More than 10 conglomerates subject for the integrated supervision of Complex Financial Group …“Middle financial holding company in need”
Kang Eun Seong | esther@ | 2017-05-30 09:55:34
Issue analysis
Integrated supervision system of Complex Financial Group`
It is a matter of concern for the actual corporations to be regulated while the establishment of an integrated supervisory system of the complex financial group is getting stronger in the new government. Experts believe that Samsung Group will be the first subject to integrated supervision under consideration of the risk of over-offsetting affiliates` capital, transferring risk to affiliates, and concentration phenomenon.
Financial institutions and academics emphasized on May 29 the need for a clear definition of regulatory targets for establishing a system of integrated financial group supervision. In principle, a large group of corporations with two or more financial affiliates is a considered as complex financial group. However, broadening the scope of supervision does not guarantee financial soundness. Rather, excessive supervision and regulation can lead to market rigidity and oversight by the expansion of scope may lead to side effects.
Hong Min-young, attorney at Kim & Chang law firm, explained in a seminar on improvement of financial supervision system sponsored by the Korea Institute of Finance last year, "The starting point of the supervision of the financial group is to clearly define the target of regulation. In the case of the complex financial group, there is no current law that defines the regulatory targets so as to fully utilize the purpose of supervision, such as the duplication of capital, the prevention of concentration and concentration of risk, and minimization of regulatory profits.”
Experts advise that it is important to see a large group of companies designated by the Fair Trade Commission. The total amount of assets designated by the Fair Trade Commission is over KRW 10 trillion as of the first day of this month. Large corporations in this category are prohibited from mutual investment among affiliates, new circulating investments and debt guarantees, as well as limited voting rights for financial companies among affiliates. However, not all enterprises with two or more financial affiliates among the large corporation group designated by the Free Trade Commission are subject to the integrated supervision system.
Kim Sang-Joo, the nominee for chairman of the Fair Trade Commission, said in a report on the redesign of the non-bank and commerce separation sector discipline system, "Among the large corporation groups, the complex financial group, which should be carefully regulated and supervised, is more than 10 corporation groups".
Meanwhile, there are also opinions that the complex financial group should regulate the regulation more finely in that the finance is divided into the financial business group in which the finance is the main business and the large business group which is not the main business but the non-financial company.
Lee Jae-yeon, Ph.D., from the Korea Institute of Finance, has presented two proposals from the `Improvement plan for direction of domestic financial group`.
The first proposal is that in the case of the financial assets in the group are more than KRW 5 trillion and the group`s total financial assets account for more than 40%, or if there are more than two financial companies whose share of assets and capital is over 10% can be the target of supervision. According to a survey conducted by the Financial Supervisory Service, Samsung Group, Hanwha Group, and Dongbu Group, which account for 50.3% of total assets, account for the largest group of companies that meet the above mentioned criteria. Dr. Lee explained, "In the case of the first proposal, the autonomous supervisory capacity can be increased as it is similar to the European standard for international supervision and is limited to a large group. However, the target of supervision is too limited, which may cause equity problems.”
The second proposal is a method of selecting a regulated entity based on the proportion of financial assets in the group, excluding the ratio of equity capital mentioned in the first proposal. In this case, Woori Bank, Mirae Asset, Kyobo, etc., can also be target to the regulation to be of integrated supervision. Besides, Samsung, Hanwha, Taekwang and Hyundai Group may be included in the regulation. Dr. Lee explained, "The main financial groups that can affect the financial system are included. They are comparable to supervisory purposes and have an impact on systemic risk (over KRW 5 trillion in financial assets), and influence the financial business on the group (over 40% of financial assets) are all considered. "
In this case, Samsung Group is the most direct target of the regulation. Samsung Group`s financial companies include Samsung Life Insurance, Samsung Fire & Marine Insurance and Samsung Card.
The problem is that Samsung Life Insurance is the largest shareholder with 7.21% (KRW 12 trillion) of Samsung Electronics common stock as of September 2015, which is the key link in Samsung Group`s overall governance structure and succession plan.
