FSC proposes changes to depository insurance

The Financial Supervisory Commission (FSC) yesterday proposed changes to the nation's depository insurance mechanism, to allow the adoption of prompt correction action (PCA) at troubled banks before their assets turn negative.

Once the amendments are passed, the Central Depository Insurance Corp (CDIC, 中央存保) will be able to take over banks whose net worth is lower than two percent of total assets, Gary Tseng (曾國烈), head of the commission's banking bureau, told a press conference yesterday.

"Such prompt corrective action aims to cut costs [for the central depository insurance fund] in solving defaulted banks," Tseng said.

Banks will be allowed a grace period to make improvements before a planned takeover, he said.

Tseng said that further discussion will be held next week to detail the draft amendments before revisions to the Bank Law (銀行法) are proposed for passage by the legislature.

Since the Financial Restructuring Fund (金融重建基金) -- set up in 2001 to help clean up the banking sector -- will be terminated in July, the bureau plans to facilitate the amendments into legislation before then, so the central depository insurance mechanism can legally implement the PCA measure, Tseng said.

The draft amendments propose expanding the size of the central depository insurance fund from some NT$10 billion to NT$200 billion by injecting capital from income from financial business taxes, pending legislative approval, he said.

The draft amendments also propose to impose higher insurance premiums on banks while maintaining a maximum claim amount of NT$1 million for each depositor.

Banks will be required to make extra insurance payments if a bankruptcy seriously impacts the nation's financial stability, the amendments said.

Insurance premiums will vary in accordance with each bank's level of risk, Tseng added.

The CDIC will also be allowed to resort to means that "cost the least" in bailing out debt-ridden banks.

For example, the CDIC will be able to work as a bridge bank to auction off problematic banks, Tseng said.

Moreover, depository insurance for new banks will remain mandatory, although approval will be granted after a review of their risk portfolio.

"New banks will be required to improve their risk portfolio before receiving depository insurance," FSC vice chairwoman Susan Chang (張秀蓮) said at the same press conference yesterday.