Consolidated Supervisory System
As financial authorities announced its plan to introduce the “Financial Group Consolidated Supervisory System,” Samsung Group has been put on emergency alert. This is because the authorities said it would introduce the consolidated capital adequacy control standards on business groups that operate financial subsidiaries, including Samsung Group. In the worst case, Samsung Life Insurance Co., one of the mainstays of Samsung Group’s governance structure, may need to sell an 8.13 percent stake in Samsung Electronics, according to industry sources.
The Korea Institute of Finance (KIF) held a public hearing in the hall of the Korea Deposit Insurance Corporation on September 27 and presented its plan for the financial group consolidated supervisory system. Accordingly, the new system will affect Samsung Group, Hanwha Group, Hyundai Motor Group, Dongbu Group, Lotte Group, Kyobo and Mirae Asset Group, not to mention financial holding companies such as Shinhan and Kookmin Bank.
During a congratulatory speech at the public hearing, Financial Services Commission (FSC) Chairman Choi Jong-ku said, “We will step up its oversight of financial groups so that we can prevent financial companies affiliated in financial groups from illegally using customers’ money in financing subsidiaries and neglecting the risk management between subsidiaries that can be damaging to customers.
Previously, Yoo Jae-soo, head of the financial policy division at the FSC said at a symposium in the National Assembly Library, “All financial groups which operate more than two out of banking, insurance, financial investment and non-banking areas will be the subject of supervision.”
The problem is that the FSC has come up with strict capital adequacy control standards for the consolidated supervisory system. The KIF said at the public hearing that financial groups should have higher “qualified equity capital” than “necessary capital”. It means that financial groups should, for exemple, always maintain more than 1 million won (US$874) of equity capital if the necessary capital is 1 million won (US$874).
The KIF also added that risks related to stocks of non-financial subsidiaries owned by financial group’s subsidiaries should be reflected in necessary capital. This is due to the fact that financial companies will not sell a stake in non-financial companies immediately because they hold it for governance structure. When the financial situation of non-financial companies gets worse, it can also adversely affect the soundness of financial companies.
For instance, Samsung Life’s stake value for Samsung Electronics worth 26 trillion won (US$22.72 billion) can be considered necessary capital. Considering the fact that Samsung Life’s total capital is 32 trillion won (US$27.96 billion), it can be categorized as insolvent enterprise in a flash. However, the KIF said, “When calculating necessary capital with such method, there can be confusion in the process of financial companies addressing investment in non-financial companies.” It also introduced a compromise plan that adds necessary capital according to the share of investments in non-financial companies.
Samsung Group is mired in chaos. It officially said, “The KIF’s plan is not an official plan of the government so we haven’t come up with the measures.” However, the group internally said, “Does the KIF want us to close down our financial subsidiaries?” An official from the financial industry said, “The consolidated supervisory system itself is clearly a double regulation but the KIF wants to additionally introduce the soundness index. Financial companies cannot spend trillion won of capital as they have difficulties in convert into an intermediate financial holding company.