‘South Korea’s Goldman’ distant as brokerages slow to get funding

SEOUL: South Korea’s goal of creating its own Goldman Sachs has stalled as big brokerages wait on approvals to raise new funds for expansion.

The focus is on so-called promissory notes, short-term contracts that authorities had said brokerages might start using to raise funds to fuel their growth, as part of the government’s goal of creating a more active domestic investment banking sector.

But regulators have only approved one such offering, and financial-industry observers’ expectations that three other brokerages would get the green light last month were disappointed.

More approvals could mean that tens of billions of dollars will flow into South Korea’s financial sector.

Half of the funds raised via promissory note sales needs to be set aside for financing in the corporate sector, especially for startups and companies with low credit ratings, according to government regulations.

Local banks have opposed the fund plan, saying it amounts to letting brokerages lend without prudential rules.

“South Korea’s financial investment industry will likely be reorganised eventually with the big investment banks dominating the market,” said Hwang Sei-woon, a research fellow at Korea Capital Market Institute in Seoul.

“The fundraising programme will help build the environment to nurture big investment banks, though it will take time for a Korean Goldman to be created.”

South Korean government officials have been saying since the early 2010’s that they want to create a “Goldman Sachs of Korea” – an investment bank big enough to compete on the international stage. They’ve encouraged consolidation in the sector, and the new fundraising plan aims to provide the top firms with the cash needed to take on global rivals.

The road ahead will likely be a long one. Mirae Asset Daewoo Co, South Korea’s biggest brokerage, had a market capitalisation of 7 trillion won (US $6.4bil). That compares with Goldman Sachs Group Inc’s US$100bil.

The brokerages are also dwarfed by the nation’s banks, which operate branches across the country. The four biggest lenders including Kookmin Bank had combined total equity 89.6 trillion won at the end of June. The top four brokerages had 20.4 trillion won.

Korea Federation of Banks said last month it’s inappropriate for the government to approve brokerages’ issuance of promissory notes, and it should be put on hold.

Authorities shouldn’t let the securities firms lend when they didn’t have a banking licence, the industry group said in a statement.

Korea Investment & Securities Co became the first South Korean brokerage to issue promissory notes last month, selling 500 billion won of the contracts, which are aimed at individual investors and can’t be traded on markets.