Financial Group Risk Classified into 15 Grades... Incentives for Excellent Grades (Comprehensive)

Eun Sung-soo, Chairman of the Financial Services Commission, is delivering opening remarks while presiding over a meeting with financial group CEOs and experts at the Government Seoul Office Building on the 24th.

[Asia Economy Reporter Kangwook Cho] The risk assessment of six major financial groups, including Samsung, Hyundai Motor, Hanwha, and Mirae Asset, will be subdivided from the current 5 grades to 15 grades. Incentives will be given to excellent grades by reducing the amount of additional required capital.

On the 24th, the Financial Services Commission held a meeting at the Government Seoul Office attended by Eun Sung-soo, Chairman of the Financial Services Commission, Yoo Kwang-yeol, Senior Deputy Governor of the Financial Supervisory Service, representatives of financial companies such as Samsung Life Insurance, Hanwha Life Insurance, Mirae Asset Daewoo, Kyobo Life Insurance, Hyundai Capital, DB Insurance, and private experts to discuss improvements to the financial group supervision system.

Chairman Eun said, "We plan to implement disclosures at the financial group level to help the market fairly evaluate group risks," adding, "We will compile information scattered across financial companies within the group into an easy-to-understand format, while operating it so as not to overlap with individual company disclosures to minimize additional burdens on financial companies."

The 'Financial Group Supervision System' is a system that manages and supervises financial groups with assets exceeding 5 trillion won operating two or more types of financial companies such as deposit-taking and lending, financial investment, and insurance. It is being promoted as one of the Moon Jae-in administration's national tasks to prevent repeating past mistakes where not only the financial companies but also consumers suffered damage due to the simultaneous insolvency of affiliated financial companies. It has been piloted since July 2018 based on a model code, targeting six companies: Samsung, Hanwha, Hyundai Motor, DB, Mirae Asset, and Kyobo.

Earlier, on the 29th of last month, the financial authorities held a seminar attended by Min Byung-doo, Chairman of the National Assembly's Political Affairs Committee, Kim Sang-jo, Chief of the Presidential Office's Policy Office, and others to discuss the results of a research project on improvements to the financial group supervision system, which started last year and was completed earlier this year. At the seminar, improvement plans to prevent risks in advance were announced, including establishing a comprehensive group risk evaluation plan, building a group self-management system, and establishing a voluntary monitoring system through disclosure of major risk factors.

According to the improvement plan, the group risk evaluation criteria will be reorganized into a single evaluation system that comprehensively considers various group risks by integrating transfer and concentration risk assessments.

The evaluation items will be composed of alternative indicators reflecting the likelihood of risk occurrence, factors increasing the risk of simultaneous insolvency among affiliates, and factors mitigating these risks.

In addition to the amount invested by financial affiliates in non-financial affiliates, various factors affecting concentration risk such as regional and industry concentration of specific assets, the proportion of non-financial affiliate shares held by financial affiliates, and dependence on internal transactions with specific affiliates will be considered and reflected in the evaluation items.

The group risk evaluation grades will be subdivided. To strengthen the discriminative power of the evaluation, the grading system will be expanded from the current 5-grade system to 15 grades by dividing each grade into three levels (+, 0, -). The better the grade, the relatively less capital will be imposed. Additional required capital will be added for all evaluation grades, but the additional ratio by grade will apply a weighted proportional method rather than a simple proportional one. This will result in a significant reduction in the amount of additional required capital for higher grades.

The financial authorities plan to finalize the group risk evaluation model and the draft additional capital ratio by the end of April. By the third quarter, they will conduct a simulated group risk evaluation and capital ratio simulation, prepare legal grounds for imposing additional capital accumulation obligations upon legislation, finalize detailed plans, and later specify these plans in subordinate regulations.

They will integrate scattered disclosure items by financial companies to provide group financial status, investment structure, and risk status in an easy-to-understand form, simplify regular reporting, and establish a system for occasional reporting of major risk factors.

Items to be reported and disclosed under the model code, business reports, and corporate group disclosures that need to be notified from the perspective of group risk will be selected and prepared by each affiliated company. The representative company will collect, verify, and disclose the group disclosure items on its website. Considering the impact on group risk and the necessity of disclosure, items such as financial and investment status will be disclosed quarterly, while general status and risk management system items will be disclosed annually, applying different disclosure cycles by item.

Regular reporting items other than disclosures will be greatly simplified, but major risk factors such as large-scale transactions at the group level will be reported immediately to the authorities.

The financial authorities will finalize detailed plans through the 'Disclosure System Establishment Task Force,' jointly operated with the industry, and plan to implement the disclosure and changed reporting methods from June after revising the model code.

To improve the level of internal control at the financial group level, the establishment of a group internal control system centered on the representative company, which can be implemented through the model code, will also be promoted. This is to induce voluntary internal control strengthening and governance improvement efforts of financial groups through disclosure and group risk evaluation.

A council composed of compliance officers from the representative company and affiliated financial companies will be newly established to promote the establishment of an internal control system at the group level. The specific form and operation method of the council will be autonomously decided by each financial group.

The council will perform roles such as setting the direction of internal control for the entire financial group, sharing major activities, and continuously identifying necessary improvements related to internal control. Currently, major financial holding companies autonomously operate compliance officer councils and conduct discussions on establishing internal control regulations at the financial group level and major issues. Major agenda items and decisions of the council will be reported and resolved at the representative company's board of directors after approval by each company's board.

Common standards for strengthening internal control at the financial group level will be prepared through consultations among affiliated financial companies, and group-level disclosures related to governance, such as the status of internal control within the financial group, will also be implemented. Through this, information compiled and organized to allow the market and investors to easily grasp the overall internal control status of the financial group will be disclosed. Meaningful information will be derived and provided at the financial group level using existing disclosure information. In particular, regulations on the internal control system at the financial group level will be reflected in the model code, and evaluations on the adequacy of internal control systems for each financial group are scheduled to be conducted in the second half of this year.

The financial authorities decided to extend the model code two months earlier than usual to speedily promote the 'Financial Group Supervision System Improvement Plan.' They also plan to finalize detailed plans before the extension and sequentially implement the improvement plan after the extension.

A financial authority official said, "We will actively support legislative discussions in the National Assembly and, if necessary, promote the inclusion of the 'Financial Group Supervision System Improvement Plan' in the bill."

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