An aide to President Lee Myung-bak criticized a group of Busan lawmakers for pushing for legislation to make the government provide full compensation for lost savings at suspended mutual savings banks, saying it would bring about moral hazard.

“Ignoring the existing law to guarantee full compensation for all savings when Busan Savings Bank is suspected of having told (its VIP customers) to withdraw money (prior to its suspension) could bring about moral hazard,” the Cheong Wa Dae official said.

The current law allows depositors to get compensation of up to 50 million won if their bank is suspended or shut down. The legislators from Busan are seeking to revise the law so that bank customers receive full compensation from the government, a plan believed by many as unrealistic.

The comments from the presidential office came as prosecutors arrested 10 major shareholders and executives of Busan Mutual Savings Bank Group, including chairman Park Yeon-ho, and indicted 11 others without detention on charges of illegal lending of more than 7 trillion won ($6.6 billion), window dressing and embezzlement.

The Financial Services Commission has suspended the operations of eight troubled savings banks so far this year, including top player Busan Savings Bank, for their insufficient capital bases.

Park and others are charged with founding 120 special purpose companies in a bid to directly run real estate businesses and managing the firms through Busan Savings employees but making them appear like independent entities having nothing to do with the major shareholder of Busan Savings.

The SPCs are accused of borrowing 4.59 trillion won from five subsidiaries of the group, violating related laws that ban savings banks from extending credit loan to their shareholders.

They are charged with ordering the five subsidiary banks to give out loans to their relatives and acquaintances without collateral, causing a 506 billion won loss for the banks.

Park and others are also charged with cooking the books, generating 2.45 trillion won in accounting irregularities and manipulating the banks’ capital ratio requirements to avoid inspection from the authorities. They are accused of inflating profits to take dividends and increasing paid-in capital by 100 billion won by using false financial statements.

Park is said to have pocketed 4.45 billion won under the pretext of loans from the Busan Savings Bank 1 and 2 to other companies, and using the public money to repay his personal debts.

The 21 suspects are charged with siphoning off a total of 7.657 trillion won through illicit lending, embezzlement and other schemes.

They are believed to have anticipated that the group would be suspended, then withdrew their deposits from the bank several days before the suspension, paying no heed to a huge loss for other depositors due to their business failure.

By Kim So-hyun (sophie@heraldcorp.com)