FINANCIAL CONGLOMERATION AND REGULATORY RESPONSES IN KOREA. Dr. Cho Young-Je

Transcription

1 FINANCIAL CONGLOMERATION AND REGULATORY RESPONSES IN KOREA Dr. Cho Young-Je Deputy Governor

2 AGENDA I. Background of Financial Conglomeration II. History of Financial Holding Companies III. Supervision of Financial Holding Companies IV. Challenges Ahead

3 I. BACKGROUND OF FINANCIAL CONGLOMERATION Response to trend of financial conglomeration & convergence Japan: introduction of financial holding companies (1998) U.S.: Gramm-Leach-Bliley Act (1999) Benefits from economies of scale & enhanced competitiveness Greater management efficiency (e.g., cross-selling) Cost savings via the sharing of IT and other office facilities Additional revenue sources from new, complicated financial services Improvement of customer services Banking, investment, and insurance services from a single firm

4 II. HISTORY OF FHCS 1. Before 1997 Asian Financial Crisis 2. Post-Crisis Financial Convergence

5 1. BEFORE 1997 ASIAN FINANCIAL CRISIS Clear boundaries and walls between financial services Banks owned securities and insurance firms as subsidiaries Banking was more important than all other financial services Group-wide business strategies were often missing Subsidiaries were often set up as a supplement to banking business Subsidiaries troubles easily spilled over to the parent bank The lack of firewalls within the group often led to failures in group-wide risk management

6 2. POST-CRISIS FINANCIAL CONVERGENCE Regulatory shift toward financial convergence Boundaries between financial services became increasingly blurred Need for prompt restructuring (e.g., via M&As) Growing need for an integrated financial supervisory body The sector-based financial supervisory structure revealed weaknesses in dealing with financial convergence The four existing supervisory bodies were integrated into the FSS

7 2. POST-CRISIS FINANCIAL CONVERGENCE Establishment of a single, integrated supervisory body (1999) MOFE BOK Office of Bank Supervision Securities Supervisory Board Insurance Supervisory Board Non-Bank Supervisory Authority Commercial banks Securities & futures companies Insurance companies Non-bank financial institutions Financial Supervisory Service Commercial banks Specialized banks Securities & futures companies Investment trust companies Insurance companies Savings banks Other financial institutions

8 2. POST-CRISIS FINANCIAL CONVERGENCE Prompt and bold industry-wide restructuring As a result of government-led restructuring (e.g., M&A, business closures), the number of financial companies fell sharply It also led to financial conglomeration, giving birth to large financial groups End-1997 End-2003 Change Banks Merchant banks Credit-specialized finance co Savings banks Credit unions 1,666 1, Insurance companies Securities companies Investment trusts, etc Total 2,145 1,

9 2. POST-CRISIS FINANCIAL CONVERGENCE Introduction of financial holding companies Financial conglomeration and convergence Financial holding companies were allowed in 2000 No contagion within the financial group Restrictions on intra-group transactions and lending Financial restructuring Efficient corporate governance for troubled banks (e.g., Woori Financial Group)

10 III. SUPERVISION OF FHCS 1. Overview 2. Key Changes After FHC Introduction ti

11 1. OVERVIEW Scope of business Management of subsidiaries and related activities Other for-profit activities not allowed Restrictions on bank holding company ownership A commercial company intending to exercise influence on the management of a bank holding company with ownership in excess of 4% is required to obtain prior approval Restrictions on transactions with and lending to a large shareholder Examination of a large shareholder, if needed

12 1. OVERVIEW Firewalls against intra-group contagion of distress Subsidiaries banned from owning shares in the parent and other subsidiaries Ban on distressed asset transactions Restrictions on a subsidiary s lending to the parent and other subsidiaries Group-wide capital requirements Bank holding companies: BIS capital ratio, debt ratio, etc. Non-bank holding companies: ratio of available capital to Non bank holding companies: ratio of available capital to required capital

13 1. OVERVIEW Management Evaluation System (RFI) Description R F I Risk management Board and senior management oversight Risk management and internal controls Monitoring and reporting by risk types Financial condition Capital adequacy, asset quality, earnings, liquidityidit Impact Potential impact on a FHC s leading subsidiary of the parent, other subsidiaries, and intra-group transactions

14 1. OVERVIEW Regulatory incentives for FHCs allow for Sharing of customer information: cross-selling, joint sales Officers holding multiple positions within the group, intra-group outsourcing Sharing of IT systems and office space Tax consolidation

15 2. KEY CHANGES AFTER FHC INTRODUCTION The number of FHCs has been on the rise 3 FHCs (in 2001) 11 FHCs (in 2011) 9 bank holding companies (2 foreign-owned), 1 insurance holding company, and 1 securities holding company (KRW, trillions) Assets No. of FHCs

16 2. KEY CHANGES AFTER FHC INTRODUCTION Growing importance in the overall financial sector Assets: 12.2% (end-2001) 47.8% (end-2011) 14 out of a total of 18 banks owned by FHCs (KRW, trillions) (%) 3, , , ,000 1,500 1, FHCs Total Financial Sector % of FHCs

17 2. KEY CHANGES AFTER FHC INTRODUCTION Information Enhanced Less concentration group-wide risk management regulatory loopholes Prompt and effective supervisory actions

18 IV. CHALLENGES AHEAD 1. Introduction of Basel III 2. Risk Management 3. Internal Controls

19 1. INTRODUCTION OF BASEL III Basel III for bank holding companies (scheduled in 2013) Quantitative impact studies Implementation plans and legal amendments Designation of D-SIFIs Assessment of systemic importance of major banks or BHCs Capital surcharge on D-SIFIs?

20 2. RISK MANAGEMENT Increase in size and complexity of financial groups Greater difficulty in risk management Poor risk management resulted in failures of major global firms and d entire ti fi financial i l systems t More systematic and effective risk management Independence and expertise in risk management Integrated approach to risk assessment, intra-group transaction reviews Group-wide stress tests

21 3. INTERNAL CONTROLS Coordination between the parent and subsidiaries Clear boundaries in roles, responsibilities, and authorities Communication within the financial group Clear command-and-control command and control between the parent and subsidiaries Prior discussions on key management issues

22 THANK YOU