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2023 Aug/07
A Decade of Comprehensive Financial Investment Business Entities in Korea: Evaluation and Development Strategies to Become "Korean IBs"
Issue Papers 23-14
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- Research Topic Financial Services Industry
- Page 23
- Summary
- A decade has passed since South Korea introduced its ‘comprehensive financial investment business entity (CFIBE, hereinafter)’ framework in May 2013. On this significant milestone, this paper evaluates how Korean CFIBEs have developed their businesses in alignment with policy objectives and proposes development strategies to gain a competitive edge over global investment banks.
Among other aspects, this study examines how Korean CFIBEs have performed in relation to the four policy objectives outlined at the outset: Expansion, profitability and business differentiation, corporate financing expansion, and risk capital provision. For the past decade, Korean CFIBEs achieved quantitative growth in expansion and profitability, with their equity capital and net revenues rising 148% and 650%, respectively. Their qualitative performance is somewhat disappointing, with 70% to 80% of their revenues still derived from brokerage and principal investment, showing no indications of business diversification. Their quantitative performance is outstanding as their credit provision increased twentyfold over the past decade. However, Korean CFIBEs are ranked between 20th and 30th, and 60th and 70th in Asian ECM/DCM and M&A, respectively, showing their weaker capacities in corporate finance compared to global peers. Furthermore, they fell short of meeting expectations as providers of risk capital since a significant portion of their corporate loans were tied to SPC and real estate assets, with only a modest amount of capital invested in equity in innovative venture firms.
The second part of this report proposes development strategies for CFIBEs based on a comparative analysis of the business strategies of Korean CFIBEs and global IBs. A SWOT analysis suggested that CFIBEs have an edge in retail and structured financing, while disproportionately concentrating on ELS, DLS, and debt guarantees to real estate PF. This shows that they lack in diversity in corporate financing services while falling short of business differentiation. Their external opportunities include accelerated digitalization, growth in new southern countries, and increased demand for wealth management. Conversely, they are confronting threats, including increased competition from players entering bigtech and fintech sectors, the blurring of boundaries in financial services, growing political and economic uncertainties, and the climate crisis.
On the path toward becoming Korean IBs, CFIBEs should fully leverage their technological strength in ICT for expanding their presence abroad in brokerage and principal investment. Based on Korea's business development company scheme and M&A activities, they need to strengthen their corporate financing capacity, and join hands with pension funds and sovereign wealth funds. As part of their preemptive measures to future changes in the financial services industry, it is advisable for Korean CFIBEs to recruit additional ICT staff, increase investments in infrastructure, and concentrate their resources and capabilities on digital finance and transition finance. Additionally, in the long run, further efforts are needed to enable CFIBEs to participate in payment and settlement services for corporations. Furthermore, CFIBEs should make efforts to enhance their risk management capabilities by enhancing their remuneration schemes and internal controls.