Sat, Mar 16, 2002 - Page 17 News List

MOF plans to shut down bad banks

DAMAGE CONTROL Several analysts applauded the finance minister's decision to close problem banks, but they say the move is a far cry from international standards

By Joyce Huang  /  STAFF REPORTER

Banking industry experts say Minister of Finance Lee Yung-san's (李庸三) plan to shut down problem banks that try to operate with thin cash reserves is an improvement, but still not in line with international standards.

Lee made the comments while speaking at the legislature Thursday, saying his ministry will take action when the capital-adequacy ratio of financial institutions drops below 2 percent.

Capital adequacy is the ability to provide banking services to the public while maintaining the legally required ratio of capital to assets.

But pundits said the Banking Law (銀行法) requires that once a bank's capital adequacy ratio drops to 5.3 percent, it should be closed, adding that problem banks remain because the ministry's law enforcement was too lax.

They also said that local bank calculations of capital adequacy ratio must meet international standards.

"By setting up a 2 percent capital ratio, Lee will be in danger of violating article 64 of the Banking Law, which has stated that the finance ministry is entitled to cease operations of any bank with losses of over one third of their capital," National Chengchi University banking professor Norman Yin (殷乃平) said.

He added that the law advises a minimum ratio of 5.3 percent before shutting banks down.

However, local authorities only step in when the assets of problem banks have fallen deep in the red, which is too late, Yin added.

In compliance with Switzerland-based Bank for International Settlements (BIS), lenders operating abroad are required to hold capital equal to at least 8 percent of their assets.

The Banking Law also stipulates that banks operating lending business are required to hold capital equal to at least 8 percent of their assets.

"Eight percent is actually a benchmark to measure the health of banks. Performance of banks under 8 percent should be aware of the dangers," said the head a foreign bank, surnamed Huang.

Huang added that most of Taiwan's business banks and state-run banks have a BIS ratio under 8 percent and so do more than 10 banks from the commercial banking sector.

If non-performing loans are to be written off in order to cut down on deteriorating profitability, these local banks' BIS ratios will be even lower, Huang said.

As the BIS is expected to revise its rules with stricter regulations in 2005, it will put the country's banking sector in a more vulnerable position, he added.

In contrast to Huang's analysis, the finance ministry only acknowledged that there were two local banks whose BIS ratio has fallen below 2 percent, according to Yin.

"It shows that the ministry has failed to recognize the reality," Yin added.

Huang, nevertheless, gave his endorsement to the finance ministry's plan to set a 2 percent BIS ratio as a threshold to shut ailing banks down.

Sharing a similar view, Shen Chung-hua (沈中華), a professor of money and banking at National Chengchi University, also said that "banks with a BIS ratio of 2 percent are highly under capitalized."

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