Korea's plan to foster 'Goldman Sachs' back in limbo

Pandemic, regulations block brokerages from becoming IB powerhouses

By Lee Min-hyung

The government's much-hyped plan to turn local securities companies into the Korean version of super-large investment banking players has hit a snag amid virus-induced market uncertainties and toughened regulations.

In 2016, the financial authorities here introduced the drive under which brokerage firms whose total equity topped 4 trillion won ($3.32 billion) were eligible for a license to become the super-large investment bank.

Those who win the license can issue a promissory note worth the double amount of their equity. The procedure is crucial for local securities players to expand their business volume under the vision of becoming the Korean version of Goldman Sachs.

The ambitious drive, however, is facing an unexpected setback, with the so-called big securities players here failing to make smooth progress in the plan due to regulatory hurdles and the prolonged economic downturn here.

As of June 8, only three securities firms ― Korea Investment & Securities, NH Investment & Securities and KB Securities ― are allowed to issue promissory notes worth trillions of won after winning the license as super-large investment banks.

But of concern is that other players which meet the qualification for the drive remain hesitant to apply for the license amid lingering external uncertainties ― represented by the virus-triggered economic shock and newly-introduced regulations.

In late May, the Bank of Korea (BOK) cut the key interest rate to a record low of 0.5 percent to revitalize the virus-hit economy. Starting early this year, the already-sagging economic condition took a turn for the worse with the rapid spread of the coronavirus pandemic here.

“The falling interest rate and ongoing economic downturn are clear negative factors for securities firms to rapidly shift their business portfolio, so local players are in a wait-and-see mode before accelerating their drive to become the mega investment bank players,” an industry source said.

Three companies ― Shinhan Investment, Hana Financial Investment and Meritz Securities ― are qualified to apply for licenses as super-large investment banks. But they are still in internal discussions before seeking the license amid lingering uncertainties in the local financial market.

They are also known to remain hesitant over the drive due to tightened regulatory hurdles here. The government has recently introduced a series of regulations on securities firms, and they include ones in the real estate project financing widely seen as their major cash cow.

For this reason, the emerging players are busy realigning their business structures in consideration of the virus shock and reinforced regulations. Against the backdrop, their plan to apply for the mega investment bank license remains up in the air for now.

Another regulation holding back the global expansion of local players is the Capital Market Law that prevents financial firms whose equity capital exceeds 3 trillion won from offering loans to their overseas subsidiaries.

This blocks overseas affiliates of local investment firms from receiving enough capital in a timely manner. The industry views the regulation as one of the most outdated legal hurdles which prevent Korean firms from enhancing their global competitiveness.

The Financial Services Commission belatedly acknowledged the need to revise the law. The revision is now pending at the National Assembly, but it remains unclear when it will be passed at a time when unnecessary legal hurdles need to be eased to help local players achieve their global vision.

Mirae Asset Daewoo, the nation's largest securities company by market capitalization, was allowed to start its promissory note issuance business about three years after the company won the license to become a super-large investment bank in July 2017.

The company was suspected of engaging in an illegal internal trading through which Mirae Asset's 11 affiliates helped Mirae Asset Consulting, a consulting business affiliate, chalk up what the Fair Trade Commission said were “unfair” profits. The antitrust watchdog recently imposed a fine of 4.39 billion won on Mirae Asset Daewoo for spearheading the scheme.

Chances are the company will soon be able to start the promissory business after being free from the years-long controversy. But it still remains to be seen whether the company will be able to achieve a meaningful leap-forward, as the declining interest rate remains a negative factor.

The company is in a position to make full-fledged preparations to win the license for the promissory note business.

“Mirae Asset Daewoo will continue pushing for the drive, even if uncertainties remain in place over the economic doldrums here and abroad,” another industry source said. “The company still considers the business as an opportunity to expand its global presence.”

With Mirae Asset Daewoo's equity capital surpassing 9 trillion won, its rival companies are paying sharp attention to the company's next step.

“Up until now, we have not yet fixed our plans for the business, but remain optimistic,” a spokesman at the company said.