As consolidated supervision of non-bank financial groups takes effect from July 1, the seven groups subject to the new regulatory regime suffer a sharp drop in their capital adequacy ratios. Accordingly, these groups are expected to expand their capital and sell their stakes in subsidiaries, which in turn will affect their their corporate governance structures
According to the simulated results of the impact of the new capital regulations disclosed by the Financial Services Commission (FSC) on July 1, the seven financial groups will see their capital adequacy ratios drop significantly. But they are not required to expand their capital at the moment as their capital adequacy ratios all exceed the minimum ratio of 100 percent. But Samsung, Hyundai Motor, Mirae Asset and Hanwha groups will have to expand their capital soon as their capital adequacy ratios drop to a low level.
According to the simulated results, the seven groups – Samsung, Hanwha, Kyobo Life, Mirae Asset, Hyundai Motor, DB and Lotte – will see their capital adequacy ratio decline by 44.8 percentage points to 156.7 percentage points. The FSC applied the third level of the total assessment framework to the simulation.
For Samsung, the current capital adequacy ratio stands at 328.9 percent, a figure that is obtained by dividing its eligible capital of 57.14 trillion won (US$51.27 billion) by the required capital of 17.38 trillion won (US$15.59 billion). However, when the new capital regulations are applied, the company's capital adequacy ratio falls to 221.2 percent. Moreover, when “concentrated risk,” a risk that arises when a financial company's assets are concentrated in a specific area, is taken into account, Samsung Life Insurance’s capital adequacy ratio drops to 110 percent. Samsung Life Insurance and Samsung Fire & Marine Insurance own about 29 trillion won (US$26.02 billion) worth of Samsung Electronics shares. Therefore, when Samsung Electronics becomes insolvent, the risk will be transferred to the two sister companies, according to financial authorities.
Financial regulators said Samsung has surpassed the limit of concentrated risk of 19 trillion to 20 trillion won (US$17.05 billion to 17.95 billion). When a company exceeds the limit of concentrated risk, it needs to secure more required capital. The authorities believe that Samsung Life’s capital adequacy ratio can decrease to 110 percent considering all the factors. In this case, Samsung Life should either sell its stake in Samsung Electronics shares or expand its capital in order to reduce the risk. It is also connected with Samsung Group’s governance structure reform. When Samsung Life sell its stake in Samsung Electronics stocks in a bid to meet the standards, it can weaken the owner family’s control of Samsung Electronics.
The current capital adequacy ratio of Mirae Asset is 307.3 percent but it can decrease to 150.7 percent when considering the overlapping capital. Mirae Asset owns stocks of its subsidiaries by using funds raised through the issuance of bonds by Mirae Asset Capital, a de facto holding company of the group. The authorities consider such capital as the overlapping capital. However, the FSC came up with the results after considering these its capitals for now since the fact that Mirae Asset Daewoo and Naver exchanged treasury shares has a lot of controversial issues. If 500 billion won (US$448.63 million) worth of Naver shares owned by Mirae Asset Daewoo are not considered the eligible capital, Mirae Asset’s capital adequacy ratio will drop to some 140 percent.
In addition, the capital adequacy ratio of Hanwha went down to 152.9 percent, Kyobo Life 200.7 percent, Hyundai Motor 127 percent, DB 168.7 percent and Lotte 176 percent. As Hyundai Motor, Mirae Asset and Hanwha don’t have enough money, recording around 150 percent of the capital adequacy ratio, they are more likely to be under pressure to expand their capitals in the future.