The South Korean government will strengthen supervision on the nation’s conglomerates operating financial affiliates to reduce risk exposures caused by their complex cross-shareholdings.

The Financial Services Commission (FSC) announced on Wednesday that it plans to introduce a new rule that excludes mutual investment by the groups’ financial affiliates from equity capital and requires them to come up with a comprehensive risk management system to prevent financial problems of a unit from affecting the others.

The new regulation will affect financial units of five family-owned chaebols - Samsung, Hanwha, Hyundai Motor, DB and Lotte- and two financial conglomerates - Kyobo Life Insurance Co. and Mirae Asset Financial Group that each hold more than 5 trillion won ($4.7 billion) in financial assets and operate two or more financial businesses including credit, insurance and financial investment.

Many Korean conglomerates - in particular, family-run chaebols - rely on cross shareholding arrangements to strengthen owner families’ control over affiliates. But this complex cross-shareholding system is often blamed to expose the whole group companies to big risks caused by troubles at a small affiliate.

Once the new rule takes effect as early as the second half of the year, the groups will be required to report their financial status and risk management process to the government and market. They will also have to set up a new risk management agency. The new rule is expected to become fully effective next year.

By Kim Tae-sung and Choi Mira

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]