As the government exempted securities firms from the obligation to maintain a 140% collateral ratio for margin loans for three months starting on the 9th, market reactions are mixed. Expectations have emerged that this will ease pressure on retail investors by breaking the vicious cycle where forced selling triggered by sharp stock price declines leads to further drops.
On the other hand, concerns have also arisen that if the bearish market continues, credit interest will accumulate and losses may widen. Given that similar measures during the pandemic were criticized for actually increasing individual losses, there are indications that this could encourage margin investing (investing with debt).
According to the financial investment industry on Monday, the government made this decision at a joint market situation review meeting of relevant agencies on the 6th. The purpose is to prevent excessive forced selling due to sharp stock price declines from increasing market volatility.
Credit lending, commonly referred to as margin investing (investing with borrowed money), refers to securities firms lending money or securities to customers using their assets (stocks, cash, etc.) as collateral. Margin loans, a type of credit lending, involve securities firms lending funds to customers for stock purchases, and are subject to regulations under the Financial Investment Business Regulations regarding total credit lending scale, deposit rates, and collateral maintenance ratios.
Currently, securities firms bear the obligation to maintain a collateral ratio of at least 140%. This means they must secure collateral of at least 140% when lending money to investors for stock purchases. Securities firms forcibly dispose of stocks (forced selling) if the collateral ratio falls below the standard due to declining stock prices. With this temporary exemption, retail investors facing the risk of forced selling have gained time.
A financial investment industry official said, "In a situation where the market is falling sharply, the government's measure will ease pressure on retail investors," adding, "Since the securities industry currently diagnoses the stock market as experiencing excessive decline, I believe it can prevent further drops."
In a sharp decline, if securities firms initiate forced selling based on collateral ratio standards, a large volume of forced sales may be dumped at once, driving stock prices down further and leading to additional forced selling, creating a vicious cycle. It is explained that the government's measure can serve as a buffer to prevent a market crash.
However, since it is a temporary suspension, there are also indications that it could encourage retail investors' margin investing or widen losses further. Another industry official said, "Margin loans should be limited to the short term and must have appropriate stop-loss selling, but if stock prices continue to fall after the temporary suspension measure, retail investors' losses may widen, so caution is needed."
Forced selling based on collateral ratio standards also serves a forced stop-loss selling function, which can prevent greater losses, yet the government's measure could actually increase retail investors' losses.
The official added, "During the pandemic, a similar policy was announced and was criticized for actually increasing the scale of retail investors' losses," noting, "It is also concerning that the government's policy to allow maintaining margin loans in a bearish market may appear to encourage margin lending."
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