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Analysts welcome halt in financial reform

Analysts welcomed the government's unexpected decision last week to apply the brakes on the implementation of the controversial second phase of the nation's financial reforms.

President Chen Shui-bian (陳水扁) promised in October 2004 to halve the number of state-owned banks to six by the end of last year and the number of financial holding firms to seven by the end of this year.

Experts said that financial policies require more careful decision making and should take market mechanisms into consideration. Otherwise, they are doomed to backfire and may harm foreign investors' confidence, they said.

"It was right to call a halt to the policy before the costs [caused by the ill-planned reform] became too much to bear," said Charles Yeh (葉銀華), director of the Graduate Institute of Finance at Fu Jen Catholic University.

The reforms were hastily drafted during a policymaking meeting and officials failed to set realistic targets and timeframes for reform, Yeh said.

Since the financial industry deals with public funds, the government should have been more well-prepared and discreet in formulating such a crucial financial policy, the academic added.

The scheme was designed to streamline the nation's banking system and sharpen local banks' competitiveness, enabling them to rival foreign financial institutions in the region.

However, the Cabinet decided last week to shelve the plan this year in order to fine tune it.

The policy turnaround came as a surprise, as the government had earlier boasted of its success in concluding several mergers among state-controlled banks before their deadline.

The government had also defended its financial reforms in the face of mounting criticisms and questions about the rationale behind its strategy, along with snowballing concerns that its plan may only benefit a few rich families.

However, the policy flip-flop and uncertainty may have created some uncertainty among foreign investors.

"Foreign investors are concerned about the policy-making process," said an analyst at a Swiss brokerage who asked to remain anonymous.

They hope the government can exert more caution in making financial policies and laws, such as the proposed personal bankruptcy law (破產法), which is designed to bail out indebted credit and cash cardholders, the analyst said.

While experts agreed that consolidation is necessary to restructure Taiwan's fragmented banking sector, they believe the government is focusing on the wrong areas.

Policymakers should let market mechanisms work, and what the government needs to do is to stay impartial and allow changes in the market to drive the consolidation, the analyst at the Swiss house said.

To facilitate mergers and acquisitions, the nation's financial regulator last year initiated an automatic approval mechanism for qualified financial groups and lowered the minimum shareholding requirement for takeover from 25 percent to 5 percent.

The legal relaxation, combined with low interest rates, encouraged interested buyers to take advantage of leveraged buyouts (LBO) plus solicitation of proxy votes to take over rivals, Yeh said.

This allowed buyers to take control of massive financial assets with little investment of their own funds, Yeh added.

This could give rise to moral hazards as LBO participants may be tempted to embezzle the funds, especially given the poor implementation of corporate governance in the country, if they run short of money to repay their borrowings, he warned.

The government should tighten these rules and demand that financial institutions enhance trans-parency and corporate governance through measures such as including foreign investors into their boards before approving takeover attempts in the future, Yeh said.

Chi Schive (薛琦), the president of Taiwan Academy of Banking and Finance, said that the government should reopen licensing for the establishment of new bank branches and financial holding companies, as well as formulating an exit mechanism for banks.

"This will expedite market competition and naturally weed out weak players through market-driven consolidation," Schive said.

The financial regulator should further liberalize the market, allowing local banks to expand across the Strait to serve Taiwanese corporate clients who are investing in the fast-growing Chinese market, he said.

"Instead of intervening, the government should create an environment to stimulate internationalization and free competition," Schive said.
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