Currently, the total assets of domestic and overseas life insurance companies are KRW 707.1 trillion and Samsung Life Insurance accounts for KRW 222.5 trillion, 31.5%. Besides, the total stocks and investments (excluding special accounts) of domestic life insurance companies accounted for KRW 23.2 trillion, accounting for 3.28% of total assets. Samsung Life Insurance accounts for 78.0% of the total, KRW 18.1 trillion (excluding special accounts, 8.13% of total assets). In other words, the remaining 24 life insurance companies, excluding Samsung Life Insurance, account for only 1.1% of the total equity and equity investment.
Nominee Kim Sang-jo pointed out, "It is a risky asset management method that cannot be found in any life insurance company in either domestic or developed countries. Furthermore, most of the ‘stocks and investment funds’ are equity stakes in non-financial subsidiaries including Samsung Electronics. It is difficult to rationalize the asset composition of Samsung Life Insurance.”
He also mentioned, "If Samsung is to oversee the integrated supervision of complex financial groups, one of the key factors is to assess the adequacy of the group`s capital under consideration of Samsung Group`s financial affiliates and non-financial affiliates. In other words, the full or substantial portion of the equity value of affiliates such as Samsung Electronics held by Samsung Life will be deducted from the qualifying capital, which is the capital adequacy of Samsung Group`s entire financial sector.” Experts point out that the need for Samsung Group to establish a `medium-term holding company` when it sees its position and size in the Korean financial market is a big burden.
Lee Jae-yeon, Ph.D., of the Korea Institute of Finance, stressed, "In the case of the Sony Group of Japan, they have established a medium-sized financial holding company to take over the supervision of the Japanese authorities as a large financial group with manufacturing companies and financial companies.” He also added, “We need to prevent the risk transfer of affiliates and get transparent supervision."
Nominee Kim Sang-jo also stated, "It is needed to convert only the financial group of Samsung Group into a financial holding company. The establishment of a financial holding company will enhance the effectiveness of integrated supervision and is the most realistic way to block domination right misuse. "
By Kang Eun Seong esther@
[ copyright ⓒ The Digitaltimes ]
Integrated supervision system of Complex Financial Group`
It is a matter of concern for the actual corporations to be regulated while the establishment of an integrated supervisory system of the complex financial group is getting stronger in the new government. Experts believe that Samsung Group will be the first subject to integrated supervision under consideration of the risk of over-offsetting affiliates` capital, transferring risk to affiliates, and concentration phenomenon.
Financial institutions and academics emphasized on May 29 the need for a clear definition of regulatory targets for establishing a system of integrated financial group supervision. In principle, a large group of corporations with two or more financial affiliates is a considered as complex financial group. However, broadening the scope of supervision does not guarantee financial soundness. Rather, excessive supervision and regulation can lead to market rigidity and oversight by the expansion of scope may lead to side effects.
Hong Min-young, attorney at Kim & Chang law firm, explained in a seminar on improvement of financial supervision system sponsored by the Korea Institute of Finance last year, "The starting point of the supervision of the financial group is to clearly define the target of regulation. In the case of the complex financial group, there is no current law that defines the regulatory targets so as to fully utilize the purpose of supervision, such as the duplication of capital, the prevention of concentration and concentration of risk, and minimization of regulatory profits.”
Experts advise that it is important to see a large group of companies designated by the Fair Trade Commission. The total amount of assets designated by the Fair Trade Commission is over KRW 10 trillion as of the first day of this month. Large corporations in this category are prohibited from mutual investment among affiliates, new circulating investments and debt guarantees, as well as limited voting rights for financial companies among affiliates. However, not all enterprises with two or more financial affiliates among the large corporation group designated by the Free Trade Commission are subject to the integrated supervision system.
Kim Sang-Joo, the nominee for chairman of the Fair Trade Commission, said in a report on the redesign of the non-bank and commerce separation sector discipline system, "Among the large corporation groups, the complex financial group, which should be carefully regulated and supervised, is more than 10 corporation groups".
