"Maintaining Designation of Financial Conglomerates Even if Assets Fall Below 5 Trillion Won After Designation"

Pre-Announcement of Financial Conglomerate Supervision Regulations from Next Month 1 to 21

[Asia Economy Reporter Park Sun-mi] Even if the total assets temporarily fall below 5 trillion won after being designated as a financial conglomerate, the designation can be maintained if the total assets are 4 trillion won or more.

On the 31st, the Financial Services Commission announced that it has publicly notified the Enforcement Decree of the Financial Conglomerate Supervision Act, scheduled to be enforced on June 30, from the 9th of this month to the 19th of next month. In addition, detailed matters delegated by the law and the Enforcement Decree will be included in the Financial Conglomerate Supervision Regulations, which will be pre-notified from the 1st to the 21st of next month.

The original law stipulates that a financial conglomerate shall be designated if it meets requirements such as total assets of 5 trillion won and operating in two or more industries (deposit-taking and lending business, financial investment business, insurance business). Even if the requirements are not met, the designation can be maintained if necessary. Currently, six groups including Samsung, Hyundai Motor, Hanwha, Mirae Asset, Kyobo, and DB are subject to this. Samsung Life Insurance, Hyundai Capital, Hanwha Life Insurance, Mirae Asset Daewoo, Kyobo Life Insurance, and DB Insurance are the representative financial companies.

The new supervision regulations specify the conditions for maintaining designation, allowing the designation to be maintained even if the total assets temporarily fall below 5 trillion won after designation, as long as the total assets are 4 trillion won or more.

Details delegated by the law regarding internal control and risk management standards that financial conglomerates must establish have also been finalized. The internal control standards include management measures for internal transactions among affiliates, agency and consignment of work, and joint investments. The risk management standards must include group-level crisis management systems, early warning systems, and crisis situation analysis.

Furthermore, the capital adequacy standards have been further specified. The law requires that the actual loss absorption capacity (consolidated capital) of financial conglomerates be maintained above the minimum capital requirement (consolidated required capital), managing the group's capital ratio accordingly. Accordingly, the supervision regulations, under the delegation of the law, specify more detailed methods for calculating the total amount of capital, overlapping capital, and minimum required capital. They also establish the evaluation method for risk-weighted capital considering additional risks at the group level and the additional ratios based on the evaluation.

The evaluation items consist of ▲affiliate risk (financial and non-financial, 30%), ▲interconnectedness (governance and internal transactions, 50%), and ▲internal control and risk management (20%), which are core items related to the group's soundness and group risk management capabilities, reflecting both quantitative and qualitative risk factors. The risk-weighted capital ratio applies a differential additional ratio of 0 to 20% according to the evaluation grade (from 1+ to 5-, total 15 grades), considering similar systems such as risk management evaluations in the banking sector.

The contents and procedures that financial conglomerates must report and disclose to supervisory authorities and the market have also been more specifically regulated. As specific matters delegated by the Enforcement Decree regarding internal transactions, financial conglomerates must disclose investments and credit extensions quarterly. In addition, detailed contents of the risk management practice evaluation stipulated by the law have been prepared. The qualitative evaluation items consist of the operation of internal control and risk management systems, policies for maintaining capital adequacy, and appropriateness of managing risk concentration, internal transactions, and risk transfer, with evaluations conducted on a total of five levels.

The Financial Conglomerate Supervision Regulations will be submitted and resolved by the Financial Services Commission after pre-notification and related regulatory reviews, and are scheduled to be enforced on June 30, coinciding with the enforcement date of the law.

A Financial Services Commission official explained, "The establishment of the Financial Conglomerate Supervision Regulations is the final step toward the legalization of the financial conglomerate supervision system. By systematizing the soundness supervision of financial conglomerates, which had been implemented based on model standards, into law, it signifies the completion of the soundness supervision system for financial conglomerates."

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