[Initial Perspective] Involuntary Self-Rescue Plans in the Securities Industry

[Asia Economy Reporter Junho Hwang] Securities firms are pooling their resources bit by bit to create a ‘Second Bond Market Stabilization Fund’ to stabilize the bond market.

This is a self-help plan suddenly proposed by the securities industry in response to the credit crunch caused by the recent Legoland incident. After the government announced it would inject up to 50 trillion won to alleviate the so-called ‘money blockage,’ the industry, led by the Korea Financial Investment Association, came up with this plan.

It is a plan to save themselves, but there is much controversy both inside and outside. In particular, the securities industry complains that the authorities are ‘twisting their arms.’ The authorities, on the other hand, deny ever demanding money.

Looking at the process leading up to the self-help plan, one can find the source of this ‘verbal dispute.’ According to an anonymous source, there was a request from the Financial Services Commission before this plan was proposed. While pledging to inject 50 trillion won to prevent liquidity crunches at securities firms, they subtly suggested that the industry should also make self-help efforts.

The authorities’ intentions are understandable. Last year, securities firms posted record-high profits, and some employees received bonuses worth billions of won. There is no need to criticize them for doing well during an economic boom. However, if they pursued high-interest, high-risk investments such as ABCP during good times, they should have prepared countermeasures for economic changes. This is not the first time the authorities had to intervene urgently within less than a month after a ‘default’ declaration in Gangwon Province. Ten years ago, the entire industry collapsed after savings banks provided PF loans in a similar manner.

Is the authorities’ suggestion to prepare a self-help plan really ‘twisting their arms’? The authorities initially announced a 1.6 trillion won bond market stabilization fund but later changed it to a total of 50 trillion won, judging the situation to be more serious than expected. However, the fund the securities firms plan to create does not exceed 2 trillion won. It seems difficult to recognize this amount as sufficient self-help efforts by the securities industry or as an amount that can improve the market. While it cannot be said to be meaningless in revitalizing the market, it cannot be seen as a secret weapon to break the money blockage. Especially since the authorities are preparing a 50 trillion won support plan and it is obvious that the industry will loudly complain about ‘arm twisting,’ it is doubtful whether they would have explicitly said ‘pool your resources bit by bit.’ The authorities’ intentions were conveyed to the industry through the association, and there is a high possibility that the will was distorted or developed during this process.

Amid controversy, the self-help plan was revised from only large securities firms pooling resources bit by bit to include all securities firms, reaching an agreement. However, the result left both sides uneasy. The authorities are seen as ‘twisting the arms’ of an industry with its own problems, while the industry is criticized for ignoring the fact that the credit crunch could affect the entire industry’s trust, causing a rift in mutual trust. Especially from an outsider’s perspective, it is hard to find the ‘unity’ both sides claim to have.

There is a regretful thought about what if the authorities had first injected warmth into the market with support measures before talking about self-help plans. Even if the self-help efforts the authorities refer to are the ‘financial support’ the industry demands, the industry’s resistance at the brink of survival would not have seemed as persuasive as it does now. Instead, voices pointing out the industry’s moral hazard would have strengthened the authorities, and a sincere self-help plan might have emerged.

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