Securities firms could be hit by ban on short-term loans

The stock brokerage industry faces a revamping as financial regulators have decided to restrict transactions of “call money,” short-term loans provided to securities firms from financial companies.

Citing the necessity of reducing the liquidity risk among securities firms, the Financial Supervisory Service said last week that it would ultimately ban brokerages from applying for call loans starting as early as 2014.

As an intermediate step, the maximum short-term funds will be limited to 25 percent of a securities firm’s equity capital from July 1, 2012.

Call loans have been a key funding source for brokerage firms as they have no deposit business.

Several big firms secure funds through call money worth 700-800 billion won ($644-$736 million) per day. Several small- and mid-sized companies are more dependent upon the call loans.

The tougher regulations could result in the closing of a number of brokerages and mergers and acquisitions.

Regulators, including the FSS and the Financial Services Commission, have tried to induce restructuring in the industry to establish bigger investment banks in the nation.

But as there have been no big M&As, stockbrokers allege that the regulators chose to adopt a substitute in a bid to turn up the heat on smaller or unprofitable players.

FSS officials downplayed the speculation, saying that the excessive call loans could pose a critical problem in the case of another financial crisis.

Some companies have been suspected of focusing on investment in risky businesses such as construction-related project financing.

“The restriction on call money transition is irrelevant with reshuffling the industry,” an FSS official said. “It is only aimed at normalizing the market of short-term borrowings.”

The FSS is instructing the companies to shift their borrowing target to the “commercial paper” or “repurchase agreement.”

But most securities firms have preferred call loans to CP or RP transactions because they could suffer a higher interest burden by applying for the latter.

There had been speculation that Daewoo Securities, a subsidiary of the state-run KDB Financial Group, and Woori Investment & Securities, would form the nation’s largest investment bank through a merger.

However, the brokerage merger has faced a bumpy road as KDB Financial failed to acquire Woori Financial Group.

By Kim Yon-se (kys@heraldcorp.com)