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

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  • Rhee, Keeyoung

Abstract

- 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.

Suggested Citation

  • Rhee, Keeyoung, 2017. "Improving Capital Regulations on Financial Institutions to Reflect Group-wide Risks," KDI Policy Forum 266, Korea Development Institute (KDI).
    • Handle: RePEc:zbw:kdifor:266
    DOI: 10.22740/kdi.forum.e.2017.266
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    References listed on IDEAS

    as
    1. Santos, Joao A. C., 1999. "Bank capital and equity investment regulations," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1095-1120, July.
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