed a probe by an independent counsel into savings banks amid growing speculation that regulators overlooked illicit activity at the lenders. Korean finance regulators have also angered investors with delays that are holding up Lone Star Funds’ sale of Korea Exchange Bank even as President Lee Myung Bak pushes for consolidation in the industry.

The Financial Services Commission, the state regulator, said last month it will postpone approval of Hana Financial Group Inc.’s planned purchase of Seoul-based Korea Exchange Bank until legal disputes involving Dallas-based Lone Star were resolved. The FSS is a privately funded agency that enforces regulations set by the FSC.

“The savings bank crisis is evolving into a corruption scandal and that’s the last thing the Lee government needs right now, when it’s already losing its battle against inflation,” said Kang Won Taek, a professor of political science at the Seoul National University. “This may make it hard for the ruling party to retain its parliamentary majority next year.”

View the full story in Bloomberg.