Korea's Capital Markets Consolidation Act, which finally took effect on Wednesday, was undoubtedly well-intentioned when first conceived a few years ago. The world's 10th biggest capital market punches well below its weight. Commercial banks dominate financing and there are no home-grown investment banks of scale. Almost 50 securities companies fight it out for business which is neither exciting nor especially profitable. Perhaps 70 per cent of industry revenues come from straight agency broking, and commissions are being ground lower by competition. Capital markets themselves are shrinking. The stock market is worth less than in 2005, and equity issuance has slowed to a trickle: last year less than $4bn was raised, versus $15bn in 1999, according to ThomsonReuters. Corporate bond issuance was 60 per cent of the 2002 peak. As a percentage of economic output, capital markets have been in retreat for much of the past decade, even before this financial crisis.
Korea wants to become a regional financial centre, by rebalancing financing away from the banks, encouraging more consolidation and, with luck, setting the stage for the creation of a home-grown investment bank or two. Deregulation should also make the market more attractive for foreigners, already active in certain segments. Take derivatives, where Korea ranks number three globally by volumes traded: foreigners command 43 per cent of the Kospi options market. But the timing is lousy: foreign banks are hacking back overseas exposure rather than expanding. Domestic financial services firms are, meanwhile, suffering losses and having to raise capital; bolting together different units is not a panacea. Melded brokerages and fund management arms, for example, still give away chunky distribution fees to the banks. Not so much a bang as a whimper.