The financial authorities will tighten securities firms' investments in real estate project financing (PF) and revise rules to increase the share of venture capital investments, the core role of investment banking (IB). They will introduce capital regulations based on actual risk rather than investment form and set a cap on the total amount of real estate investments. The aim is to force a restructuring of the securities industry, which has faced criticism for becoming a "real estate lending window."
The Financial Services Commission and the Financial Supervisory Service said on the 23rd they will give prior notice of changes to the Financial Investment Business Regulations and the Enforcement Detailed Rules of the Financial Investment Business Regulations reflecting these measures. After a notice period from the 24th to Feb. 2 next year, the amendments are to be finalized and implemented following deliberation and resolution by the Securities and Futures Commission and the Financial Services Commission.
First, the financial authorities will overhaul the real estate prudential regulation framework from an "investment form"-centered approach to an "actual risk"-centered one. Currently, when securities firms invest in real estate PF, they choose among loan, debt guarantee, or fund structures, and the net capital ratio (NCR) risk weights are applied differently at 100%, 18%, and 60%, respectively. The lower the risk weight, the less regulatory capital is consumed.
Because of this, securities firms have concentrated on debt guarantees, which are relatively less burdensome. Even if they provide the same 10 billion won in support, when treated as a debt guarantee it is calculated as consuming only 1.8 billion won of capital, but if booked as a loan, the full 10 billion won is deemed consumed. Although actual risk varies by project stage or loan-to-value (LTV), they have been treated the same under regulations.
In response, the financial authorities decided to apply differentiated NCR risk weights by project stage and LTV level, regardless of investment method. For bridge loan PF, high LTV of 60% or more will carry a 90% risk weight and low LTV below 60% will carry 60%. For main PF, 36% applies to high LTV and 24% to low LTV. For real estate investments that are not PF, high LTV will carry 18% and low LTV 12%. Overseas real estate, which is considered at higher risk of delinquency, will have a minimum risk weight of 60%.
A new cap on the total amount of real estate investments will also be introduced. Previously, it was sufficient to keep real estate debt guarantees within 100% of equity capital, but going forward, the entire amount of real estate investments, including loans and funds, must be kept within 100% of equity capital. Domestic nonresidential properties and overseas real estate, which had been reflected at 50%, will now be fully reflected at 100%.
Securities firms that have already exceeded the cap will be given time. The cap on total real estate investments will be gradually lowered to 130% in 2026, 120% in 2027, and 110% in 2028, with 100% applied in 2029.
Provisions regulations related to real estate PF will also be strengthened. Until now, if certain conditions were met, firms could set aside a low 0.5% provision for normal credit, but the eased rule will be removed and raised to a level similar to other financial sectors. The provisioning rate applied to apartment PF will also be raised from 7% to 10%.
The venture capital investment structure for comprehensive investment firms will also be revised. To prevent concentration in relatively safe A-rated bonds and mid-sized corporations, performance from those investments will count for up to 30% of the venture capital supply requirement. For example, if funding from issuance-backed notes and integrated managed accounts (IMA) totals 10 billion won, at least 2.5 billion won must be supplied as venture capital, of which investments in A-rated bonds and mid-sized corporations will count for only up to 750 million won.
Meanwhile, some licensing review standards for securities firms will be eased. If a securities firm's largest shareholder is a corporation, regulators had reviewed the corporation's representative individual under executive qualification standards. Going forward, in consideration of consistency with other financial sectors and the legal framework, such review criteria will not be applied.