Grand Prize Korean investment banking industry in need of deregulation, consolidation
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/Graphic by Cho Sang-won
By Kyle Huntzberry
Korea has been able to nurture and develop some of the largest and most profitable companies in the world. Samsung, LG, Kia, and Hyundai are brands that have influence all over the world. However, the one significant sector where Korean companies are lacking on the global stage is banking.
Korea does not have a global investment bank like Goldman Sachs or J.P. Morgan. The IB industry in Korea is underdeveloped, especially in comparison to the United States and Europe. To develop a globally competitive IB, Korea must continue to pursue domestic reforms targeted at improving and streamlining the laws and regulations that govern the merger and acquisition (M&A) market.
Research performed in 2012 by the Shorenstein Asia-Pacific Research Center and the Korea Capital Market Institute, revealed that in order for a Korean investment bank to grow into a global powerhouse, there needs to be more consolidation. Korean investment banks are severely lacking in capital reserves and leverage ratios, and with so many foreign IBs already flooding the Korean market, organic growth is going to be extremely difficult to achieve.
In the past year we have seen improvements in this area as Mirae Asset Financial Group and Daewoo Securities merged. The success of this deal is in the numbers, as Mirae Asset Daewoo became the largest initial public offering manager in Korea so far this year, with a market share of over 20 percent.
Gaining more market share leads to increased profits and capital, which only helps when trying to increase one’s capabilities in the global marketplace. Now, this is not saying that Korean investment banks should become too big to fail, but rather increasing size and revenues are a necessity in order to compete globally.
Another burden that has hurt Korean investment banks has been the regulatory structure. Korean banks have had much higher capital requirements than their counterparts in the United States, which means that they are leveraged less.
While Korean banks have historically been exposed to less risk, they have not been able to see the returns on equity that other global investment banks have seen. High returns are absolutely essential to growth, especially if a bank is thinking of going global.
In recent years, however, the Korean government has made improvements to the regulatory structure. The M&A market in Korea is improving, as evidenced by the record number of deals made in 2015.
Recently, the “One Shot” Act went into effect, which aims to allow companies to merge without the approval of the shareholders. Amendments to the Financial Investments Services and Capital Markets Act (FSCMA) have also allowed larger companies to engage in broader services like offering credit provision to corporate clients. These are critical steps that the Korean government will have to continue to make in order to improve the global standing of Korean investment banks.
The Korean government has recognized the importance of deregulating the M&A market, and improvements are being made to the banking industry’s regulatory framework. However, there is still much work to be done in order to nurture a domestic investment bank that can compete globally. Currently, Korean investment banks are lacking the capital and profits to compete globally. Continued deregulation and consolidation will be the key in improving the revenues and profits among those investment banks in order to compete on the global stage.
Kyle Huntzberry, 21, is a senior at Franklin and Marshal College in Lancaster, PA. He studies economics and government, and is working on a research project about the creative economy agenda set forth by President Park Geun-hye.