Tough Road to Investment Bank
The South Korean financial authorities are in a dilemma over the minimum equity capital threshold in preparing measures to give rise to super-large securities companies.
The Financial Services Commission (FSC) of South Korea brought in the concept of total financial and investment service provider in 2013, through an amendment of the Capital Markets Act, so that major securities firms in South Korea can better compete with global leading investment banks by being allowed to be engaged in investment banking.
However, the growth of the corporate finance market based on the major securities companies has remained slow in spite of the implementation of the new system, and now the FSC is mulling over raising the minimum equity capital requirement for the total service provider title and incentives for those that have the title from three trillion won to five trillion won. This specific amount seems to be in view of the fact that Mirae Asset Daewoo Securities and Mirae Asset Securities are to be merged with each other in October this year to result in the creation of a securities company with an equity capital of 5.9 trillion won. The equity capital of another new company to result from a merger between KB Investment & Securities and Hyundai Securities is estimated at 3.9 trillion won.
The dilemma of the financial authorities is because those in the financial and securities industries are opposed to the FSC’s plan. “The three trillion won criterion was introduced just three years ago and now the government is looking to change it, and we are having a hard time predicting the direction of its policy,” a securities firm explained, adding, “At present, only Mirae Asset resulting from the scheduled business combination can satisfy the five trillion won criterion, and then controversies over a special favor could arise.” Many securities companies, including Shinhan Investment Corporation and Meritz Securities, are planning on paid-in capital increase, M&A and the like these days in order to meet the three trillion won threshold.
Under the circumstances, the FSC is planning to relax capital adequacy regulations so that securities companies increasing their equity capitals can have access to a larger amount of money in the market. Specifically, the yardstick of the Basel Committee on Banking Supervision of the Bank for International Settlements is expected to replace the net capital ratio (NCR) for those that do so. The NCR is considered to restrict investment as it is a measurement of the ratio of cash liquidity to high-risk assets of a securities firm. On the contrary, the former gives it more leeway in terms of capital utilization because it is risk level calculation by asset type.
In addition, the FSC is pondering on relaxing foreign exchange regulations as well so as to help the major securities companies do business abroad. According to the current law, a securities company in South Korea has to go through a bank if it is to carry out remittance and exchange in the Seoul Foreign Exchange Market for any purpose other than investment. However, this is expected to be changed with the financial authorities being positive about forex regulation relaxation.