Financial Supervision
The introduction of comprehensive supervision of financial conglomerates is picking up speed in South Korea. Under the circumstances, much attention is being paid to which companies will be subject to the supervision.
According to financial experts and scholars, a clear definition of financial conglomerates should come first for the establishment of the supervisory system with no domestic law providing the definition as of now. In principle, any large business group that owns at least two subsidiaries in the banking and financial sector can be categorized as a financial conglomerate.
Some of them say that those designated as large business groups by the Korea Fair Trade Commission (KFTC) should be looked into first. As of May 1 this year, a total of 31 groups fall into this category of enterprises subject to its ban on cross-shareholding with a total asset of more than 10 trillion won (US$9 billion). Still, not every one of them with at least two subsidiaries in the sector is subject to the supervision. “Excluding those that own small asset management firms, the number is estimated at 10 or so,” said Kim Sang-jo, KFTC chief nominee.
The others point out that the companies to be subject to the supervision should be finely divided in that financial conglomerates are divided into those doing business mainly in the banking and financial sector and those whose main business is not banking and finance. In this regard, economist Lee Jae-youn at the Korea Institute of Finance has proposed two categorization methods.
One is to cover each business group that has a total financial asset of at least five trillion won with the ratio of the financial asset to its total asset equal to or greater than 40% or that owns at least two financial companies whose equity capital and asset by financial sector segment exceeds 10%. According to this categorization method, the Hanwha and Dongbu Groups are to be seen as financial conglomerates along with the Samsung Group, whose financial asset accounts for 50.3% of its total asset. “In this case that is similar to European standards, autonomous supervision is ensured to a large extent with the supervisory system covering a small number of large groups,” the economist explained, adding, “However, this method is not free from controversy about fairness and equal treatment.”
The other method is solely based on the amount and ratio of financial assets. Subject to the supervision in this case are financial groups such as Woori Bank, Mirae Asset and Kyobo and large corporations such as Samsung, Hanwha, Taekwang, and Hyundai. “The second method complies more with the purpose of the supervision because every major player that is capable of affecting the financial system is included,” he went on to say, continuing, “In addition, this method takes into account both possible effects on systemic risks and possible effects of the financial business on the groups by reflecting the amount and ratio of financial assets set at five trillion won or more and 40% or more, respectively.”
The Samsung Group, which owns Samsung Life Insurance, Samsung Fire & Marine Insurance, Samsung Card and so on, emerges as a main target according to the second method. As of September 2015, Samsung Life Insurance was the largest shareholder in Samsung Electronics with a shareholding ratio of 7.21%, which was equivalent to 12 trillion won, and this constitutes a key link in the corporate governance structure of and ownership transfer in the Samsung Group as a whole.
At present, life insurance companies in South Korea have a total asset of 707.1 trillion won and Samsung Life Insurance accounts for 31.5% of it. In addition, their total equity investments are 23.2 trillion won, 3.28% of their total asset, with Samsung Life Insurance representing 78% of it, 8.13% of its total asset. This means the 24 life insurance companies in South Korea other than Samsung Life Insurance have a ratio of equity investments to total assets of merely 1.1% or so.
“This is an unprecedentedly risky way of asset management,” said the KFTC chief nominee, continuing, “The asset structure of Samsung Life Insurance is not acceptable at all in that most of the equity investments are shares in the non-financial subsidiaries including Samsung Electronics that constitute assets which cannot be sold.”
He went on to say, “Samsung is likely to become the first target once the supervisory system is established with group-wide capital adequacy assessment forming a key part of it, and then investment between the financial and non-financial subsidiaries of Samsung will be considered as a deduction factor, which means at least a large portion of the subsidiary shares owned by Samsung Life Insurance is likely to be deducted from its qualifying capital to pose a significant burden in the entire financial arm of the Samsung Group maintaining its capital adequacy.”
Experts point out that the Samsung Group needs to set up an intermediate financial holding company in view of its presence in the domestic financial market. “Samsung’s financial division needs to be changed into an intermediate financial holding company,” the nominee recently remarked as well, adding, “Establishment of such companies is the most practical way of preventing conglomerates from abusing their power in the financial sector by enhancing the efficiency of the comprehensive supervision.”