Merchant banks

Merchant banks (종합금융회사) are financial institutions that specialize in corporate finance, combining medium- and long-term equipment financing services with the functions performed by British merchant banks and American investment banks.

The institutional framework for merchant banks was established by the enactment and promulgation of the Merchant Banks Act in December 1975. After ups and downs of merchant banking businesses, however, the Merchant Banks Act was finally repealed in February 4, 2009 with implementation of the Financial Investment Services and Capital Markets Act.

Key words
British merchant banks, American investment banks, corporate finance, equipment finance

History
The establishment of merchant banks was designed to create a new financing channel through which the private sector would be able to promote increased importation of foreign capital, and to introduce financial institutions that could provide consolidated financial services by complimenting the then-existing financial system divided into banks and securities companies.

The Korea Merchant Banking Corporation was established in April 1976 as the pioneering merchant bank in Korea. Five additional merchant banks had been founded by 1979, and after that no further merchant banks were established until the early 1990s.

All six merchant banks emerged from joint ventures between foreign financial institutions and domestic companies including domestic financial institutions. Investment and financial services companies were converted to merchant banks in the 1990s, as part of financial industry reorganization, and the Merchant Banks Act was wholly amended as well.

By end-1997, merchant banks numbered 30 in total, as additional investment and financial services companies were converted into merchant banks, including nine local companies in 1994 and 15 in 1996.

However, reckless investment and expansion of assets brought merchant banks to insolvency, and they were blamed as the main culprit behind the Korean currency crisis. Sixteen insolvent banks were liquidated in 1998, and this was followed by the liquidations or acquisitions of an additional 13 banks (including one new merchant bank) between 1999 and 2003.

In April 2010, Meritz Investment Bank merged with Meritz Securities to become Meritz Securities Co., Ltd. With this event, as of end-June 2011 Kumho Investment Bank remained the sole specialized merchant bank, while three banks (Shinhan Bank, Korea Exchange Bank and Woori Bank), as well as securities companies including Meritz Securities Co., Ltd. were providing fundamental merchant banking services as sideline businesses.

Business and Services
Merchant banks engage in primary businesses as prescribed by law, incidental businesses as determined by Presidential Decree, and other ancillary businesses authorized by related laws.

The businesses of merchant banks include a variety of short-term financial services:
 * issuance, discounting, trading, brokerage, underwriting and guarantees of bills expiring within one year; CMA services; factoring; and
 * underwriting, trading and brokerage of CDs and securities selected for open-market operations.

Merchant banks raise funds primarily through the issuance of bills and through provision of CMA services. Merchant banks also engage in borrowing and subleasing of long- and short-term foreign capital, arrangement of international financing, payment guarantees denominated in foreign currencies, investment in foreign currency securities, and trading of foreign exchange and deferred-payment export bills.

The volume of foreign capital borrowed by domestic merchant banks increased sharply from the 1980s, as they ended their dependence on overseas joint ventures and began to borrow funds from foreign investors directly.

After the currency crisis starting at the end of 1997, however, a number of merchant banks suffered from reduced credit ratings and were eventually forced into liquidation. This led to a sharp reduction in their volume of borrowed foreign capital and a significant decline in their share of the international financing business.

Merchant banks are in addition permitted to operate securities-related services by participating in the issue market as underwriting groups, including the underwriting, sale and public offering of securities or arrangements for their sale. They may also engage in trading, trading on consignment, and acting as brokers or agents for the trading of securities, as well as in other ancillary businesses such as equipment leasing, creation and cancellation of investment trusts, management of investment trust assets, and investment trading and brokerage.

Merchant banks are also allowed to issue bonds within limits equivalent to ten times their equity capital, but these limits may be exceeded on temporary bases as needed for redemption of the issued bonds.