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Experts still split over approach to banking reforms

Lawmakers and academics yesterday remained divided over the government's banking reforms, with some championing a free-market mechanism while others insisted that strong enforcement of corporate governance is key to addressing the public's concerns.

"The problem with Taiwan's finance sector is not overbanking but a lack of elastic exit and entry systems ... resulting in low differentiation and the prolonged existence of unhealthy banks," Chi Schive (薛琦), president of the Taiwan Academy of Banking and Finance (金融研訓院), told a forum yesterday.

The government should adopt the so-called "prompt correction" action being used in the US and demand that banks with a capital adequacy ratio of less than 2 percent must seek bailout funds or be voluntarily taken over within 90 days, after which their licenses will be invalidated, Schive said.

The enforcement of the Basel II advanced internal ratings approach would also help banks with good assets to acquire those being plagued by poor risk management, Schive said, adding that these rules could effectively stimulate spontaneous consolidation activities without government intervention.

The government has vowed to push forward the consolidation of the banking sector by halving the number of state banks to six by the end of the year, and reducing the number of financial holdings firms to seven by the end of next year, hoping to make the country a regional financial-services hub.

"Sole dependence on market mechanisms will be too slow," Council for Economic Planning and Development Chairman Hu Sheng-cheng (胡勝正) said.

This is why the government should have a hand in the reforms, especially with competition from regional economies like South Korea, Hu said.

However, People First Party Legislator Christina Liu (劉憶如) questioned the legitimacy and rationality of the government's policymaking process, citing a survey by the US Journal of Banking and Finance in 22 countries that indicated privatization without prior democratic and open discussion to decide the targets and orders could lead to corruption and chaos, as was the case in Chile and other Latin American countries from the 1970s until the 1990s.

Liu also cited a report by the US financial regulator stating it was not in favor of giant financial holding firms, because of the possible risk to the entire economy if such banks fail.

Expressing support for the government's plan, Ko Chen-en (柯承恩), president of the Chung-Hua Institute for Economic Research, said economies like those of the Netherlands, Switzerland and Singapore each have only two or three large, internationally competitive financial institutions.

"Corporate governance is the key," Ko said, adding that the proposed regulatory seats reserved for independent directors should be increased from one-fifth of the number of board seats to at least one-third, to satisfy the requirements for internal supervision and transparency.

Taiwan Solidarity Union Legislator Lo Chih-ming (羅志明) questioned whether the reforms would only benefit the rich families which between them control six financial holding firms worth NT$10 trillion, or more than 60 percent of all financial holding firms' assets.
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