Korea Capital Market Institute

In this report, we investigate these changes in capital requirements for the banking and financial investment industry in the world since the global financial crisis.

The basic tool of the current global financial regulation is the BIS ratio set out by the members of the Basel Committee. Now the Basel III was introduced to replace the Basel II. In short, its contents are divided into micro-prudential supervision and macro-prudential supervision. Micro-prudential supervision includes the followings: strengthening the quality and quantity of regulatory capital, expanding the risk perception range of regulatory capital, introducing the global liquidity standards, and tightening the supervision?risk management and public disclosure. On the other hand, macro-prudential supervision includes the introduction of a countercyclical capital buffer, the introduction of regulatory leverage ratio, and the reinforced regulations for systemically important banks.

In Korea, capital regulation for securities firms is conducted through NCR(Net Capital Ratio) scheme. Securities firms should maintain net capital ratio of above 250% to operate. Banks are on the verge of introducing the Basel III.

In the US, differentiated regulations shall apply to the large brokerage firms and small and medium-sized brokerages. The Dodd-Frank legislation will be applied to large IBs that takes the form of a bank holding company with bank subsidiaries. Especially, when recognized as a systemically important financial institution (SIFI), it is subject to the regulatory framework based on the Basel III standards.

In EU, the Basel II has been implemented through CRD guidelines. CRD IV is scheduled to be carried out step by step from 2013 and will be applied to 8,300 finance companies operating in EU. UK financial investment companies, like UK banks, are under the regulatory supervision of GENPRU and BIPRU, but funding element and calculation method for capital requirements are loosely defined compared to the ones for banks. On the other hand, the capital requirements for securities firms in Japan are very similar to the NCR scheme in Korea.

In Korea, we need a different approach for small and medium-sized brokerages because there is a high possibility for them to focus on specific tasks unlike the large brokerages. While maintaining the current NCR scheme in the short term, there needs to be a separate and more lenient regulation or a variety of regulatory exemptions for small brokerages with limited operations. These adjustments for small and medium-sized brokerages will make it possible for new entrants to compete with incumbents and to invigorate the withering industry.