The financial authorities of South Korea are tightening their risk management with regard to securities companies’ real estate investment, which amounts to 100 trillion won.
The Financial Supervisory Service released a project financing exposure management plan last week. According to the plan, the debt guarantee limit applied to real estate project financing will be limited to 100 percent of equity capital and debt guarantee will be more reflected in net capital ratio (NCR) calculation. Although the plan will be implemented in 2021, securities companies in which debt guarantee is close to equity capital are likely to become almost impossible to make a new real estate project financing investment.
A resultant decrease in NCR is a bigger problem for securities companies in that a decline in NCR inevitably leads to a decrease in investment for corporate financing and many other purposes as well as real estate investment. According to Hi Investment & Securities, the implementation of the plan is likely to cause major securities companies’ NCR to fall below 150 percent.
Under the circumstances, the companies are trying to seek a way out. Immediately after the announcement of the plan, they held a meeting with the Korea Financial Investment Association in order to discuss how to respond to the regulations on their real estate business, which has become their main profit source.