Despite increasing risk exposure from expanding assets and leverage among large securities firms, the current Net Capital Ratio (NCR) framework does not adequately capture these risks. To strengthen risk sensitivity while maintaining a balance between financial soundness and industry growth, the NCR formula for large securities firms should revert to its pre-2016 structure, and a differentiated regulatory approach tailored to business scope and risk characteristics should apply to small- and medium-sized firms.

Ⅰ.  Introduction

In Korea, securities firms have rapidly expanded in both scale and functional scope. These firms have expanded beyond stock brokerage and asset management into credit extension traditionally associated with banks, including corporate finance and real estate project finance (PF). This shift aligns with global trends following the 2007―09 global financial crisis, in which tighter prudential regulation of banks has coincided with the growing prominence of non-bank financial intermediaries.

With the objectives of fostering larger securities firms, enhancing competitiveness, and diversifying financial intermediation functions within the securities industry, Korean authorities introduced the Comprehensive Financial Investment Business Entity (CFIBE)framework in 2013. Between 2014 and 2016, a series of CFIBE-centered institutional reforms followed, including revisions to the formula for the Net Capital Ratio (NCR), a prudential regulation for securities firms. CFIBEs―securities firms with equity capital of at least 3 trillion won―are authorized to conduct a full range of financial investment activities, including investment banking (IB), asset management, and brokerage operations, leveraging their sizable capital bases. In 2016, the authorities announced measures to foster the development of large investment banks. Under this initiative, CFIBEs with equity capital exceeding 4 trillion won were permitted to issue short-term notes, and those with equity capital exceeding 8 trillion won were authorized to operate Investment Management Accounts (IMAs).Funds raised through short-term notes and IMAs were excluded from the leverage ratio regulation (1,100%), creating an incentive to facilitate the rapid expansion of corporate financing capacity (Financial Services Commission, 2025).

These institutional changes have driven the expansion of assets and leverage among large securities firms and are expected to continue reshaping the structure of Korea’s financial industry and markets. In particular, the introduction of IMAs at the end of 2025 is likely to bring additional changes to securities firms’ funding structures. Through IMAs, these firms can engage in short-term borrowing of up to 300% of equity capital―200% through short-term notes and an additional 100% through IMAs―allowing their asset size and market influence to expand further.

Despite this outward expansion in scale and functions, concerns persist that the current NCR framework does not adequately reflect the risks associated with rising assets and leverage (Kim, 2023; Lee, 2022, etc.). The liquidity stress observed in the short-term funding market following the equity-linked securities (ELS) margin call episode in March 2020 demonstrated how liquidity and asset-quality risks at securities firms can propagate rapidly across the broader financial system, highlighting the need to assess the prudential framework governing securities firms (Box 1).

Against this backdrop, this study empirically examines the structural limitations and distortions embedded in the current NCR regime and proposes reform directions to better reflect the risks securities firms face.

Ⅱ.  Assets, Liabilities, and NCRs of Securities Firms

1.Assets and Liabilities

Figure 2 illustrates changes in the size of assets and liabilities, as well as leverage, across Korean securities firms. Their total assets expanded from 199.8 trillion won in 2010 to 851.7 trillion won in the first half of 2025, a 4.3-fold increase. In terms of asset composition, the shares of securities holdings, credit extension, and derivatives remained broadly stable, while their absolute levels rose steadily. Moreover, as the share of other assets increased, illiquid and off-balance-sheet assets, such as accounts receivable and other operating assets, made up a larger portion of total assets. This pattern suggests a gradual diversification of asset holdings beyond operating assets (Appendix Table 1).

Total liabilities increased roughly 4.6 times, from 162.6 trillion won in 2010 to 755.2 trillion won in 2025. In terms of liability composition, the share of other liability items, including short-term notes and derivative liabilities, expanded within borrowings. Short-term notes grew to 44.4 trillion won by 2025 after large securities firms were permitted to issue them in 2017. Derivative liabilities also rose with higher sales of structured products―equity-linked securities (ELS) and derivativelinked securities (DLS)―and the associated expansion of hedging positions. Given that short-term notes typically mature in less than one year and that the effective maturity of ELS/DLS generally ranges from three to six months, the funding structure of large securities firms has increasingly tilted toward short-term funding instruments.

These changes also point to a broadening of funding channels for securities firms into various forms linked to trading activities, product structuring, and operational needs. With expanding assets and liabilities, leverage ratios increased. The average leverage ratio of all securities firms rose from 6.3 times in 2010 to 9.2 times in 2025, while the ratio for large securities firms increased more sharply, from 5.6 times to 9.4 times over the same period.

2.NCR Regulation

The expansion of assets and leverage among domestic securities firms has been shaped mainly by a series of policy-driven institutional changes. The reform of the NCR framework is a primary driver designed to encourage the growth of securities firms. Previously, NCR was calculated as the ratio of net operating capital to total risk. Since 2016, the formula has changed to compare “safe capital,” net operating capital minus total risk, with the required minimum capital. Required minimum capital is defined as 70% of the sum of the mandatory minimum equity capital across the financial investment business lines of a securities firm. For firms engaged in the full range of activities, including dealing and brokerage, the required minimum capital is fixed at approximately 134.2 billion won per firm (70% of 191.75 billion won). In the securities industry, capital regulation can be broadly divided into a going-concern perspective, which assumes the continuation of normal operations, and a gone-concern perspective, which prioritizes the protection of customer assets in the event of bankruptcy. The previous NCR formula corresponded to the former, whereas the current one, introduced in 2016, aligns with the latter by requiring net capital to exceed risk assets.

