New bank runs not likely, analysts say

The unprecedented takeover of three problematic financial institutions over the weekend is unlikely to trigger a systemic liquidity crisis in the nation's financial sector, because the government has vowed to maintain financial stability, analysts said yesterday.

"We do not expect bank runs to occur at the four remaining blacklisted banks [today], and therefore there is no risk of a liquidity crisis," Jesse Wang (王嘉樞), head of equity research at BNP Paribas Securities (Taiwan) Co, said in a phone interview yesterday.

The government has shown its determination to maintain the nation's financial stability, backed-up by taxpayer funds, which has allayed the public's fears, Wang said.

Last Friday night, the Financial Supervisory Commission (FSC) announced the take over of The Chinese Bank (中華銀行) six hours after the takeover of the Enterprise Bank of Hualien (花蓮企銀). Bank runs had consumed the bank's cash after two affiliated firms under Rebar Asia Pacific Group (力霸亞太企業集團) claimed insolvency, which shattered depositor confidence.

Financial insecurity extended to another group member when the commission decided on Saturday that Great Chinese Bills Finance Corp (力華票券), which had reported a funding gap of NT$1.7 billion (US$52.13 million), would be taken over by two creditor banks.

The intensive activity sparked public concern about a possible domino effect impacting another four blacklisted lenders, including Bowa Bank (寶華銀行) and Chinfon Bank (慶豐銀行).

There were concerns that the cash-strapped government restructuring fund and Central Deposit Insurance Corp (中央存保) could have difficulty financing the banks in the face of a liquidity crisis.

To build public confidence, the government has held four press conferences within the past two days to allay concerns, saying it has NT$100 billion in funds available to deal with any further bank runs.

Joint call

In an unprecedented move, the government bought front-page advertisements endorsed jointly by FSC Chairman Shih Jun-ji (施俊吉), Minister of Finance Ho Chih-chin (何志欽), and central bank head Perng Fai-nan (彭淮南), urging depositors not to panic and reassuring them that their money was fully secured by the government.

"We take the incident as a one-off event that will not lead to a giant chain reaction in the financial sector or impact the stock market as a whole," it said.

BNP Paribas retained its neutral view on financial stocks and predicted a better performance for financial and retail stocks when compared with electronics, which is experiencing a seasonal downward trend.

Nevertheless, another market watcher appeared less optimistic about the possible fallout.

"The incident revealed the problem of risk control in the banking sector," with Mega International Commercial Bank (兆豐國際商銀) -- Rebar's largest creditor bank -- not even booking enough reserves to cover potential bad loans to the already distressed company, said Shirley Yang (楊慶祺), a fund manager at Invesco Taiwan Ltd (景順投信).

Tighter money?

In addition, the takeover of the bill financing company could trigger a tightening of money supply and create cash flow problems for some small and medium enterprises in the future, Yang said.

"This also indicates that the net interest rate margin narrowing as a result of price wars in an overly competitive market makes banks vulnerable to any unexpected shocks," she added.