Financial holding companies

Financial holding companies (금융지주회사) are companies that, through the possession of stocks or shares, conduct business mainly by means of controlling corporations which carry out further financial businesses or are closely related to the management of financial businesses in Korea.

Key words
bank holding company, general holding company, ownership of banks, lower-tier subsidiaries

History
The Financial Holding Companies Act was enacted in October 2000, in reflection of the trend of Korean financial institutions pursuing economies of scale and scope. Pursuant to this Act, Woori Finance Holdings Co., Ltd.(Woori FHC), the first of its kind, was established in April 2001.

As of the end of June 2011, there were a total of 12 authorized financial holding companies in Korea ― nine bank and three non-bank holding companies.

Unlike general holding companies whose main focus is the control of corporations unrelated to the financial business, financial holding companies are regulated in accordance with the Monopoly Regulation and Fair Trade Act as well as the Financial Holding Companies Act. In this regard, the United States and Japan also regulate their financial holding companies separately from their general holding companies.

Comparison with General Holding Companies
Concerning the regulations to which they are subject, general holding companies and financial holding companies do share commonalities.

First of all, they are forbidden from simultaneous ownership of financial and non-financial subsidiaries: general holding companies may not control financial companies as subsidiaries, and financial holding companies may not own non-financial firms as subsidiaries.

This follows the principle of separation of financial and industrial capital (金産분리). A subsidiary of a holding company may in addition not own stock in other subsidiaries or holding companies. This is aimed to mitigate corollary effects, including the spread of risk among subsidiaries through circular equity investment and mutual investments among other negative effects.

There are on the other hand also several differences between these two types of holding companies. Depending upon whether or not holding companies conduct other businesses in addition to the control of their subsidiaries, they can be sub-categorized into operating holding companies and pure holding companies.

And financial holding companies may found only pure holding companies, that exclusively control subsidiaries, while general holding companies are allowed to establish both operating holding companies and pure holding companies.

They also differ in terms of their establishment procedures: general holding companies must simply register with the Fair Trade Commission (FTC) upon their establishment, while financial holding companies must acquire approval from the Financial Services Commission (FSC) prior to establishment. In the case of incorporating financial corporations as both subsidiaries and lower-tier subsidiaries, authorization of the FSC must be acquired beforehand.

Moreover, in order to prevent the dissemination of risk among subsidiaries under a single holding company, transactions among subsidiaries such as the granting of credit are restricted. The granting of credit between subsidiaries is only permitted within 10 percent or less of equity capital, and if it is done appropriate security such as government bonds must be procured. The granting of credit from subsidiaries to holding companies, and trading in dishonored assets between subsidiaries or between subsidiaries and holding companies is prohibited.

Establishment of lower-tier subsidiaries is exceptionally allowed only when they are related to the subsidiaries’ businesses, and second-tier subsidiaries are not allowed.

Benefits to Financial Holding Companies
In this way, financial holding companies are subject to a variety of regulations, but they also enjoy certain benefits.

Firstly, financial firms under the same financial holding company may share customers’ transaction and credit information. In addition, the concurrent holding of executive positions at a holding company as well as a subsidiary, or at different subsidiaries, is widely accepted; considerable exceptions to the ban on holding of more than one office are allowed, depending upon regulations that control the businesses concerned.

Executives and staff members of a holding company may concurrently hold executive positions at subsidiaries, while executives at subsidiaries may concurrently hold executive positions at other subsidiaries in the same category of business. Moreover, tax benefits, including deferred taxes on gains on equity transfer, are possible.

Regulation of Financial Holding Companies
When financial holding companies were first introduced, regulations were applied uniformly without consideration of the features of the respective businesses; non-bank financial holding companies that did not own banks as subsidiaries were strictly controlled at the same level as bank holding companies.

To correct this situation, the non-bank holding company system was extensively revised in 2009. Firstly, non-bank holding companies were allowed to control non-financial firms as subsidiaries. Notably, in the case of financial investment holding companies, financial subsidiaries were allowed to control non-financial companies, thus enabling financial investment holding companies to establish lower-tier subsidiaries. Moreover, when making inroads into foreign markets joint investment by subsidiaries was allowed, and the establishment of overseas second-tier subsidiaries was permitted.

Meanwhile, the ceilings on shareholding in bank holding companies by industrial capital were raised, from the initial four percent allowed at the time of the system’s introduction to nine percent (ten percent when voting rights on the excess are not exercised).