FSC hits chaebol with tougher rules on risk

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FSC hits chaebol with tougher rules on risk

Korea’s top financial regulator required financial units from major conglomerates to strengthen their capital reserves and rein in their risks due to shares in other affiliates today.

The Financial Services Commission (FSC) said on Sunday that seven conglomerates - Samsung, Hanwha, Lotte, Mirae Asset, Hyundai Motor, Kyobo and DB Group - will be subject to new guidelines on risk.

Companies, however, won’t yet face legal consequences under the new requirement. The FSC will take the rule to the National Assembly in the second half of this year, and if it passes it will go into effect at the start of next year.

Under the new regulation, the financial affiliates of the selected conglomerates will face higher capital requirements because they are required to factor in risks posed to their non-financial affiliates.

The FSC said that while none of the groups fall short of the new standards, their capital adequacy ratio, which is based on risk versus capital, will be lowered, as they will be faced with additional liabilities.

For instance, Samsung’s capital adequacy ratio stood at 328.9 percent in the older system, but the rate will slide to around 221.2 percent under the new rule, according to the regulator.

In the case of Hyundai Motor, the rate will go from 171.8 percent to 127 percent, while Mirae Asset’s will fall from 307.3 percent to 200.7 percent.

If a company fails to surpass 100 percent, then its financial unit is not meeting its capital requirement.

The move is part of financial authorities’ efforts to bring conglomerate financial affiliates under the same level of scrutiny as financial holding groups and limit complex cross-shareholding networks among group affiliates.

Lee Se-hoon, the director-general of the FSC’s financial group regulation bureau, said that the gap will be particularly large at Samsung due to Samsung Life Insurance’s holdings in Samsung Electronics.

“We will specify different types of risks, and one of them is to the danger of asset concentration,” Lee said. “While other companies are not relevant, Samsung has a high degree of risk in this regard because of its stake in Samsung Electronics. This issue should be solved.”

Samsung Life Insurance holds a 7.9 percent stake in Samsung Electronics worth over 20 trillion won ($17.9 billion), an acquisition the regulator believes makes the life insurance vulnerable to the fate of the tech giant.

The head of the FSC reiterated that Samsung Life Insurance should sell its shares in Samsung Electronics. A bill aimed at limiting its stake is pending at the National Assembly. The measure will let the groups appoint one financial unit at the top of their corporate governance structure to oversee risks.

The life insurance units of Samsung, Hanwha, Kyobo and DB will be in charge, while Lotte Card will oversee risk at Lotte Group. As for Mirae Asset, the flagship brokerage Mirae Asset Daewoo will be in charge and Hyundai Capital will handle risk management at Hyundai Motor.

Another point of oversight is internal transactions among affiliates.

“Financial groups need to assess how an internal trading would affect fiscal soundness of their companies,” the regulator said in a statement.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]
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