South Korea Corruption

South Korea, by many criteria, increasingly fits the mold of an advanced nation. But, despite the country's growing role in international affairs and its status as the world's 13th-biggest economy, one black spot, at least, challenges that definition: pervasive corruption. One of examples is corruption banking scandal with the participation of President Lee's closest aides and political allies.

South Korea's savings bank industry was born in the aftermath of Asia's 1997 financial crisis, when regulators allowed private lenders and rural cooperatives to call themselves "savings banks" to offer loans at higher interest rates than major banks to working-class people and companies without adequate collateral. Subsequently, the state granted deposit protection equal to insurance at nationwide lenders and eased lending rules to permit the small banks to lend to the property market. In 2005, when low interest rates fueled a property boom, savings banks increased their exposure to real-estate-project financing loans. South Korea's sluggish real estate market following the global financial crisis in 2008 led to capital and liquidity shortages and loan defaults. This, coupled with corruption and malpractices, was the primary reason for the downfall of the small savings banks.

"Korean savings banks collapsed after expanding into real- estate businesses, just like Spanish ones," said Samsung's Jeong. "We've learned that banking businesses, regardless of their size, require an extremely high level of transparency, stringent regulations and qualified managers and owners."

To survive, savings banks started selling customers subordinated bonds that had low priority for repayment in the event of default. The bonds became popular, particularly among the elderly living on interest payments. The yields, as much as 10 percent annually, were almost double the savings account rates at national banks.

Korean banks kept interest rates artificially high for years and used questionable criteria for determining how much to charge borrowers have stoked public anger as ordinary South Koreans struggle with high levels of debt. Households and companies had been burdened with unnecessarily high interest payments.

In January 2011, South Korean regulators have closed the nation's 20 weakest "savings banks". They have unveiled 200 cases of illicit lending and lax oversight resulting in corrupt and illegal practices by bankers to cover loan default losses. Some of President Lee's closest aides and political allies have been convicted or put on trial in the savings bank scandal, where operators of failing financial firms paid off the officials to cover up mismanagement. Their "greed" damaged the society, the court stated in its sentencing, calling the executives "immoral" for pursuing high-risk returns instead of stability.

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