The government's public fund to bail out failed banks shouldn't cover their non-depository liabilities, which are considered uninsured losses, William Seidman, former chairman of the US Federal Deposit Insurance Corp (FDIC) and Resolution Trust Corp (RTC) said yesterday in Taipei.
"The [public fund] system could collapse if overdone," Seidman told a luncheon organized by Democratic Progresive Party Legislator Charles Chiang (江昭儀) yesterday, "uninsured creditors [of distressed banks] should never know they are protected even though they may end up being protected."
Seidman's remarks yesterday provided a reference point for the disagreement between opposition lawmakers and the Ministry of Finance, which insists that the nation's Financial Restructuring Fund (
During the last legislative sessions, opposition parties shelved the review of the bill proposed by the ministry and threatened to reduce the size of the fund from NT$680 billion to NT$320 billion, thereby preventing banks from covering the liabilities.
At yesterday's luncheon, People First Party Legislator Christina Liu (劉憶如) reiterated her stance, saying that, if the government were to be allowed to use the fund to cover such liabilities, it would be a tremendous burden on the government's budget.
But the ministry refused to make any concessions, hoping to persuade the legislature into giving its approval to assume the non-depository liabilities of distressed banks' on the grounds of preventing systematic liquidity risks in the local banking sector.
Also participating in yester-day's luncheon was Gary Tseng (
He argued that, given the fact that the public fund was designed to maintain financial stability at minimum costs, the government has no alternative but to cover banks' non-depository liabilities to prevent a financial crisis.
Tseng added that in the US, there were many "money brokers" who could take advantage of a bail-out fund after the government decided to step in and cover depositors' losses. But few such money brokers exist in Taiwan to abuse the use of the fund, he said.
Tseng concured with Seidman, saying that the bill shouldn't stipulate that losses on non-insured creditors will be covered.
In his address, Seidman urged governments that face a problematic financial sector to adopt an aggressive posture in dealing with bad loans.
"The longer you wait, the more it will cost," Seidman said, citing the decade-long banking problem in Japan as an example. He added that bad-loans were not something that just disappears over time.
He also said that once the government decided to step in, a transparent mechanism should be formulated to efficiently use the public fund to help the financial sector return to health, while finding ways to cut back reconstruction costs by restructuring part of the bad loans.
He said that the government should establish a restructuring agency, seeking collaboration with the private sector, to jointly work on turning troubled enterprises into viable businesses, which will be able to repay their defaulted loans.
Seidman stressed the importance of using government capital as an incentive during the corporate restructuring process, saying few private companies would be interested in taking up the task if there's no guaranteed involvement from the government.
Seidman served at the US FDIC between 1985 and 1991, which helped recover 1,617 distressed banks with a total of US$302.6 billion in assets. He also served at the RTC between 1989 and 1992, which took initiatives in writing off NT$21 trillion in the US' bad loans.
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