The Financial Services Commission is planning to exclude the concept of concentration risk from its financial group supervision guidelines to be applied to Samsung Group. According to the current law, Samsung Life Insurance must increase its capital in order to retain 3 percent or more of Samsung Electronics shares. The commission’s decision is expected to slightly alleviate the burden of Samsung Life Insurance.
The commission is going to assess the capital adequacy of certain financial groups based on the single criterion of group risk instead of concentration and contagion risks. The contagion risk can be defined as a deterioration of one subsidiary’s financial conditions attributable to the insolvency of another subsidiary in the same financial group. The concentration risk can be defined as a financial group’s assets lopsided to a particular industry, region, transaction counterpart, etc.
The financial group supervision guidelines of the commission were implemented in 2018 so that the spread and transfer of financial risks attributable to the globalization of the industry can be better controlled.
The concept of concentration risk has been a main issue related to the guidelines. Especially, Samsung Life Insurance’s shareholding in Samsung Electronics has drawn much attention. As of the end of September 2019, Samsung Life Insurance owned 508,157,148 common stocks with voting rights in Samsung Electronics, equivalent to a shareholding of 8.51 percent. In terms of Samsung Electronics’ closing stock price on Feb. 24 this year, the shareholding was equivalent to 9.4 percent of the total assets of Samsung Life Insurance. This means Samsung Life Insurance must reduce its exposure related to Samsung Electronics or increase its capital in order to meet the concentration risk part of the guidelines.
The group risks to be assessed by the commission include subsidiary-specific risks such as subsidiaries’ financial risks and the degree of asset concentration, inter-subsidiary risks such as the degree of dependence on internal transactions, the size of such transactions and shareholdings in non-financial subsidiaries, and risks related to internal control and risk management such as the adequacy and appropriateness of internal control policies.