[COVID-19 Transformation] Major Securities Firms Could Plummet Instantly... Proactive System Overhaul Needed

Possibility of Bankruptcy Despite Surplus Due to Global Stock Market Crash...Liquidity Supply Policy Must Be Prepared in Advance

[Asia Economy Reporter Ji-hwan Park] "If the government had not stepped in during the March margin call crisis on equity-linked securities (ELS) at some major securities firms and provided emergency dollar liquidity injection worth $1 billion (approximately 1.227 trillion KRW), the ownership of these companies might have changed by now." This is according to a senior official in the capital markets industry. This statement highlights how urgent the situation was at the time. Even the leading large securities firms in Korea could have faced a crisis due to the collapse of international financial markets, underscoring the need for proactive system improvements to prepare for such scenarios.

According to the financial investment industry on the 18th, in March, amid the global stock market crash triggered by the worldwide spread of the novel coronavirus (COVID-19), there were concerns that some major securities firms might face insolvency despite being profitable. This was due to the sharp decline in overseas futures, which serve as the underlying assets for ELS and derivative-linked securities (DLS). Margin calls occurred on futures due to the steep drops in overseas indices such as the Euro Stoxx 50 and the S&P 500, and domestic securities firms faced temporary dollar shortages caused by additional dollar margin requirements from foreign investment banks (IBs).

Besides the government's dollar liquidity supply, the securities industry was also fortunate. Because the indices fell sharply, their recovery was also swift. As concerns over the COVID-19 pandemic grew, the Euro Stoxx 50 index peaked at 3867.28 on February 20 and then plunged more than 40% to 2302.84 by March 16. It then experienced a rollercoaster ride, rising 18% to 2715.11 by March 24, just over a week later.

Experts warn that unexpected shocks like COVID-19 could happen again at any time and urge the urgent establishment of policies to prepare for large-scale adverse events. Banks regularly check capital soundness through the Basel Committee on Banking Supervision (BIS) capital adequacy ratio, securities firms through the Net Capital Ratio (NCR), and insurance companies through the Risk-Based Capital (RBC) ratio. However, this crisis demonstrated that these measures can collapse helplessly during major crises. In fact, the NCR of domestic securities firms all significantly exceed the financial authorities' recommended level of 200%. According to the Financial Supervisory Service, the securities industry's NCR stood at about 559.1% as of the end of last year.

Professor Do-jin Jeong of Chung-Ang University's Department of Business Administration said, "This COVID-19 crisis should serve as a turning point to distinguish between normal and abnormal situations and prepare crisis response plans in advance," adding, "No matter how well capital soundness is managed using existing indicators like NCR, RBC, and BIS, these standards are based on normal conditions and thus cannot detect crisis situations."

There is also a growing call for a proactive system to be in place rather than scrambling to find solutions after a problem arises. Above all, it is urgent to formalize mechanisms that can provide emergency liquidity to companies facing crises during this opportunity.

Hwang Se-woon, a research fellow at the Korea Capital Market Institute, explained, "In the U.S., as soon as the COVID-19 crisis broke out, programs for purchasing commercial paper (CP), corporate bonds, and foreign currency securities were immediately announced," adding, "The Federal Reserve supplies the funds, and the U.S. administration assumes credit risk; all related matters were pre-coordinated." This approach prevents missing the golden time by discussing measures only after a crisis occurs.

The U.S. Federal Reserve announced a liquidity injection plan for the CP market on March 17 (local time). Although Korea experienced the COVID-19 spread earlier than the U.S., stabilization measures for the corporate bond and short-term funding markets were announced about a week later.

Research fellow Hwang added, "We need to complete pre-coordination on large-scale liquidity shock countermeasures such as CP purchases, corporate bond purchases, securitized asset purchases, and bank loan extension programs and be ready to deploy them."

There are also calls to revisit the utilization of asset purchase and leaseback programs (sales and leaseback), which are currently established but largely ineffective. Professor Jeong said, "Rather than blindly providing funds, a method where the government first purchases a company's movable assets and then leases them back could effectively improve corporate liquidity," noting, "Challenges such as valuing corporate movable assets and the absence of a liquidation market for easy disposal are issues the government needs to address going forward."

While the industry acknowledges the need to review risk management systems following this incident, there are concerns that excessive regulatory tightening could have adverse effects. It is pointed out that while helping a child who has fallen is good, overly restrictive regulations that prevent them from going outside altogether could undermine industry competitiveness.

An executive at a major securities firm said, "Even if Mirae Asset Daewoo's capital grows to 100 trillion KRW in the future, it cannot suddenly become like Goldman Sachs," emphasizing, "It is through various mistakes and experiences in achieving actual performance that a firm can enter the realm of global investment banks."

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