[On-site Snapshot] Mega IB and Real Estate

[Asia Economy Reporter Song Hwajeong] The government’s recent tightening of regulations on securities firms’ real estate investments has raised significant concerns within the securities industry. There are even worries that the growth of mega investment banks (IBs) may slow down.

On the 7th, Eun Sung-soo, Chairman of the Financial Services Commission, stated at a CEO meeting of the financial investment industry, "It is undesirable for funds that should be supplied to small and medium-sized enterprises (SMEs) to flow into real estate development projects through special purpose companies (SPCs)." He added, "We plan to promote measures to exclude SPCs and real estate-related corporations from the scope of SMEs defined as credit extension targets for IBs, along with an accurate fact-finding survey." Following last month’s announcement of soundness management measures for real estate project financing (PF) exposure, the Financial Services Commission Chairman directly met with securities CEOs to firmly impose regulations on real estate investments.

Last month, the government finalized soundness management measures for real estate PF exposure, introducing regulations on debt guarantee limits, strengthening liquidity risk related to debt guarantees, and blocking the expansion of real estate PF loans by comprehensive financial investment business operators. Industry analysis suggests that setting the debt guarantee limit for real estate at 100% of equity capital alone will significantly curb securities firms’ real estate PF operations.

In particular, blocking the expansion of real estate PF loans by comprehensive financial investment business operators could be a direct blow to mega IBs. This is because real estate PF loans were entirely excluded from the contents allowed under the mega IB development plan. The limit on real estate PF loans for issuance notes that mega IBs with equity capital exceeding 4 trillion won can sell has been reduced again from 30% to 10%, leading the industry to view this as making sales practically difficult due to margin deterioration. Real estate PF has expanded since 2012 and, after the introduction of the mega IB development plan in 2016, emerged as a key growth driver for securities firms. As profitability in brokerage and corporate finance continued to decline, securities firms have increasingly strengthened their real estate sectors, which served as a driving force for their leap to mega IB status.

Although three years have passed since the introduction of the mega IB development plan, the growth of mega IBs remains slow. Among the five firms initially designated as mega IBs, only three have received approval for issuance notes, which are considered core to mega IBs. Korea Investment & Securities received approval in 2017, NH Investment & Securities in 2018, and KB Securities last year. Only one firm has been approved per year. Additionally, the scope for maneuvering is inevitably limited due to the net capital ratio (NCR) regulation, a soundness indicator.

While excessive concentration in real estate is problematic, it should not be overlooked that overly stringent regulations to curb this could cause other imbalances.

This content was produced with the assistance of AI translation services.