Tue, Feb 06, 2007 - Page 12 News List

Regulators push for market discipline

LOOKING ON Moody's is waiting to see how the game will play out before taking any rating action as the banking authorities push for a greater measure of control

By Amber Chung  /  STAFF REPORTER

The nation's regulatory authorities increased their emphasis on market discipline for the banking system and seemed to be moving away from their traditional supportive stance following a run on small banks last month, Moody's Investors Service said yesterday.

Despite the new signals sent by the financial regulators, Moody's hadn't taken any immediate rating action and was carefully monitoring the regulator's efforts to instil greater market discipline, the service said.

"Regulators have taken their first meaningful steps away from their previous philosophy of `support for all' and are now stepping towards greater market discipline," said Cherry Huang (黃嬿如), Moody's senior analyst who authored a new report titled Taiwan Bank Regulator Increases Emphasis on Market Discipline released yesterday.

However, political forces, weakness in the banking system and a shortage of state resources could slow the transition to full market discipline, Huang warned.

Moody's made the comments after members of the Rebar Asia Pacific Group (力霸亞太企業集團) announced on Jan. 4 they had filed for corporate restructuring, which triggered a run on affiliated The Chinese Bank (中華銀行) that led to a government takeover the following day.

On Jan. 18, the legislature approved an amendment to the Deposit Insurance Act (存款保險條例), indicating the government's preference for relying more on a deposit insurance mechanism -- which would be partly funded by stronger financial institutions rather than taxpayers -- to support troubled banks.

The ratings services provider was nevertheless worried about a possible political backlash resulting from the change in regulatory philosophy.

Questions about adequate funding could also slow the move toward full market discipline.

"An abrupt move to market discipline can only be tolerated by systems in which all banks are intrinsically strong," Huang said.

"If there are too many vulnerable players in the banking system, the first sign of serious difficulties at any bank could spark a system-wide panic, forcing the regulator back to a `support for all' approach," Huang added.

Moody's believes that systemic stability should continue to be the regulator's priority and that the strong support traditionally offered to banks would still be available in case of a broader loss of market confidence, the analyst said.

In the mid-term, downward ratings pressure could occur if losses to uninsured depositors and creditors became more likely as a result of the new regulatory emphasis, Moody's warned.

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