Fri, May 05, 2000 page17

• Chung Shing loan scandal just the tip of the iceberg

  HOW MUCH FURTHER After recent a loan scandal triggered a run on the Chung Shing Bank, both consumers and investors alike are wondering whether this is an isolated incident or the precursor to widespread mayhem in the financial industry

  • By Stanley Chou / STAFF REPORTER
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  The Chung Shing Bank (中興銀行) scandal has revealed to the public industry secrets discussed behind closed doors ever since a dozen new commercial banks were established 10 years ago. Not only have weaknesses in the regulatory system under the KMT administration been exposed, but also scandal watchers have been treated to ring-side seats at the "family-controlled banking for fun-and-profit circus."

  Whether the DPP administration will be able to rebuild financial discipline in the financial system during the next four years seems to be one of the most difficult tasks ahead for Chen Shui-bian (陳水扁), the president-elect. The Chung Shing Bank incident could be a good test for him and his Cabinet right from the start.

  "Rome was not built in a day," said a senior executive of a securities company, who was an employee of Chung Shing Bank 10 years ago.

  "When I worked for Chung Shing Bank in the early 1990s, when the bank was first established, I immediately found out its loan procedures were different from the foreign bank that I had worked for before moving to Chung Shing. In Chung Shing, the auditing and internal control system simply doesn't work. The big boss determined everything, especially during the loan procedure. If anyone defied the boss' wishes, he lost his job right away. There was no such thing in the foreign bank I'd worked for. It's why I decided to quit the job and work for a securities company which has nothing to do with local banking, since many other family-controlled banks are said to have similar problems."

  The former Chung Shing executive asked not to be named in this report for fear of reprisal.

  What's happened at Chung Shing may not be an isolated incident. It has much to do with the background of the new commercial banks when the banking industry was deregulated in the early 1990s.

  Before then, the government-controlled banks dominated Taiwan's banking industry for more than four decades. But then the government finally decided to deregulate the industry and 15 new commercial banks were established shortly afterward, one of them being Chung Shing Bank.

  However, there are always one or two families behind almost every new commercial bank, even though the practice is forbidden by the Ministry of Finance. According to the Banking Law, any shareholder cannot directly or indirectly hold more than 25 percent of a commercial bank. But in practice, few banks abide by the regulation. Many of the new commercial banks are controlled by a dozen or so families through dummy shareholders. These families also control conglomerates in industries such as construction and insurance -- using the banks to fund their conglomerates.

  In order to avoid the ceiling stipulated by the Ministry of Finance that no single-party loan can exceed more than 40 percent of the bank's net worth, they use dummy accounts in their own banks to obtain loans.

  "From the loan list, there is no way to detect the connection with the families, unless there is a thorough investigation on all the accounts," said a senior executive of a local bank who also declined to be identified.

  As to how many banks have similar problems like Chung Shing Bank, the answer from analysts is not surprising.

  "The Chung Shing Bank incident is just the tip of the iceberg," said a banking academic, who also choose to remain anonymous.

  "Most domestic commercial banks currently have serious overdue-loan problems. Among the 15 new commercial banks, at least one-third have similar problems like Chung Shing Bank, or even worse. In Taiwan's banking industry, using dummy accounts to get illegitimate loans has been a popular phenomenon. It has created outrageous overdue loan ratios of more than 80 percent," the academic said.

  According to the latest disclosure by the Central Bank of China (央行), the average overdue loan of Taiwan's 56 commercial banks was as high as 5.03 percent at the end of March, or 0.15 percentage points higher than the end of last year. The total amount of overdue loans reached a new record of NT$688 billion (US$23 billion).

  Besides the new commercial banks, dozens of government-controlled banks and business banks, which serve medium and small business, also have serious overdue loan problems. And there is good reason for this, analysts said.

  "Kickbacks and bribery have been the basic incentives that created record bad loans in the state-run banks for decades, and the new commercial banks also followed," said a fund manager of a local fund house.

  Which banks are next

  If one wants to know which banks might be the next one to be hit by a crisis and bank run, it is not hard to find out from the overdue loan figures disclosed by these institutions (see graphic).

  "Several questionable banks with extremely high overdue loan ratios are the Taitung Business Bank (台東中小企銀) with a 9.77 percent overdue loan ratio and Taiwan Development Investment Trust (台開) with a whopping 21 percent, compared with Chung Shing Bank's 3.72 percent [as disclosed by the banks themselves]. Actual figures for most banks should be more than double their disclosure figures. One of the reasons that Taitung Business Bank has not been forced to close is the largest shareholder has been Yu Huai-yin (游淮銀), a legislator, though recently he has named his son-in-law to replace him as chairman of the bank -- therefore holding off outside pressure. There is a possibility that the Chung Shing Bank incident could trigger a domino effect in the market and spark a financial crisis," the academic said.

  When so many banks are experiencing similar difficulties, why was Chung Shing Bank singled out? Analysts see the situation as more a political one than economic one.

  "The bank run crisis of Chung Shing was initiated from the default of Taiwan Pineapple (台鳳), one of the most aggressive players in the stock market. According to my observations it was political," the academic said.

  "During the presidential election, the Wang family, who controls the Chung Shing Bank and is a long-time KMT political ally in Kaohsiung, had been reluctant to support Lien Chan (連戰), the KMT presidential candidate. After the KMT defeat in southern Taiwan, it was time for KMT to punish the betrayal," the academic said.

  A senior executive of a foreign securities company further elaborated. "Part of it was the presidential election, but the real stimulus of the investigation is that the KMT wants to disconnect any possible trouble that the Chung Shing Bank scandal might give KMT after May 20. It is why the agencies have to launch a massive investigation right now. If they don't and Chen Ting-nan (陳定南), the next justice minister, conducts his own investigation, the KMT and its business connections could be devastated," said the anonymous executive.

  "Several other new commercial banks have the same problems as Chung Shing Bank, such as Ta Chong Bank (大眾商銀) and Chinese Bank (中華商銀), or even worse," the executive said.

  "Ta Chong Bank is controlled by Chen Tien-mau (陳田錨), Chinese Bank is controlled by Wang Yeou-Tseng (王又曾); both control large conglomerates and are members of the KMT Central Standing Committee. Were it not for their political connections, these two banks might have already encountered a crisis similar to Chung Shing Bank's," the executive said.

  Ticking time bombs

  What is the new administration going to do with the numerous time bombs in the banking industry? Analysts have different views on future prospects, but all of them agree that continued moves to merge the industry's over-saturated market is a must.

  "I do not expect that Shea Jia-dong (許嘉棟), the next finance minister and present deputy governor of Central Bank, and the rest of the new administration to start investigating corrupt financial institutions aggressively at the beginning," the academic said.

  "One of the top priorities of the new administration is to maintain the stability of Taiwan's economy, [especially under the strong pressure currently from China]. A financial market veteran like Shea clearly knows that a series of bank runs could endanger the entire financial system. The only thing that the new administration can do is to try to move the internal control system closer to international standards."
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