New rules may cut bank bailouts

With the legislature scheduled to recess on Friday, Vice Minister of Finance Sam Wang (王得山) yesterday said that the ministry plans to fight a resolution this week which may prohibit the government's financial clean-up fund from bailing out ailing commercial banks.

The KMT and PFP legislative caucuses joined forces last Friday in passing the resolution with a 112 to 95 vote, stipulating that the government's Financial Restructuring Fund (重建基金) -- a mechanism similar to the US Resolution Trust Corp set up in early 1980s -- should be used to resolve the difficulties of grassroots financial institutions instead of debt-ridden commercial banks, such as Chung Shing Bank (中興銀行) and Kaohsiung Commercial Bank (高雄企銀).

The legislature regards farmers' and fishermen's banks and local credit cooperatives as grass-roots financial institutions as .

The resolution immediately created obstacles to the ministry's dealings with financially distressed commercial banks, as the third auction to sell off Chung Shing assets will be held in mid-July.

According to the ministry's plan, the government may help absorb as much as NT$60 billion of Chung Shing's debt, which is all that the fund has left after bailing out 36 grassroots institutions last year.

"We will discuss the matter further with the legislature this week," Wang said.

The ministry hasn't decided whether it will propose a motion to reverse the legislative resolution this week, he said.

Minister of Finance Lee Yung-san (李庸三) said the resolution would create enormous difficulties in resolving bad and non-performing loan issues in some domestic financial institutions.

"It's unreasonable to ask the ministry to bail out all problematic grassroots financial institutions before it can deal with problematic commercial banks," Lee was quoted as saying in the local Chinese-language media.

"If commercial-bank assets turn negative, how can the ministry just sit back and do nothing while the situation further deteriorates?" Lee said.

"In any case, the ministry intends to first deal with any serious problems at grassroots financial institutions," Lee said.

Failing to block the opposition-led resolution from passing, Lee said that he will further discuss the matter with other finance officials. A veto of the resolution may be considered, he said.