Comprehensive Risk Assessment of Affiliates for Six Complex Financial Groups
[Asia Economy Reporter Kim Hyo-jin] Financial authorities will soon conduct a group risk simulation assessment for six complex financial groups: Samsung, Hyundai Motor, Hanwha, Mirae Asset, Kyobo, and DB.
According to financial authorities on the 15th, the Financial Services Commission and the Financial Supervisory Service plan to start the simulation assessment as early as this month in accordance with the Financial Group Supervision Best Practices. A financial authority official said, "We are currently in the final preparation stages." Earlier in May, the financial group supervision council held a meeting and decided to conduct the simulation assessment for these groups during the third quarter of this year.
However, a financial authority official noted, "There is a possibility that the assessment schedule may be delayed compared to the original plan due to the impact of the novel coronavirus disease (COVID-19)."
The current best practices designate supervision targets among non-holding complex financial groups with financial assets exceeding 5 trillion won and operating two or more businesses among deposit-taking and lending, insurance, and financial investment, where the necessity is recognized.
For supervised financial groups, a representative company within the group is selected, and the representative company must carry out soundness-related tasks such as establishing risk management policies. The purpose is to prevent issues in non-financial affiliates within the group from spreading to financial affiliates and adversely affecting overall financial soundness. Financial holding companies are managed and supervised under the Financial Holding Companies Act.
The simulation assessment items include affiliate risk, inter-affiliate interconnectedness, internal control, and risk management. Through this, financial authorities plan to measure the six financial groups' concentration risk (asset concentration and specific person biased investment) and contagion risk (risk of simultaneous insolvency of other affiliates).
The disclosure of simulation assessment results and specific utilization plans have not yet been decided. The purpose of risk measurement is to take soundness improvement measures such as selling risky assets based on these results, but since the best practices are administrative guidance without legal binding force, there are limitations in utilizing the simulation assessment results this time.
A financial authority official explained, "This simulation assessment can be seen as a step toward establishing standards for ongoing future assessments," adding, "If potential risk factors are identified through the assessment, consulting will be provided to resolve them."
The best practices will be legislated as early as this year through the 'Financial Group Supervision Act' draft, which the financial authorities announced for public comment last month. This will provide a legal basis for risk assessments and related improvement measures by financial authorities. The authorities plan to submit the draft to the National Assembly in September. The current best practices serve to fill the supervisory gap until the enactment of the draft.
Details on how to utilize and reflect the results of supervisory activities conducted under the best practices are expected to be discussed during the establishment of subordinate regulations prior to the enforcement of the draft.
Meanwhile, in September, integrated disclosure by financial groups will be implemented for the first time under the best practices. The disclosure covers 25 items across eight areas, including ownership and control structure, internal control and risk management systems, financial soundness, and internal transactions.
The burden on these financial groups is increasing. Financial companies are already exposed to various regulations under financial sector supervision rules, and they may face double regulation under the financial group supervision system. There are also concerns that the financial group supervision draft could be used as a basis for preemptive and discretionary regulation by financial authorities.
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