Metric Change
A major overhaul is expected to be conducted on the measuring basis of the Net Capital Ratio, a barometer for finance companies’ financial health.
This is the first time that there has been a change in the basics of NCR regulations since the NCR was established. The purpose of the NCR when it was established was to restructure securities companies at the time of a financial crisis.
When the new NCR ratio is introduced, the “Below NCR 150%” system, that was used as a barometer for deciding default finance investment companies, will be greatly modified, and its de facto meaning will be lost.
According to financial authorities and the investment bank (IB) industry on April 3, the Financial Services Committee will announce “NCR Regulation Rationalization Measures” next week. After the announcement, the measures will be implemented in the latter half of the year at the earliest, after going through a public hearing, and financial regulations and operational rules revision.
NCR assesses net operating capital by dividing it into total risk amounts. The regulation has been under criticism, arguing that since it computes exorbitant risk amounts, it is an excessive and retrogressive regulation amid financial investment markets where the IB area is expanding.
The NCR reform this time tries to rationalize the regulation by adjusting the weight and computational factors of net operating capital and total risk amounts.
NCR criteria modification can have mixed ramifications depending on the operating status of securities companies of different sizes that are running IB businesses.
Therefore, the Financial Services Committee will offer 1-2 years of a probation period before introducing the most difficult portion of the revision.
Moreover, under the newly revised NCR criteria, NCR conditions will be eased one-by-one for related organizations such as exchange regulations (listing of Equity Linked Warrants, Equity Linked Securities), Ministry of Strategy and Finance (Exchange Bond Specialty Dealer), the Korea Deposit Insurance Corporation (KDIC), and credit assessment agencies.
Until now securities companies have been avoiding high-risk investments even when they had fund availability, because NCR got higher when net operating capital was bigger and risk amounts were smaller.