Concerns of Local Investment Banks
South Korea’s financial authority officially announced that it would complete approval for mega investment banks’ issuance of promissory notes it has been putting off by the end of this year and start a review for investment management accounts (IMAs). This came after some pointed out that it has postponed the additional review and approval to firms other than Korea Investment & Securities Co., showing its weaker will after announcement of the mega sized IB policy. However, the IB industry expresses concerns that the latest announcement can also end in an empty pledge.
On March 4, the Financial Services Commission (FSC) announced its plan this year to provide up to 24 trillion won (US$22.28 billion) of financial support to startups through five mega IBs. The 24 trillion won (US$22.28 billion) is the amount that is possible to raise after all five securities companies with more than 4 trillion won (US$3.71 billion) of equity capital, including Mirae Asset Daewoo Co., NH Investment & Securities Co., Korea Investment & Securities Co., Samsung Securities Co. and KB Investment & Securities Co., issue a one-year promissory note with the maximum limit of 200 percent of its equity capital. This is a kind of commercial loan. Mega IBs need to receive approval from the financial authorities to issue promissory note but the FSC suspended the review process whether to grant permission to other firms, excluding Korea Investment & Securities, due to lack of major shareholder’s eligibility requirements and history of restrictions. In the meantime, the FSC announced once again to complete the approval process by the end of the year.
In addition, the FSC said it would completely set up the evaluation standards for IMAs that only securities firms with 8 trillion won (US$7.42 billion) of equity capital can operate by the end of this year. IMAs, which securities companies manage customers’ money and provide profits while guaranteeing their principal, have a greater ripple effect than issuance of promissory notes. They are more threatening to other banks in terms of corporate financing than the issuance of promissory notes at 50 percent because it is possible to invest in with the limit of 70 percent of profits.
In this case, it is also favorable to Mirae Asset Daewoo which plans to expand its capital to 8 trillion won (US$7.42 billion) in the first quarter this year through a capital increase by issuing new stocks. Currently, both the FSC and the Financial Supervisory Service (FSS) said it is impossible to run IMA business before receiving approval for issuance of promissory notes. However, the company will be able to win approval for not only issuance of promissory notes but also IMA at the same time when the screening process of issuance of promissory notes becomes accelerated. In this regard, an official from the FSS said, “Building the examination standards has nothing to do with advantages or disadvantages of specific securities firms.” As the size of capital is bigger, the examination standards also can be stricter than the one for issuance of promissory notes.
With signs of such changes, the IB industry is in doubt. Another official from the IB industry said, “We are doubtful as to whether the financial authorities adopt a conciliatory policy as securities companies are voluntarily withdrawing application for the issuance of promissory notes and less willing to become a mega IB. The industry will be hit hard if the latest announcement ends in an empty promise.”