Banks, brokerages and insurers tighten risk controls after leverage-fueled rally Rena Kwok, senior credit analyst at Bloomberg Intelligence (Bloomberg Intelligence) South Korean investors are unlikely to repeat excessive leverage use after experiencing a severe unwinding of leveraged positions — even if the benchmark Kospi resumes its rally, a Bloomberg Intelligence analyst said.Rena Kwok, a senior credit analyst at Bloomberg Intelligence, projected leveraging would not be as "severe" as the first half of this year, even if the market regains its upward momentum, in a recent online interview with The Korea Herald."Some investors were overly bullish and took on excessive leverage to chase the stock market rally. Given the recent market volatility, they now have to reassess their risk tolerance after experiencing these sharp corrections themselves," Kwok said.Regulators and financial companies have also tightened their controls on leverage to prevent investors from returning to similar risk-taking behavior."First, we have supportive measures from the government and the regulator," Kwok said, referring to tighter restrictions on single-stock leveraged exchange-traded funds, including a higher minimum deposit requirement and an increase in the minimum trading unit."Second, financial institutions themselves, from brokerages to banks and insurers, have tightened their risk controls. They are all strengthening their risk limits to contain potential risks, which should help reduce the likelihood of any material stress."The tighter controls partly reflect the financial sector's efforts to shield itself from the potential fallout of excessive stock-market leverage. Though brokerages posted record-breaking earnings earlier this year on increased trading volumes, a buildup of leverage can still create spillover risks by weakening their balance sheets and liquidity positions, Kwok stressed."For brokerages, we have seen a rise in forced stock liquidations as well as margin lending, at least before the regulator imposed its latest measures," Kwok said. "If forced liquidations continue to increase amid elevated market volatility, this could pose risks, particularly for brokerages with weaker capital and liquidity buffers. They would face greater pressure from higher liquidity demands."Banks are no exception. Local lenders have already seen a surge in unsecured lending as borrowers increasingly took out personal loans to invest in the stock market during the Kospi rally, she explained.Lending capacity is now largely constrained, meaning banks have limited room to extend additional credit. This should also help prevent a renewed buildup of leverage."What we have seen is that retail borrowers increasingly took out unsecured loans to invest in the stock market during the Kospi rally. However, going into the second half, we expect unsecured loan growth to moderate," Kwok said."On the insurance side, we saw many retail investors surrender insurance policies early or increase policy loans to fund stock market investments earlier this year. However, after the recent market volatility, we expect investors to reassess their risk appetite." Though the risks have been contained for the time being, continued vigilance will be needed to ensure that leverage does not build up again as market conditions improve, "The bigger question is how quickly retail confidence can recover," Kwok said."Much of the previous rally was driven by speculative trading, and many investors did not expect the regulatory measures to be introduced so abruptly. Recovering from that speculative mindset will take time."