Two days ago, Rep. Kim Hyun-jung of the Democratic Party of Korea asked Shinhan Bank President Jung Sang-hyuk, "Are you going to seek a third term?" The exchange took place at the National Assembly's parliamentary audit of the Financial Supervisory Service. Rep. Han Chang-min of the Social Democratic Party went further. Targeting the heads of the five largest banks, he said, "A bank president who cannot even protect customer data has no standing to discuss reappointment."
There is no excuse for the leak of personal data caused by artificial intelligence-driven hacking. For banks, which handle money, trust is everything. A security failure here is of a different order from one at an IT company or a telecom carrier. Some 100,000 pieces of personal information leaked from 16 financial firms. The banks appear unable to escape responsibility. FSS Governor Lee Chan-jin has vowed to "hold chief executives accountable."
In practice, Korean banks' security budgets and staffing amount to just one-37th and one-47th of those at large U.S. banks. The asset gap is tenfold, but the security gap is wider still. There are several reasons. Security ranks relatively low in investment priorities. Given how Korean banks are structured, sales and strategy are favored over IT and information protection.
There are structural causes as well. The AI hacking episode reveals the chronic ailments of Korean finance — state control and compliance. Worried about hacking, the government introduced network separation across the banking sector and eliminated the risk entirely. It is much like reducing the odds of a plane crash to zero by never flying. The risk of data leaks disappeared, but response capability regressed and opportunities for technological advancement vanished.
The United States takes a different approach. It does not mandate network separation. As a result, U.S. banks face relentless external attacks — and have raised investment accordingly. Korean banks now belatedly plan to increase budget allocations and invest in AI security. But unless the hothouse-flower framework changes, similar incidents are bound to recur.
The role of politicians and regulators is to examine the causes and responsibility behind this incident and produce sanctions and measures commensurate with them. Summoning bank presidents to press them on whether they intend to seek another term, as if to shame them, has neither justification nor practical effect. The gravity of the matter should be weighed. Pinning all responsibility on chief executives may feel satisfying, but it only magnifies the side effects of state control. Many ordinary investors suffered losses on single-stock leveraged exchange-traded funds — has any official been held accountable for that?
What is worrisome is whether politicians and regulators have come to view banks as too easy a target under the Lee Jae-myung administration. Even though banks plainly have shareholders and boards of directors, officials intervene openly in personnel decisions. The resurfacing of the dated BNK Financial Group affair at the FSS audit is another example. Judging by remarks describing financial holding companies as a "corrupt inner circle," or presidential comments that "finance is the most brutal field" and that the government should "purchase delinquent debt at the state level," there appears to be virtually no place for the financial sector under this administration.
Banks are the foundation of the financial industry and the arteries of the national economy. It is hard to imagine now, but when banks falter, the country's economy wobbles. During the 1997 foreign exchange crisis, the five largest banks — Chohung, Commercial Bank of Korea, Korea First, Hanil and Seoul Bank — disappeared. A single number, the Bank for International Settlements capital adequacy ratio of 8%, determined which banks lived and died. With banks impaired, they were busy calling in existing loans, let alone extending new ones. The companies that vanished in that process were legion.
The 2008 global financial crisis was no different. One of today's four largest banks faced the threat of default on its foreign currency bonds. The turmoil subsided only after the government stepped in and announced it would provide payment guarantees. Had a default on those foreign currency bonds been declared then, Korea might have suffered the tragedy of a "second IMF" crisis.
The value of banks deserves recognition. Banks are said to snatch away the umbrella when it rains, but if banks collapse, so does the economy. In Japan, as the bubble deflated in the 1990s, roughly 330 financial firms — including banks, regional banks and securities houses — were forced out of business. That was the prelude to the "lost 30 years." Talk of a property price crash circulating in and around the Presidential Office could become the same kind of nightmare.
Without banks, support for advanced industries and ambitions of manufacturing supremacy amount to empty words. JPMorgan Chase, the largest U.S. bank, provided $230 billion (about 306 trillion won) in the first year after launching its Security and Resiliency Initiative. Samsung Electronics (005930) and SK hynix (000660) cannot fight alone without help from the financial sector. If nurturing the financial industry is too difficult, it would be better to simply leave the banks alone. Tax audits and assorted FSS examinations only push the banking business further backward.