Real Estate PF Risk Value Skyrockets: Will NCR Take the Leap and Introduce Corporate Payment Settlement
Securities Company ABCP Debt Guarantee Risk Value to Increase
The Financial Services Commission is reviewing a plan to increase the real estate project financing (PF) risk value, which is currently fixed at 18%. This move aims to attract capital market funds concentrated in real estate PF to corporate finance, such as corporate mergers and acquisitions (M&A) and corporate credit extensions.
Background of the New NCR System
The new net operating capital ratio (NCR) system was introduced in 2016 to improve the financial soundness of securities companies. The NCR is an indicator that measures the financial soundness of a securities company by dividing net operating capital by total risk amount. The new NCR system changed the evaluation formula to divide the amount obtained by subtracting the total amount of risky assets from the net operating capital by the required maintenance capital for each business unit.
Impact of the New NCR System
According to the Capital Market Research Institute, the total risk assets of securities companies increased approximately fourfold from KRW 9.4 trillion in 2016 to KRW 33.7 trillion in 2022. During the same period, equity capital increased 1.8-fold from KRW 45 trillion to KRW 80 trillion. However, the rate at which the risk amount increases is faster than the rate at which equity capital increases, indicating that the risk amount increased due to a significant increase in not only brokerage fees but also derivative linked securities and PF exposure.
Real Estate PF Risk Value to Increase
The Financial Services Commission is reviewing a plan to refine the real estate PF risk weighting formula and vary the risk weighting according to the size of the debt guarantee and the level of risk. Currently, the NCR risk value for domestic residential loans is higher, while the NCR risk value for non-residential and overseas real estate investments is lower. However, the real estate PF debt guarantee risk weighting is applied uniformly at 18%, which is considered too low.
Financial Industry Demands New Businesses
The financial investment industry demands that new businesses be allowed to enhance the competitiveness of investment companies. A representative example is the approval of integrated investment account (IMA) operators. IMA is an account in which a securities company guarantees the principal and invests the customer’s deposits in various corporate finances to pursue profits. Corporate payment settlement is also one of the long-awaited projects of securities companies, which would allow corporations to pay salaries and utility bills through securities company accounts.
Conclusion
The Financial Services Commission’s plan to increase the real estate PF risk value is expected to have a significant impact on the securities industry. The industry demands that new businesses be allowed to enhance competitiveness, and the approval of IMA operators and corporate payment settlement is expected to be a major step forward.
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