[OUTLOOK]Regulatory walls down at lastThe belated capital market integration bill has finally been made public. Until now, regulations on securities mainly divided the sector into different business areas and let different companies dominate a particular area.
While both a securities firm and a futures company are brokers, a securities firm does spot trading while a futures company deals with futures. This is why they were subject to different sets of regulations. It was as if real estate brokerage was divided into land and apartments, requiring two different licenses. Under the new law, a real estate agent dealing with land and an agent brokering apartments would not be viewed separately, and both would be called real estate agents, so to speak. They are under the same regulations, while the law has reinforced the protection of investors.
It is desirable for finance, banking, securities and insurance to maintain a balance with one another and grow together. However, in Korea’s case, the role of banks has been overemphasized while securities and insurance businesses are relatively minor presences.
As the industrial structure becomes increasingly technology-intensive, business risks are growing. In order to diversify one’s risk, development of the capital market is essential. But in reality, the dominance of banks is growing even larger, so legislation integrating the capital market has been desperately needed in order to boost the competitiveness of the securities industry through opening and competition.
While few people would dispute the meaning and significance of the capital market integration law, there are several things we need to keep in mind. First, finance has been a history of responses to challenges. A financial institution can create profit by aggressively taking risks that it can handle with its capital. The integration law prepares the environment for investment banks to develop various financial products.
In order to fully utilize the ability to develop new products, the government and other market participants need to work hard so that the calculated challenging spirit of investment banks can be established as a culture. Through these efforts, an investment banking giant like Goldman Sachs can be born in Korea.
Secondly, a securities company should either realize economies of scale through expansion or aim at a niche market through specialization. However, it is not easy for a firm to grow big or develop a specialty even if the bill is passed. Securities companies have too much capital for their essential job of brokerage and are inefficiently using money.
When the market shows signs of prosperity periodically, securities firms are likely to be complacent with their brokerage business. In other words, they do not have the sense of crisis from insolvency that banks do, and are relatively insensitive to changes and reform. Therefore, it is questionable whether the legislation of the capital market integration law and the new environment for expansion will actually encourage banks to grow big. Appropriate inducement measures should be offered for expansion. Just as banks move into the brokerage business through subsidiaries, investment banks need to grow big and expand to traditional banking. Only then can a Korean investment bank be a match for prestigious foreign financial institutions.
Thirdly, the integration law allows securities companies to do various businesses, and therefore, there could be conflicts of interest among the businesses, and resistance from banks is expected. But the conflict of interest can be resolved through reinforcement of supervision or internal regulation for the sake of financial consumers. We should not make the mistake of not doing the right thing for fear of minor side effects. Moreover, yielding to the opposition of the banks is not reasonable in terms of establishing a financial hub. Fourthly, the substructure of settlements and clearing-off functions is as important as the superstructure of the capital market, and the reorganization of the substructure is a task that has to be completed for the efficiency of the capital market. However, the integration law does not mention this.
The financial sector is relatively weaker than the object economy in Korea, and it is impeding the country’s leap to an advanced economy. To make matters worse, the financial industry is concentrated on banks, showing a bipolarization of finance. When securities companies stand tall at the center of the financial industry, we can advance the birth of an innovative company that will be a driving force of the economy. I hope that the financial market integration law can work as a trigger.
* The writer is a professor of business administration at Hanyang University. Translation by the JoongAng Daily staff.
by Lee Sang-bin