Monday, September 01, 2014

Birth of Local Investment Banks

Era of Investment Banking Opens in Korea

1 November 2013

Local securities companies with equity capital of over three trillion won (US$2.82 billion) are now allowed to handle business loans. At the same time, the prime brokerage service, which has been limited to domestic hedge funds, is allowed for financial companies, pension funds, and overseas hedge funds. This means that a new chapter has been opened for Korean investment banks in two years since major securities companies increased their capital by issuing new stocks to meet the three trillion won equity capital requirement. 

The Financial Services Commission selected five securities firms -- KDB Daewoo Securities, Samsung Securities, Woori Investment & Securities, Korea Investment & Securities and Hyundai Securities -- on October 30 as Korea’s first investment banks. All of them have prepared themselves for the past two years, waiting for the revision on the Financial Investment Services and Capital Markets Act. They obtained the authorization for investment banking business on that day. 

They are moving nimbly to dominate the market based on organizational restructuring and their own future plans. Their focus is fixed on business loans, as the permission will result in new high-value businesses beyond simple loans for companies. 

There still remains a hurdle on the systemic side though. According to the Financial Investment Services and Capital Markets Act, credit offerings are limited to 100% of equity capital. This regulation conflicts with another one that stipulates securities firms’ net capital ratio (NCR) be at least 150%.  

“Due to the NCR restriction, it seems that IBs will be able to make use of just 500 billion to 600 billion won out of the equity capital of three trillion won or over,” said an industry insider. “The NCR regulations need to be amended to facilitate the IB’s business,” Korea Capital Market Institute researcher Lee Seok-hoon added. He continued, “I guess that the problem will be dealt with sooner or later, as the government is well aware of it.”

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