asem Capital Market Developing Into Future Growth Engine

By Hwang Kun-ho

Chairman of Korea Securities Dealers Association

Today's rapidly changing financial environment poses major challenges to the global financial community. Globalization has led to the alignment of financial markets worldwide. With the subsequent advancement of information technology and the expansion of financial innovations, rapid securitization is occurring within and across various financial fields.

Increasingly, we find that the traditional definition of the financial services industry as a supporting tool for the real economy no longer applies. For instance, the financial services sector accounted for 31.3 percent of total corporate profits in the U.S. in 2007, which was much larger than the 19.2 percent represented by the manufacturing sector.

This is the case in advanced markets around the world, as the transformation of the financial services sector into a high value-added industry is well underway.

Over the last few decades, the Korean economy was able to achieve exponential growth due to the boom in its manufacturing industries with one-way support from the financial sector. Entering the new millennium, however, the economy cooled off, with per capita income struggling to climb past the $20,000 mark.

While the systemic factors inherent to the manufacturing sector, such as the rising price of raw materials, are certainly root causes for this stagnation, another equally significant factor is the underdevelopment of the financial services sector.

The rehabilitation process that followed the financial crisis in the late 1990s focused primarily on the banking sector in Korea. This meant that while banks were able to increase their competitiveness through restructuring efforts, Korean securities firms were unable to keep pace with the growth of some of the more prominent global investment banks.

Recognizing this, the Korean government made it a top priority to address the imbalance within the financial sector. The Korean securities industry and the government worked together to draft comprehensive deregulatory measures.

The culmination of these efforts is the Capital Market Consolidation Act, which was enacted by the National Assembly last July and will take effect next February. The act will introduce a negative system in defining financial products, promote functional regulation, expand the business scope of securities companies, and strengthen investor protection.

Under this new regulatory framework, the financial sector will be bolstered by the three pillars of commercial banking, securities and insurance. Among the three, the securities industry will take on a much larger role. Its innovative products will become the new infrastructure for the market, by offering diverse hedging tools and attracting more investment.

Securities companies will not be complacent with settling on brokerage business as it has done in the past. It will actively create new added values, diversifying the revenue sources ranging from investment banking services such as principal investment and M&As to asset management business.

Growth in the securities industry will translate into the revitalization of corporate financing. In the past, Korean financial institutions mainly focused on retail businesses, but with increased investment banking services becoming available, corporate financing will grow in the future.

Yet, there are many tasks that we must pursue for the advancement of the Korean capital markets.

Conglomeration, Specialization

First of all, Korean securities companies must strive to grow larger through restructuring and M&As. The benefits to having economies of scale are indispensable, when it comes to undertaking risk-taking activities such as principal investment and investment banking. They must also explore specialized business areas, where they can take full advantage of their unique expertise.

Success in investment banking or asset management, which requires advanced techniques in investment analysis and risk management, depends entirely on the capabilities of individual financial professionals.

At the moment, however, we lack a sufficient talent pool of financial professionals. To address this shortage, the government and the securities industry have been working together to find a long-term solution to nurture qualified financial professionals.

For our part, the KSDA has initiated the ``Master Plan for Nurturing Financial Professionals.'' It is a program designed to foster hundreds of new market professionals every year in cooperation with the industry and the academic community. We have also developed practical education programs in investment banking, asset management, risk management and so on.

Further, the KSDA has looked to increase its strategic alliances with advanced education institutions in Britain and Hong Kong. We firmly believe that strengthening cooperation between the academic and business community is a critical step in improving the quality of future financial professionals.

Entry Into Overseas Markets

As the Korean securities industry continues to develop, it will increasingly look toward overseas markets to diversify its revenue sources. Due to our geopolitical proximity and our cultural similarities, we can say that the Korean industry enjoys a natural competitive advantage over global firms in Southeast Asian emerging markets.

The KSDA has held various programs to fully leverage this advantage to the benefit of the Korean securities industry. Our efforts include organizing an ``Annual Road Show to Emerging Markets,'' hosting training seminars for emerging markets professionals, and facilitating an annual interchange program between Korea and China.

Reflecting the growing interest of our member associations, we recently opened the KSDA Emerging Markets Support Center. The center provides the securities industry with comprehensive information on each emerging market such as its financial industry regulations.

In the wake of the new act, we face a paradigm-shift in the regulatory regime. The macro prudent regulation, investor protection, and areas requiring strict supervision will belong to public regulation. For other areas, however, self-regulation can respond in a more prompt and flexible manner.

Cultivating a mutually complementary relationship between public and self-regulation will allow for a low-cost, high-efficiency system to oversee the financial services industry and market.

The Korean capital market is poised to develop into the new future growth engine for the economy. Korea has already demonstrated the ability to create ``something'' from ``nothing'' in its manufacturing sector, having achieved global competencies in the shipbuilding, steel, automobile, and semi-conductor industries.

There is no reason why we cannot witness another success story take place in the financial services sector. The sector has the potential to achieve dramatic growth, and current conditions are far more favorable than those present during Korea's manufacturing success twenty, thirty years ago. The introduction of a new comprehensive regulatory system is only the initial step in this process.