Regulation on Financial Conglomerates
The South Korean government is accelerating the introduction of regulations targeting financial conglomerates, which fizzled out in the previous administration. Korea University professor Jang Ha-sung and Hansung University professor Kim Sang-jo, who are advocates of the principle of separation between banking and commerce, have been nominated as its chief policymaker and head of the Korea Fair Trade Commission (KFTC), respectively. More recently, the Special Presidential Advisory Committee said that it would focus on the three financial reform issues of financial consumer protection, comprehensive supervision of financial groups and anti-capital market disturbance.
The purpose of the regulations is to designate financial companies belonging to conglomerates as financial conglomerates so that they can be subject to the same strict supervision applied to financial holding companies. At present, South Korean financial companies are divided into financial groups like Shinhan Financial and KB Financial and non-financial conglomerates such as Samsung, Hanwha, Dongbu, Lotte and Taekwang. As of the end of 2014, 19 out of 61 large business groups owned at least two financial companies and fell into the latter category.
Experts point out that the lack of comprehensive supervision of the financial conglomerates constitutes a major loophole of the domestic financial supervisory system. “Financial conglomerates have caused various risks based on the relations between the subsidiaries of the same groups, examples of which include the transfer of customers’ money from the banks and insurers to the other subsidiaries, and these risks are hardly detectable due to their complex business structures,” the Korea Institute of Finance explained. One of such examples is the Tong Yang scandal in 2013. At that time, the Tong Yang Group conducted an incomplete sale of corporate paper and bonds via Tong Yang Securities in order to deal with the financial risk of the parent company. In addition, it made an investment in insolvent subsidiaries via its lender, causing substantial losses on the part of individual investors.
KFTC chief nominee Kim Sang-jo also mentioned last year that the lack of control of financial conglomerates is one of the biggest flaws of the current financial supervisory system. “Concentration and transfer of risks that are attributable to inter-subsidiary transactions can have a negative effect on entire groups,” he remarked.
The same has been pointed out by multiple international organizations as well. For instance, the IMF mentioned the same issue in its Financial Sector Assessment Program (FSAP) for 2014, saying that the South Korean government’s supervision was limited to the banking sector and individual control with the government having a far way to go in terms of understanding of financial groups and preventive analysis.