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Interview: CDIC officials cast light on plans to fortify bank sector

Sunday, Apr 29, 2007, Page 11

"The deposit insurance system underpins the stability of the banking sector, and no one should enjoy these benefits for free."

Johnson Chen, president of the Central Deposit Insurance Corp

Taipei Times: The Central Deposit Insurance Corp (CDIC, 中央存保) earlier this month announced the auction rules for Taitung Business Bank (台東企銀) and Enterprise Bank of Hualien (花蓮企銀), which were earlier taken over by the government. What progress has been made so far?

Johnson Chen (陳戰勝): We have received lots of inquiries after the announcement. The two banks each attracted four to five interested buyers, including local financial holding firms and commercial lenders, as well as overseas private equity funds and international banks. Renowned foreign banks are particularly active, as Citibank and Standard Chartered Bank's buyouts of two local lenders have made expansion more urgent than ever.

We plan to sell Enterprise Bank of Hualien as a whole unit with the bid to be opened on May 31, while planning to divide Taitung Business Bank into a "good bank" (branch channels) and "bad bank" (non-performing loans) and auctioning them off separately on June 7.

TT: Is the government likely to fully recover the takeover cost through the sales?

Chen: We hope competition in the open auctions will stimulate bidding prices, which can help reduce our cost. The sales of Kaohsiung Business Bank (高雄企銀) and Chung Shing Bank (中興銀行) [in 2004] showed us that competition plus the attractiveness of a distribution network made much more difference than we had thought.

TT: Taiwan Ratings Corp (中華信評) last week downgraded its outlook ratings to negative on Bowa Bank (寶華銀行), Chinfon Bank (慶豐銀行) and Asia Trust and Investment Corp (亞洲信託), issuing a warning of these banks' worsening financial conditions. Does this imply impeding takeovers?

Ray Dawn (董瑞斌): These banks have been on the government's watch list for several years. Both depositors and investors know that they are in trouble and need an injection of new capital. The downgrades are certainly a warning sign, not the first, but one of the sequential warning signs after the government's moves.

It is our duty to monitor these lenders' daily operations, and what we know is that they are now in talks with potential local and foreign investors about providing funds, as the government has urged. I think we will see the results in the next few months.

Chen: We have requested preview agendas for all of these banks' board meetings and are supervising their cash flow to prevent possible ethical hazards associated with the widening financial gaps related to management's personal gain. As we understand it, these lenders are in close talks with overseas investors that are planning to tap into China's financial market by using Taiwanese banks as a platform.

TT: The CDIC is planning to revamp the differential premium system into five grades from the current three grades in accordance with the operating risk of insured institutions. How will you do this?

Chen: The CDIC will be introducing the differential premium rate system in July to boost the reserve pool.

So far, we have two options: one with premium rates from 0.03 percent to 0.07 percent, and the other with rates from 0.04 percent to 0.08 percent.

As the premium calculation base will expand total deposit balance, instead of the amount insured as before [which means rising premium cost for foreign banks], we are also mulling to lower the rates to between 0.02 percent and 0.06 percent to prevent an excessive leap in banks' insurance cost.

Annual premium income is expected to double to NT$8 billion (US$241 million), if we go for the first option with rates starting at 0.03 percent, while the amount would grow by only 50 percent to NT$6 billion with rates starting at 0.02 percent.

The reserve would increase to NT$200 billion in 10 years from the present NT$15.1 billion. Yet the final decision depends on further discussions with the industry.

TT: Some foreign banks in Taiwan have voiced opposition to the change and claimed the new system was unfair to them, considering their small, yet rich customer bases are made up of corporate accounts containing huge deposits. They claim the change could lead to enormous increases in premium cost. What's your opinion?

Chen: We are fully aware of the situation. The dissidents are a minority and mainly foreign wholesale banks whose deposits are mostly foreign funds used to invest in the local stock market. But the deposit insurance system underpins the stability of the banking sector, and no one should enjoy these benefits for free. We will continue to communicate with them to reach agreement.
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