While net operating capital for all securities firms grew 2.5 times (73.9 trillion won in 2025 from 29.4 trillion won in 2010), the total risk amount expanded roughly 7.5 times, far outpacing the pace of capital growth. This divergence is more pronounced among large securities firms, where net operating capital increased by approximately 3.6 times (from 10.5 trillion won in 2010 to 38.0 trillion won in 2025), while total risk rose by nearly 11-fold. In terms of risk composition, market risk―arising from fluctuations in equity prices, interest rates, and exchange rates―has consistently accounted for around 60% of total risk, even as its absolute magnitude increased markedly. At the same time, the share of credit risk rose from 25.0% to 34.0%, indicating expanding risk exposure across both market and credit dimensions. Despite total risk expanding much faster than net operating capital, NCR levels rose substantially: from 489% to 1,170% for all securities firms, and from 659% to 2,218% for large securities firms.

III.  Problems with the Current NCR Formula

3. Systemic Risk Accumulation from Lack of Risk-Bearing Mechanisms

Third, because the current NCR framework fails to capture risk expansion in a timely manner, it may allow systemic risk to accumulate without imposing adequate penalties on risk-taking behavior. Systemic risk refers to a form of structural instability in which the insolvency or liquidity distress of an individual financial institution propagates through the broader financial system, potentially leading to credit contractions, sharp asset price corrections, and adverse spillovers to the real economy. Large financial institutions typically carry greater risk exposures and maintain stronger market linkages than smaller institutions, implying a larger systemic impact when distress materializes. The ELS margin call episode involving securities firms in 2020, together with the short-term funding market stress triggered by concerns over real estate project finance (PF) exposures in 2022, illustrates how liquidity and asset-quality risks at securities firms can rapidly spread across financial markets.

In light of this, the study employs SRISK, a widely used measure of an individual institution’s potential capital shortfall relative to the financial system as a whole. SRISK estimates the amount of capital an institution would need to raise to restore adequate capitalization in the event of a system-wide financial crisis (Brownlees and Engle, 2017). An SRISK analysis shows that the systemic importance of large securities firms has increased markedly since 2016. A comparison with medium-sized banks of similar scale―bank holding companies not designated as domestic systemically important banks (D-SIBs)―finds that systemic risk among large securities firms has risen at a significantly faster pace in recent years. Specifically, the average SRISK of large securities firms increased by approximately 4.5 times between 2011 and 2022 (from 1.2 trillion won to 5.4 trillion won), substantially exceeding the corresponding increase for medium-sized banks (2.8 times, from 1.4 trillion won to 4.0 trillion won) over the same period. This divergence widened notably after 2016, coinciding with the NCR reform into its current formula. This suggests that large securities firms have expanded their asset base, leverage, and risk-related activities more aggressively than medium-sized banks. As a result, their relative importance within the financial system and their potential contribution to systemic risk now exceed those of medium-sized banks.

Ⅳ.  Policy Agenda

Meanwhile, Korea’s NCR framework does not sufficiently reflect liquidity risks, including short-term funding crunches. In major economies, including the U.K. and the E.U., liquidity regulation for large securities firms is likewise differentiated by systemic importance: large firms are subject to Basel-type liquidity requirements such as the Liquidity Coverage Ratio (LCR), while small- and medium-sized firms are subject only to basic liquidity requirements. In line with this global trend, Korea should, alongside size-based differentiation in the NCR framework, phase in Basel III―type liquidity requirements (e.g., the LCR) for large securities firms and introduce basic liquidity standards for smaller firms. In addition, there is a need to closely assess the increasing systemic importance of securities firms and determine whether to extend the Recovery and Resolution Plan (RRP)―currently applied to domestic systemically important financial institutions (D-SIFIs) and banks (D-SIBs)―to large securities firms. Requiring them to prepare ex ante for crisis response, liquidity sourcing, and loss absorption arrangements would help enhance resilience at the firm level and strengthen the stability of the financial system as a whole.

Moreover, implementation should follow a phased and balanced approach to safeguard capital market stability without undermining the intermediation function. While the financial authorities recognize the direction of reform and the need for gradual implementation,regulatory changes have thus far been mainly framed as mediumto long-term tasks, with detailed implementation roadmaps still underdeveloped (Financial Services Commission, April 9, 2025).

Some supplementary measures have been introduced for IMA operators. For example, amendments to the Detailed Enforcement Rules of the Regulation on Financial Investment Business require IMA operators to maintain the NCR above 150% under the previous framework. Nevertheless, clear guidance on the timeline and scope of broader NCR reform remains limited. Accordingly, reform efforts should enhance the effectiveness and acceptability of the reforms by establishing predictable implementation schedules and coordinating with market participants, alongside a careful assessment of industry risk-management practices and their incorporation into the regulatory design.

The launch of IMA products in December 2025 may further expand the role of large securities firms in financial markets. Reforming the NCR framework should therefore serve as the foundational first step toward strengthening prudential regulation for securities firms and laying the groundwork for a more sophisticated risk-management framework. Given their direct participation in a wide range of financial markets, advancing detailed risk-management capabilities and strengthening internal controls and risk-management functions will become increasingly important policy priorities. To ensure that the expanding functions of securities firms do not lead to excessive systemic risk, comprehensive and systematic improvements to the prudential regulatory framework are needed.

Appendix