New Plan for Mega IBs
The South Korean government has finally mapped out detailed plans to foster mega investment banks. The nation’s top financial regulator Financial Services Commission (FSC) has decided to allow big brokerage firms with an equity capital of 3 trillion to 8 trillion won (US$2.71 billion to 7.22 billion) to engage in wider range of investment banking businesses and benefit from deregulation.
The investment banking industry welcomes the government’s decision as it is now securing new business areas. However, the new measures focus on encouraging securities firms to grow in size. So, some say that it has still a long way to go to achieve its earlier policy goal of fostering the Korean version of Goldman Sachs or Nomura Securities.
Under the mega investment bank promotion plan released on August 2, the FSC will enable brokerages to begin new business and relax regulations when they scale up their capital sizes in order to have ability to accept risks. In return, mega investment banks should be a supplier of venture funds that existing conservative banks are reluctant to do. Kim Tae-hyun, director general of the capital market bureau at the FSC, said, “Domestic securities firms now cannot survive with insufficient capital, structure to raise funds by offering high interest and commission-centered business alone. Based on sufficient capital, they should strengthen its duty as investment banks which can actively supply venture funds to companies with high growth potential.
The FSC also presented the ways to raise and operate funds to firms according to their capital sizes. First, securities firms with over 4 trillion won (US$3.61 billion) in capital will be allowed to issue one-year promissory notes in order to raise funds from numerous investors on a permanent basis, and the funds will not be under regulation of leverages.
Those with capital exceeding 8 trillion won will be allowed to offer investment management accounts, which has a function of deposit, to private investors. These are dividend payment products which firms manage the funds invested in the accounts and provide earnings. The financial regulator has opened new ways to raise capital with promissory notes and investment management accounts. However, the Depositor Protection Act will not be applied unlike products offered in banks. Currently, only two brokerage houses Mirae Asset Deawoo and NH Investment & Securities are with equity capital of more than 4 trillion won (US$3.61 billion). The former’s capital stands at 6.7 trillion won (US$6.05 billion) while the latter at 4.5 trillion won (US$4.06 billion). KB Investment & Securities and Hyundai Securities, whose combined capital is 3.8 trillion won (US$3.43 billion), Samsung Securities, which has a capital of 3.4 trillion won (US$3.07 billion) and Korea Investment & Securities with a capital of 3.2 trillion won (US$2.89 billion) can join the group anytime through merger and acquisition and capital increase.
Investment banks welcome the government’s mega investment bank promotion measures for now. Previously, the FSC was expected to apply a high equity capital standard of more than 5 trillion won (US$4.51 billion) and give benefits to certain securities firms. However, more companies will be able to benefit as the government decided to provide benefits according to the size of their capital.
Some say that some benefits will be invalid. Seo Bo-ik, an analyst at Eugene Investment & Securities, said, “No protection for depositors on investment management accounts and promissory notes will be a factor that reduces the investment promotion. In particular, the FSC allowed only brokerages with over 8 trillion won (US$7.22 billion) to have a function of deposit but excluded the application of Depositor Protection Act. So, its effectiveness is questionable.” Moreover, Park Hye-jin, an analyst at Kyobo Securities, said, “The FSC’s measures seems to have a goal of encouraging securities firms to grow in size through M&A, rather than fostering mega investment banks which have the competitiveness in the global market. In addition, there are less benefits from increasing capital sizes than expected.”
In this regard, the FSC also said that the latest plan is just a middle step to promote the continuous expansion with a goal of fostering investment banks with more than 10 trillion won (US$9.03 billion) in capital in medium and long term.