Breeze or Typhoon?
All eyes are on whether mega investment banks (IBs) to be launched next month will be able to grow into the Korean-version of Goldman Sachs, creating a sensation in the capital market.
However, a screening procedure for Samsung Securities’ license has been halted as the financial regulator has started applying stricter standards to the eligibility of major shareholders of mega IBs after the change of the government. There are also concerns that mega IBs will not be successful contrary to expectations after the new bill that expands corporate loans to 200 percent of equity capital, which is the prerequisite to activate mega IBs, failed to pass the National Assembly again.
According to the Financial Supervisory Service (FSS), investment banking industry sources and politicians on September 24, the FSS conducted a due diligence and completed the evaluation committee of outside experts on four securities firms that have applied for large IB licenses, except for Samsung Securities. Since the financial regulator announced to designate mega IBs and approve for short-term banking business quickly, which securities companies will receive IB licenses will be confirmed next month after a regular meeting with the Securities & Futures Commission of the Financial Services Commission if there are no major variables.
When receiving approval for large IB licenses next month, four mega IBs, including Mirae Asset Daewoo, NH Investment & Securities, KB Securities and Korea Investment & Securities, are expected to invest trillions of won of capital in small and mid-sized companies according to the terms that require to inject more than half of raising funds into corporate financing. Chae Byung-kwon, executive director at IB division of Mirae Asset Daewoo, said, “The total received amount of the four companies that have applied for large IB licenses is nearly 8 trillion won (US$7.05 billion). If 10 percent of the total is invested into venture capital, 800 billion won (US$705.16 million) of venture capital will be additionally supplied to the market.” The nation’s venture capital is estimated at 2 trillion won (US$1.76 billion) a year. This overlaps with the Moon Jae-in government’s projects to establish growth ladder by activating venture capital.
However, there are concerns in the market that the financial regulator excessively applied the review of the eligibility of major shareholder and put off its decision to grant a new business license to Samsung Securities. This is because the profitability of the five large securities will get worse when they trust the government’s policy and increase equity capital but fails the screening for licenses.
One of problems to be solved is the passive attitude of the National Assembly to revising the capital market act that increases corporate credit offering by 200 percent which is required for optimized capital management of mega IBs. The revised bill of the capital market act failed to pass again on the 21st at the National Policy Committee meeting due to the objection from the ruling Democratic Party this time after the People's Party.
Park Yong-jin of the Democratic Party said, “When credit offering for companies is expanded to 200 percent without use restrictions, securities firms will become banks. We can support the revised bill if there are limits of uses for business loans including merger and acquisition.” The industry said the actual corporate finance will fall short of 10 percent if the credit offering of individuals and enterprises is limited within 100 percent of equity capital just like under the current laws.
In this regard, Choi Woon-yul of the Democratic Party said, “When freedom of the movement is limited to only domestic mega IBs, foreign IBs will monopolize large deals. We will suggest one-point review of bills at the general meeting on the 25th.”