Meanwhile, there are also opinions that the complex financial group should regulate the regulation more finely in that the finance is divided into the financial business group in which the finance is the main business and the large business group which is not the main business but the non-financial company.
Lee Jae-yeon, Ph.D., from the Korea Institute of Finance, has presented two proposals from the `Improvement plan for direction of domestic financial group`.
The first proposal is that in the case of the financial assets in the group are more than KRW 5 trillion and the group`s total financial assets account for more than 40%, or if there are more than two financial companies whose share of assets and capital is over 10% can be the target of supervision. According to a survey conducted by the Financial Supervisory Service, Samsung Group, Hanwha Group, and Dongbu Group, which account for 50.3% of total assets, account for the largest group of companies that meet the above mentioned criteria. Dr. Lee explained, "In the case of the first proposal, the autonomous supervisory capacity can be increased as it is similar to the European standard for international supervision and is limited to a large group. However, the target of supervision is too limited, which may cause equity problems.”
The second proposal is a method of selecting a regulated entity based on the proportion of financial assets in the group, excluding the ratio of equity capital mentioned in the first proposal. In this case, Woori Bank, Mirae Asset, Kyobo, etc., can also be target to the regulation to be of integrated supervision. Besides, Samsung, Hanwha, Taekwang and Hyundai Group may be included in the regulation. Dr. Lee explained, "The main financial groups that can affect the financial system are included. They are comparable to supervisory purposes and have an impact on systemic risk (over KRW 5 trillion in financial assets), and influence the financial business on the group (over 40% of financial assets) are all considered. "
In this case, Samsung Group is the most direct target of the regulation. Samsung Group`s financial companies include Samsung Life Insurance, Samsung Fire & Marine Insurance and Samsung Card.
The problem is that Samsung Life Insurance is the largest shareholder with 7.21% (KRW 12 trillion) of Samsung Electronics common stock as of September 2015, which is the key link in Samsung Group`s overall governance structure and succession plan.
Currently, the total assets of domestic and overseas life insurance companies are KRW 707.1 trillion and Samsung Life Insurance accounts for KRW 222.5 trillion, 31.5%. Besides, the total stocks and investments (excluding special accounts) of domestic life insurance companies accounted for KRW 23.2 trillion, accounting for 3.28% of total assets. Samsung Life Insurance accounts for 78.0% of the total, KRW 18.1 trillion (excluding special accounts, 8.13% of total assets). In other words, the remaining 24 life insurance companies, excluding Samsung Life Insurance, account for only 1.1% of the total equity and equity investment.
Nominee Kim Sang-jo pointed out, "It is a risky asset management method that cannot be found in any life insurance company in either domestic or developed countries. Furthermore, most of the ‘stocks and investment funds’ are equity stakes in non-financial subsidiaries including Samsung Electronics. It is difficult to rationalize the asset composition of Samsung Life Insurance.”
He also mentioned, "If Samsung is to oversee the integrated supervision of complex financial groups, one of the key factors is to assess the adequacy of the group`s capital under consideration of Samsung Group`s financial affiliates and non-financial affiliates. In other words, the full or substantial portion of the equity value of affiliates such as Samsung Electronics held by Samsung Life will be deducted from the qualifying capital, which is the capital adequacy of Samsung Group`s entire financial sector.” Experts point out that the need for Samsung Group to establish a `medium-term holding company` when it sees its position and size in the Korean financial market is a big burden.
Lee Jae-yeon, Ph.D., of the Korea Institute of Finance, stressed, "In the case of the Sony Group of Japan, they have established a medium-sized financial holding company to take over the supervision of the Japanese authorities as a large financial group with manufacturing companies and financial companies.” He also added, “We need to prevent the risk transfer of affiliates and get transparent supervision."
Nominee Kim Sang-jo also stated, "It is needed to convert only the financial group of Samsung Group into a financial holding company. The establishment of a financial holding company will enhance the effectiveness of integrated supervision and is the most realistic way to block domination right misuse. "
By Kang Eun Seong esther@