(Yonhap Feature) Global crisis clouds S. Korea's capital market reform

By Park Bo-ram

SEOUL, Feb. 24 (Yonhap) -- In early February, South Korea conducted a sweeping deregulation of the nation's underdeveloped capital market in an ambitious plan to hone its international competitiveness and spur innovation.

After years of preparation and political wrangling, the Capital Market
Consolidation Act went into effect on Feb. 4, giving greater leeway to nonbank
financial firms by tearing down barriers separating stock brokerage, futures
trading and asset management.
Although authorities tout the act as a "financial Big Bang" that could help bring
about the advent of global investment banks, analysts say it couldn't have come
at a worse time as the local capital market has been pommeled by global financial
turmoil.
Spooked by the U.S.-sparked global financial crisis, local investors are
scrambling to withdraw a mountain of money from risky capital market investments
and parking their money in safer bank deposits.
Such a risk-averse tendency among jittery investors is emerging as an initial
stumbling block to local brokerage houses which have set their sights on becoming
major global players, they point out.
"The ongoing global crisis represents a roadblock to the deregulation act's
purpose, as a dented risk-taking appetite will only make investors shy away from
capital market investments," said Kim Dong-hwan, an economist at the Korea
Institute of Finance.
With investors becoming more risk-averse, the local stock market last year
suffered the biggest loss since the burst of an information-technology bubble in
2000.
The key index KOSPI plunged nearly 40 percent from a year earlier, wiping about
375 trillion won (US$248.2 billion) off the total market value.
In addition, equity financing, the major revenue source for brokerages'
expansion, nose-dived last year with corporate debt financing also tumbling.
The stock market slump also weighed down initial public offerings, with fewer
companies opting to offer their shares.
"The financial market squeeze will likely delay the emergence of full-blown
investment banks because demand for risky corporate bonds is expected to remain
low for some time," said Kim Hyun-wook, an economist at the state-run Korea
Development Institute (KDI).
Falling earnings also signal a bumpy load ahead for brokerages dreaming of
becoming leading investment banks. In the face of the sagging capital market,
local securities firms saw their combined earnings more than halved on-year in
the third quarter of fiscal 2008.
Biggest brokerage house Samsung Securities Co., which is aming to become a major
investment bank, took the brunt as its net income was more than cut in half in
the October-December period due to mounting losses from equity and bond price
falls.
"The current headache of brokerage houses is that they are losing their own
equity capital from investment, let alone clients' money," said Jun Gyun, a
senior analyst at Samsung Securities. "The current market situation is
unfavorable for the growth of brokering companies."
Setting aside unfavorable market conditions, experts say the new law runs counter
to the global trend of tightening financial regulation following the collapse of
Lehman Brothers.
The debacle of Lehman Brothers has increased the need for stricter government
regulation on financial institutions' risk management practices and prompted
global investment banks such as Goldman Sachs to switch to more risk-reducing
plans, according to them.
"Financial authorities should step up efforts to prevent local brokerages from
following in the footsteps of failed U.S. investment banks," said Kim of KDI.