[Annoying Fees for Borrowers]③ Ignoring Market Interest Rates on Loans... Explosive 10% Interest Rates

Opaque Securities Lending Transactions Exploited for Attribute-Based Investor Fee Discrimination
Business and Commercial Relationships Influence Lending Fee Rate Calculations
Margin Loan Interest Rates Set Excessively Above Market Rates

The interest business of securities firms is most clearly revealed in the stock lending (loan transaction) sector. Since the fee rates for each investor are not disclosed, individual investors cannot know that they are receiving the lowest fees (interest). In contrast, the interest rates on margin loans are based on market interest rates but are charged excessively high.

Reasonable Fees Only for Institutional and Foreign Investors

Stock lending is available to institutional and foreign investors, as well as individuals who meet the criteria for professional investors. The stocks borrowed by securities firms from these investors are used as collateral for loans and other purposes, but mostly for short selling. According to data submitted by the Financial Supervisory Service to Yoon Chang-hyun, a member of the People Power Party, the total retail pool contract amount of seven major domestic securities firms (Mirae Asset, Korea Investment, Samsung, NH Investment, KB, Kiwoom, Shinhan Investment) was KRW 15.1299 trillion (as of the end of November last year). The retail pool refers to the total stocks held by individuals who have subscribed to the stock lending service. If securities firms cannot obtain stocks from the retail pool, they borrow stocks from institutional and foreign investors. Over six months from June last year, the seven major securities firms borrowed 136.55 million shares from the retail pool and 51.96 million shares from institutional and foreign investors, based on the top 10 stocks by short selling balance.

The problem is that the same stocks are borrowed while paying different fees to individuals and institutional/foreign investors. Moreover, the fee rates for each investor are not disclosed. The seven major securities firms paid an average annual fee of 2.8% to institutional and foreign investors (based on the top 10 stocks by short selling balance). For individuals, they only paid an average annual fee of 1.0%. Securities firms paid different fees depending on the institution. The closeness of the relationship between the securities firm's prime brokerage service (PBS) and asset management companies, as well as business relations, influenced this. A senior official in the financial investment industry hinted, "Business relationships affect fee calculations."

Ultimately, the problem is information opacity. The supervisory authorities, who have turned a blind eye to this issue, cannot escape responsibility. The Financial Supervisory Service is well aware that securities firms have profited by exploiting information asymmetry. A Financial Supervisory Service official stated, "The task force (TF) plans to discuss with related organizations measures to significantly strengthen disclosures related to the loan market."

Profitable High-Interest Margin Loan Business

Securities firms actively reflect base rate hikes when setting margin loan interest rates. During periods of rate hikes, they rush to raise margin loan interest rates. The problem is that the interest rates are set at levels far higher than market rates. They exceeded 10% annually but were slightly lowered following pressure from the Financial Supervisory Service.

According to the Korea Financial Investment Association, the total margin loan balance of domestic securities firms (based on 32 firms) was KRW 35.455 trillion at the end of last year, down 14.2% from KRW 41.311 trillion at the end of the previous year. Among these, the margin loan balance decreased by 28.5%, from KRW 23.0883 trillion at the end of 2021 to KRW 16.5186 trillion at the end of last year. Margin loans refer to loans taken out by investors using securities deposited with securities firms as collateral, including margin loans and securities-backed loans. Margin loans involve borrowing funds to purchase stocks using securities as collateral, while securities-backed loans involve borrowing cash.

The decrease in margin loans and margin loan balances is due to the sharp stock market decline last year, which reduced so-called "debt investment" (borrowing to invest). Nevertheless, securities firms' interest income from margin loans was KRW 2.6472 trillion last year, decreasing by only 2.7% during the same period. This is because margin loan interest rates increased. Except for Leading Investment & Securities and Kakao Pay Securities, which recorded interest income from margin loans for the first time last year among the 32 securities firms, most saw an increase in interest income.

The securities firm with the highest interest income from margin loans last year was Mirae Asset Securities (KRW 407.8 billion). The large firm with the largest increase in interest income was Kiwoom Securities, which rose 9.3% from KRW 341.7 billion in 2021 to KRW 343 billion last year. Among small and medium-sized firms with interest income exceeding KRW 10 billion, BNK Investment & Securities had the highest growth rate (22.6%).

However, securities firms are concerned that lowering margin loan interest rates could lead to a sharp increase in debt investment. A securities firm official said, "If interest rates are lowered, debt investment increases, causing a balloon effect," adding, "Policy considerations should be made at a level that does not interfere with the natural flow of the market." Kang Hyung-gu, director of the Financial Consumer Federation's Financial Bureau, criticized, "Margin loans in stocks not only provide stocks as collateral but also accept the condition of maintaining a 140% collateral maintenance ratio. Stocks are more liquid than real estate, so it is unreasonable that margin loan interest rates are much higher than bank mortgage loan interest rates." He continued, "The Financial Supervisory Service should closely examine whether the interest rate levels are appropriate and transparently disclose the criteria for interest rate calculation to investors."