Financial regulator to apply new risk gauging system to business groups

The Financial Services Commission on Sunday presented a comprehensive risk management road map for business groups owning financial units, raising the baseline for capital adequacy.

Starting Monday, the financial regulator is to activate a special supervision system seeking to detect the financial risk exposure level of subject groups and to prevent risk transfer among affiliates, it said in a release.

During the six-month trial period, seven business groups -- Samsung, Hanwha, Kyobo, Mirae Asset, Hyundai Motor, DB and Lotte -- will be under regulatory oversight.

Such business groups hold at least 5 trillion won ($4.5 billion) in financial assets and own multiple units in at least two financial industry sectors of the three -- insurance, financial investment or private financing.

Excluded from the new supervisory system are businesses that have been licensed as financial holding groups, banks affiliated to global banking groups and financial groups effectively devoted to one financial industry sector.

A key factor is the tightened way of gauging the capital adequacy ratio -- eligible capital divided by necessary capital.

When calculating eligible capital, the amount of overlapping items should be deducted from the sum of equities. Also, concentrated risk and risk transfer factors should be included in the necessary capital index.

Reflecting these combined changes in the numerator and denominator, most subject groups have seen their capital adequacy ratio decline, compared to the conventional measurement.

Measuring the end-2017 data of the seven business groups, the ratio fell by 44.8 percentage points at the smallest, and by 156.7 percentage points at the largest in a new criterion, according to the regulator‘s estimate.

Of the seven, Hyundai Motor Group scored the lowest at 127 percent, followed by Mirae Aseet and Hanwha, whereas Samsung scored the highest at 221.2 percent, followed by Kyobo Life Insurance and Lotte.

If the score goes below 100 percent, a business group will find it necessary to raise more equities by selling off shares of the group’s affiliates.

But the preliminary estimate did not reflect the qualitative assessment -- nonexistent as of Sunday -- to measure a level of risk contagion, according to the FSC. Moreover, Samsung is the only conglomerate of the seven that is subject to risk concentration, excluded in Sunday measurement.

Ways to detect aforementioned risks lacked in the conventional set of guidelines designed to oversee financial soundness of an individual financial unit and deter the unit’s counter-party risk, market risk and operational risk, according to the FSC.

“A (business group owning financial units) should be equipped with capability to cushion financial losses considering a group‘s risk exposure, beyond capital adequacy of an individual firm,” said Lee Se-hoon, director-general of financial group regulation bureau of the FSC, in a press briefing.

The capital adequacy is one of the four categories to determine the group-wide financial health, in addition to a system for the group’s risk management, transactions within a group and a conflict of interest between units.

Lee added the new guidelines are not meant for disciplinary actions against or enforcement to the business groups, but instead to “raise the business sectors’ awareness.”

The preliminary guidelines and details in gauging financial adequacy will develop into a final version by December this year, through checks and discussions, according to the FSC‘s plan.

The FSC also aims to put the issue up for discussion at the National Assembly during the second half of this year. 

By Son Ji-hyoung
(consnow@heraldcorp.com)