Financial Authorities Strengthened Risk Management... But Capital Adequacy of Financial Groups Declines (Comprehensive)

Increased Internal Transactions Raise Risk of Contagion
All 6 Companies Including Samsung and Hyundai Motor Decline

[Asia Economy Reporter Oh Hyung-gil] Although risk management for financial conglomerates such as Samsung and Hyundai Motor has been legally strengthened, their capital adequacy has been continuously deteriorating. In particular, some groups have increased internal transactions, raising concerns about the risk of contagion of insolvency among affiliates.

According to disclosures from financial conglomerates on the 6th, all six financial conglomerates?Samsung, Hyundai Motor, Hanwha, Kyobo, Mirae Asset, and DB?saw their capital adequacy ratios decline in the first quarter of this year compared to the end of last year.

The capital adequacy ratio is a standard for securing financial soundness. The loss absorption capacity considering capital duplication (consolidated equity capital) must be maintained above the minimum capital requirement considering additional risks at the group level (consolidated required capital).

Especially, from next year, when 'risk-weighted capital' is reflected in the consolidated required capital, this figure is expected to decrease further. Each group plans to calculate the capital adequacy ratio reflecting risk-weighted capital in the first half of next year based on this year's performance.

By group, Samsung's capital adequacy ratio was the highest among financial groups at 301.5% in the first quarter, but it fell by 16.9 percentage points from 318.4% at the end of last year. Kyobo, which recorded the highest capital adequacy ratio (321.4%) at the end of last year, dropped sharply by 41.1 percentage points to 280.3% in the first quarter.

During the same period, Hanwha also decreased by 32.8 percentage points from 234.1% to 201.3%, while DB and Hyundai Motor recorded 194.2% and 274.2%, down by 11.1 and 0.9 percentage points respectively.

Among the six financial groups, Mirae Asset had the lowest capital adequacy ratio at 157.5%, influenced by an increase of about 700 billion KRW in duplicated capital. Notably, Mirae Asset's capital adequacy ratio has been declining every quarter since 165.9% in the first quarter of last year, becoming the first among financial groups to fall into the 150% range.

According to the 'Act on the Supervision of Financial Conglomerates' enacted on the 30th of last month, if the capital adequacy ratio falls below 100%, the financial authorities require submission of a management improvement plan to enhance financial soundness.

Although Mirae Asset still has some margin compared to regulatory standards, given the ongoing downward trend, more meticulous capital management is required.

Internal transactions within these groups are also on the rise. In the first quarter, internal transactions among the six major groups amounted to 27.9 trillion KRW, an increase of over 5 trillion KRW compared to 22.8 trillion KRW in the same period last year.

Samsung's internal transactions increased by 38.2% year-on-year to 13.2 trillion KRW. Kyobo also surged by 47.4%, from 4 trillion KRW to 6 trillion KRW. The interconnectedness through internal transactions accounts for as much as 50% in the risk-weighted capital assessment, raising concerns that it will ultimately lower the capital adequacy ratio.

Furthermore, under current law, financial conglomerates must establish and comply with internal control and risk management policies and standards. Internal control standards should include measures to prevent conflicts of interest and checks on executive personnel operations, reflecting matters that must be observed for sound group-level management.

Risk management standards include group-level risk recognition, assessment, and control methods; risk exposure limits and capital allocation methods and procedures for each affiliated financial company; and the establishment and operation of dedicated risk management departments. Internal transactions exceeding 5 billion KRW require approval from the board of directors of the respective financial company.

This content was produced with the assistance of AI translation services.