Japan-style financial crisis looms: report

Taiwan will soon face a financial crisis similar in type and scale to that which hit Japan in 1997, a researcher with the Asian Development Bank Institute (ADBI) said in Taipei yesterday.

"It could happen any time. It's likely [to happen] in the next year or so unless drastic measures are taken," Heather Montgomery told reporters yesterday after an international conference.

Attending the conference called "Asian Crisis," organized by the economics department of National Taiwan University, Montgomery, a visiting ADBI researcher, is expected to deliver her report today, detailing indicators that signal a Japan-type financial crisis in Taiwan.

"The decline in land prices significantly eroded the value of the collateral backing their loans. ... The collapse in the equity markets also hurt the banking sector," Montgomery said in her report. She argued that the nation's ratio of non-performing loans (NPLs) has hit an all time high of 12 percent and that major banks' return on assets (ROA) and return of equity (ROE) have also been declining since 1997.

Since the performance of domestic banks is closely tied to the performance of the equity and real-estate market, Montgomery said that Taiwan is not only suffering from "overbanking, but also a lack of exit from the sector" especially for badly-performing smaller financial institutions such as cooperatives and fishermen and farmers' credit associations.

As a result, Taiwan handled problems with the local banking sector by what she called a "convoy system" -- arranged mergers with healthier banks. Montgomery yesterday said that this is similar to measures taken by Japan and, by doing so, banking problems are not solved but prolonged and left for healthier banks to deal with.

The experience and causes of problems in Taiwan's banking sector thus far closely resemble those in the early stages of Japan's banking crisis, the report said.

"Banking crises are often preceded by slowing economic activity, often following a boom, and financial liberalization," Montgomery quoted a study by Graciela Kaminsky and Carmen Reinhart in 1999 as saying.

While identifying a banking crisis as "the closure, mergering, takeover, or large-scale government assistance of an important financial institution that marks the start of a string of similar outcomes for other financial institutions," Japan's banking crisis can be dated as beginning in November 1997, when the Takushoku Bank, one of the top 20 banks, failed, the report said.

Following that criteria, Taiwan may have yet to experience a major bank failure, but all threshold indicators in Kaminsky and Reinhart's study, which have correctively predicted banking crises in other Asian countries, strongly signal an upcoming banking crisis in Taiwan, Montgomery concluded.

The ADBI researcher yesterday further commented on the use of government funds in bailing out troubled banks in Japan, saying that after securing capital injections from the government, "banks did not really change their business practices."

In response to Montgomery's conclusions, Central Bank Governor Perng Fai-nan (彭淮南) yesterday called the report into question. He said the report is not officially sanctioned by the Asian Development Bank and is "inaccurate."