Financial authorities are about to further deregulate laws governing the capital market as a last resort to save the declining securities sector, but industry watchers see the measures as less than satisfactory.
The Financial Services Commission on Sunday unveiled a set of deregulatory measures to encourage brokerage houses that were able to stay afloat in the troubled environment to either take over or merge with their ailing peers.
Those that pursue mergers and acquisitions in the industry within a period set by the regulator will be allowed to further diversify and expand into other businesses such as investment banking, pension management, and private equity and hedge funds.
However, it remains to be seen whether an industry consolidation could occur in the near future given that previous deregulations did not really change the financial landscape but only increased the number of small brokerage houses in the market, analysts said.
The so-called Capital Market Consolidation Act, which was introduced in 2007 through a set of deregulatory measures, did not generate globally competitive Korean investment banks.
The capital market “big bang” also promoted industry M&A by tearing down the business barriers between brokerages, asset management and futures, but it did not lead to as many deals as the regulator initially hoped.
Other than seeing an equity fund frenzy, there has been only one M&A deal since 2010 ― Hanwha Securities’ acquisition of Prudential Investment & Securities, according to a FSC report.
Instead, new securities companies emerged, boosting the number of players in the market, and a majority of them stuck by the sector’s traditional business of stock trading for their customers.
Soon after, the securities industry faced what experts said the biggest financial crisis since the Great Depression of the 1930s, which set a negative chain reaction in the stock and bond markets in 2008.
Global investors then shunned stocks by relocating their funds to safer assets such as gold and treasuries or holding onto U.S. dollars in their bank accounts. Korean investors also followed this trend by pulling their money out of equity funds, while seeing the value of their real estate assets slide.
Faced with continuing volatile trading worldwide, the Korean securities, with little business diversity, began to lose profitability that relied heavily on stock brokerages.
Of the 62 securities companies, 26 recorded net losses, and 12 saw their capital eroded as of the first half of fiscal 2013, according to the FSC.
The government’s deregulatory policy could help securities companies overcome their limited business models, said analyst Woo Da-hee of Woori Investment & Securities said.
However, it may do little to improve their earnings in the short term, Woo said in a report when the National Assembly passed a revised law promoting investment banking early this year.
