[Seungseop Song's Financial Light] Why Were Financial Holding Companies Created?

Passage of the 'Financial Holding Companies Act' in 2000 Opens the Way
Synergy Effects Easier to Achieve Through 'Economies of Scope'
Risk Management Favored by Minimizing Risk Contagion
Also Prevents Side Effects Such as Overuse of Safety Devices

Finance is difficult. It is filled with confusing terms and complex backstories intertwined. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Therefore, Asia Economy selects one financial issue each week and explains it in very simple terms. Even if you know nothing about finance, you can immediately understand these 'light' stories that illuminate your understanding of finance.

Jung Eun-bo, Governor of the Financial Supervisory Service, and the chairmen of each financial holding company. They are meeting for a commemorative photo at the Bankers' Hall in Jung-gu, Seoul, on the 3rd of last month. From the left: Kim Tae-o, Chairman of DGB Financial Group; Kim Ki-hong, Chairman of JB Financial Group; Kim Jung-tae, Chairman of Hana Financial Group; Governor Jung; Yoon Jong-kyu, Chairman of KB Financial Group; Sohn Tae-seung, Chairman of Woori Financial Group; Sohn Byung-hwan, Chairman of NH Financial Group; Kim Ji-wan, Chairman of BNK Financial Group. Photo by Moon Ho-nam munonam@

[Asia Economy Reporter Song Seungseop] Most of the large financial companies you use are subsidiaries grouped under financial groups. This means they are subsidiaries owned by financial holding companies. However, this structure was not common in the early 2000s. Companies operated independently or banks owned insurance companies and investment firms. Why did financial companies start creating holding companies?

A financial holding company refers to a company that holds shares of financial subsidiaries such as banks, securities firms, insurance companies, card companies, savings banks, and capital companies. Non-financial companies cannot be incorporated. Also, earning income through business activities is prohibited. Instead, the holding company is responsible for planning, human resources, and financial management of all the financial subsidiaries it owns. Under the name of a financial holding company, all subsidiaries are connected as one family.

In Korea, until the early 1990s, strict regulations prevented financial companies from grouping together. It was only in 1993 that the need for financial companies to engage in multiple businesses was accepted, allowing banks to concurrently operate securities or insurance businesses. Then, in October 2000, the 'Financial Holding Companies Act' was passed by the National Assembly in just four months. This was to normalize financial companies that had received public funds and to promote the growth of strong banks. At that time, with approval from the Financial Supervisory Commission, financial holding companies could be established, and subsidiaries were allowed to create sub-subsidiaries if their businesses were related.

Notably, the four major financial groups?KB, Shinhan, Hana, and Woori Financial Holdings?have established financial holding company systems. The first to be established was 'Woori Financial Holdings' in April 2001, Korea's first financial holding company. Later that same year, Shinhan Financial Holdings was launched. Hana Financial Holdings was established in 2005, and KB Financial Holdings in 2008. The current Woori Financial Holdings was re-established in 2019. Each financial holding company owns about ten financial subsidiaries.

Efficient and Safe 'Financial Holding' System

The reason financial companies that were previously scattered came together under financial holdings is due to 'economies of scope.' Economies of scope refer to the phenomenon where production costs decrease when a single company produces multiple products that were previously produced separately by individual companies. The same applies to financial companies. Under financial holding management, it becomes easier to engage in multiple financial products, reducing sales costs and increasing profits through synergy effects. Bancassurance, where insurance products are sold together using bank branches nationwide, is a representative example.

Risk management is also easier. What happens if a bank that is not a holding company owns securities or insurance companies? Losses from securities and insurance companies are directly reflected in the bank. Banks are subject to strict regulations such as capital adequacy ratios, and if a subsidiary falters, the bank will also be affected. This phenomenon is called 'risk contagion.' Financial holding companies minimize the risk contagion effect.

Another advantage is that the industry avoids the phenomenon of 'overuse of safety nets.' Overuse of safety nets refers to the excessive use of a bank's financial power to prevent the bankruptcy of subsidiaries or to promote their growth. Banks have safety nets to prevent failure because their collapse would cause significant damage. Using this, banks might easily lend money or invest in subsidiaries. In a financial holding system, although they are affiliated companies, they are not subsidiaries, so this risk is reduced.

Additionally, it is advantageous for customer promotion and building a positive image. One reason why the US-based Citigroup grew into a large global financial company is its holding company structure. As the scale grew and the number of branches increased, it was able to instill a perception of convenience and safety. Bank customers could be converted into 'loyal customers' who use affiliated companies for cards, asset management, and insurance as well.

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