Banks panic as brokerages are offered new services

The banking sector and securities industry are in a new tug of war as the government considers allowing large brokerages to issue promissory notes.

A committee under the Financial Services Commission, the country’s top financial regulator, preliminarily agreed to allow Korea Investment and Securities the right to issue promissory notes. The regulator is expected to grant the same right to the other four of the Big Five securities companies - Mirae Asset Daewoo, NH Investment and Securities, KB Securities, Samsung Securities - as a part of its efforts to nurture larger investment banking companies.

But the banking sector wants the decision put on hold.

The Korean Federation of Banks said there is no oversight system in the securities industry to manage the issuance of such notes. That role has been reserved for bank, which are subject to stricter rules and capital requirements.

“The decision allows [the brokerages] to run a banking business without licenses,” a spokesperson for the federation said.

“There are concerns that this could lead to an uneven playing field among industries and lack of regulation,” the spokesperson said, adding that more deliberation and measures to address such issues are needed.

A promissory note is a short-term means of financing with less than one year maturity. Brokerages have been banned from issuing such notes.

The securities industry says the handling of such notes in the industry could generate various benefits.

“If the government gives the right to the five securities companies, they could issue promissory notes worth 24.6 trillion won [$22 billion],” said the Korea Financial Investment Association.

The regulator is planning to allow each brokerage to issue promissory notes with a total value of up to twice its capital.

“If the money flows into promising industry sectors and is used as venture capital, that can create jobs for up to 430,000 people,” the Korea Financial Investment Association, which represents brokerages and asset management companies, said in a statement.

The big five companies also maintain better liquidity ratios than what is required by the regulator, the association added.

Under the measures announced last year, securities firms with over 4 trillion won in capital will be allowed to issue one-year promissory notes.

The government wants brokerages to move into businesses including investment banking and corporate financing.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]