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KDI Policy Forum

KDI Policy Forum

Improving Capital Regulations on Financial Institutions to Reflect Group-wide Risks

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  • Author Rhee. Keeyoung
  • Date 2017/08/25
  • Series No. KDI Policy Forum No. 266 (2017-02), eng.
  • Language English
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SUMMARY □ The group-wide risks associated with business group affiliation must be reflected in capital regulations that assess the soundness of financial institutions.

○ When financial institutions hold shares with the intent to maintain control over a business group, the insolvency of one affiliate could rapidly spread throughout the entire group due to difficulties in disposing of the respective shares.

○ If such risks are not reflected in capital regulations, the capital adequacy of financial institutions [in groups] against losses may be assessed inaccurately.

□ It was found that the current capital regulations on insurance and securities companies do not reflect the group-wide risks posed by affiliates’ investments in shares.

○ The risks may be underestimated for capital regulations on insurance companies as the companies’ investments in non-consolidated affiliates are regarded as general stock investments.

○ As for capital regulations on securities companies, capital adequacy may be incorrectly assessed due to the deduction of the whole investment in affiliates from their capital.
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