Seven conglomerates face tougher scrutiny

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Seven conglomerates face tougher scrutiny


Choi Jong-ku

The nation’s financial regulator will put seven major conglomerates with financial affiliates under tougher financial scrutiny starting 2019.

The seven groups are Samsung, Hanwha, Lotte, Mirae Asset, Hyundai Motor, Kyobo Life Insurance and DB Group, the Financial Services Commission announced on Wednesday. The criteria was that two of their financial business segments - whether they are banking, securities or insurance - have combined assets of 5 trillion won ($4.7 billion).

The new regulation will require the companies to abide by the capital requirements and risk management rules applied to financial holding units.

Currently, each financial affiliate is independently subject to requirements concerning debt and capital reserves, but the authorities have raised the need to comprehensively manage risks as a group.

This means that the seven corporations might face a higher capital reserve because the new regulation will take into account the risk and financial state of the group’s non-financial affiliates.

“The amount of additional capital requirement will be decided based on the degree of potential risk transfer from the non-financial affiliates,” said Lee Se-hoon, head of the financial group oversight division at the Financial Services Commission.

Since Mirae Asset and Kyobo have no non-financial units, the major targets will be Samsung, Hanwha, Lotte, DB Group and Hyundai Motor.

As for whether Samsung needs to increase capital reserves, Lee said that “the question can’t be answered with a yes or no, because we need to make a new model to see if other affiliates transfer any risk to financial units.”

The regulatory agency will devise a new assessment model to measure the risks from other affiliates in the groups this year with the aim of bringing the result based on the model by the end of this year.

Lee said that the Financial Services Commission will allow for enough time to raise capital should a company fail to pass the new standard.

“It might be hard to prepare additional capital reserves in six months to one year,” Lee said, “After finishing the assessment we will suggest a timeline at the end of this year.”

The stronger oversight effort came as the government vowed to avoid a repeat of the Tongyang Group fiasco. The group’s Tongyang Securities was accused of nudging investors to buy bonds from other affiliates in 2013 while not informing them of risks.

But one of the units, Tongyang Cement, went into court receivership in 2013 as Tongyang Group faced a liquidity crisis. The downward spiral incurred huge losses to investors.

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