Wed, Jul 20, 2011 - Page 11 News List

FSC considers tightening rules on banks’ credit risks

EXCESS LIQUIDITY:The commission wants local banks to pay more attention to default risks, given the amount of bad loan provisions the banks are holding

By Crystal Hsu  /  Staff Reporter

The Financial Supervisory Commission (FSC) said yesterday it is mulling tightening credit risk control rules because of concerns over the nation’s low interest margin amid cut-throat competition and excess liquidity in the banking sector.

The move came after the commission held a seminar yesterday afternoon on the banking industry’s risk pricing and assessment.

“We are concerned that some banks are expanding loans without paying due attention to default risks,” Financial Supervisory Commission Vice Chairwoman Lee Jih-chu (李紀珠) said on the sidelines of the seminar.

Bad loan provisions totaled about NT$200 billion (US$6.94 billion) as of the end of May, a sum that may not be sufficient to buffer major defaults, despite the nation’s record low bad loan rate and unprecedented high coverage.

To address that concern, the commission is to review lending rules and step up inspections on banks’ corporate financing operations, Lee said.

It has no timetable on the potential legal revision, but will allow banks a period of time for voluntary improvement, Banking Bureau Director-General, Kuei Hsien-nung (桂先農) said.

“All banks should match default risks with equal amounts of provisions when carrying out lending operations,” Kuei said. “It is odd that some banks should allow the borrowers to set the interest rates in the competition for customers.”

The commission could impose fines or withhold approval for bank’s applications to set up overseas branches if they fail to come up with proper pricing for credit costs, Kuei said.

Interest rates on new unsecured loans for big corporations averaged 2.64 percent last year, lower than credit costs of 3.04 percent on secured loans for small and medium firms, said Jeffrey Lin (林思惟), manager at Joint Credit Information Center (聯徵中心).

Large corporations have greater bargaining power in pricing and excessive liquidity has contributed to the phenomenon, Lin said.

Interest rates on ProMOS Technologies Inc’s (茂德科技) NT$57 billion syndicated loan stand at 3.5 percent despite the loss-making memory chipmaker’s shaky financial standing.

To help absorb idle funds, the central bank had issued NT$6.8 trillion worth of certificates of deposit and negotiable certificates of deposit as of the middle of this month.

Lin called for the establishment of a loss-driven default database to help monitor risk controls by banks.

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