[Inside Chodong] 10 Years of CFIBOs: Global IB Status Still Out of Reach

Qualitative Growth Lags Behind Quantitative Expansion
Industry Needs to Establish Differentiated Growth Strategies
Government Must Overhaul Its Support Measures

Recently, small and mid-sized securities firms have been actively working to increase their equity capital. The reason for their efforts, such as selling office buildings and issuing new shares, is to obtain the Comprehensive Financial Investment Business Operator (CFIBO) title.

Daishin Securities decided to sell its headquarters building in Euljiro, Seoul this past July. Through the sale, the company aims to surpass 3 trillion won in equity capital within the year to meet the requirements for CFIBO status. As of the end of the first half of this year, Daishin Securities’ equity capital stood at 2.1007 trillion won. Kyobo Securities has opted for a capital increase. Last month, it announced a third-party allotment capital increase to raise 250 billion won from its largest shareholder, Kyobo Life Insurance. Kyobo Securities explained that the purpose of this capital increase is to obtain CFIBO approval.

It has been 10 years since the CFIBO system was introduced to foster investment banks (IBs). In 2013, the financial authorities designated major securities firms with more than 3 trillion won in equity capital and established internal control standards as CFIBOs, allowing them to provide corporate credit and exclusive brokerage services.

The introduction of the CFIBO system laid the groundwork for the growth of Korean-style IBs. However, the domestic securities industry has largely remained at the brokerage level. The supply of venture capital has also fallen short of expectations. In response, in 2016, the financial authorities announced the “CFIBO System Improvement Plan for Fostering Mega-IBs” and took a more proactive approach to nurturing large-scale IBs. The improvement plan allowed CFIBOs with more than 4 trillion won in equity capital to engage in note-issuing business, and those with more than 8 trillion won to operate Integrated Investment Accounts (IMA). In addition, benefits such as increased corporate credit limits, permission for multilateral unlisted stock trading and brokerage, and support for overseas expansion were provided. To date, nine securities firms have obtained the CFIBO title, and in 2017, five of them were designated as mega-IBs.

Over the past 10 years, securities firms have achieved remarkable growth, supported by government initiatives. The equity capital of domestic CFIBOs increased by 148% over the decade, while net operating income grew by 650%. However, qualitative growth has lagged behind quantitative expansion. According to the Korea Capital Market Institute, domestic CFIBOs rank only 20th to 30th in Asia in the equity capital market (ECM) and debt capital market (DCM), and 60th to 70th in mergers and acquisitions (M&A). This is because they have focused on short-term profit businesses such as real estate project financing (PF) and equity-linked securities (ELS), rather than on providing venture capital and comprehensive corporate finance services.

In particular, real estate PF, which securities firms aggressively expanded during the low interest rate and real estate boom period, has now emerged as a potential trigger for insolvency, making the situation precarious. The CFIBO system has also deepened polarization among securities firms. While large securities firms can operate in broader and more diverse business areas thanks to their CFIBO status, the position of small and mid-sized firms has become increasingly marginalized. This is why small and mid-sized firms, whose growth engines have weakened, are making desperate efforts to obtain CFIBO approval.

Ten years have passed since the introduction of the CFIBO system. Just as a lot can change in a decade, the number of CFIBOs has increased to nine and the industry has grown in scale, marking clear positive changes in the domestic securities sector. However, it is difficult to confidently say that these changes have fully met the original intentions and expectations. The industry has grown in size, but there are few achievements that can be touted as representative of a Korean-style IB. Now is the time for securities firms to establish differentiated growth strategies so they can confidently compete in the global market as Korean-style IBs, and for the government to reconsider and refine what support is needed.