Looser bank rules closer to adoption

DEREGULATION: The rules, modeled after recent US banking law changes, would permit banks to invest in firms such as securities and insurance companies

By Stanley Chou  /  STAFF REPORTER

Fri, Jan 07, 2000 - Page 17

The Executive Yuan yesterday passed an amendment to the Banking Law (銀|瑼k) which would loosen investment restrictions on commercial banks operating in the securities, insurance and other financial sectors.

The change is expected to increase the competitiveness of domestic financial institutions, but financial analysts questioned its lack of a regulatory mechanism to guard consumer privacy, as well as other loopholes.

They also questioned the timing of an amendment -- less than three months before the presidential election -- that is expected to greatly benefit the commercial banking industry.

The amendment to Article 74 of the Banking Law will be submitted to the Legislative Yuan immediately. Then it will be appended to the draft Banking Law, which has already passed its first reading and committee review. The passage of the draft bill is expected to be completed during this session of Legislative Yuan, which ends next Friday.

Chen Shu (3紋), director of Division Four of the Executive Yuan and a former chairman of the Securities and Futures Commission (證期會), said the amendment was aimed at loosening the regulations under which commercial banks operate.

"Presently, the strict restrictions the Banking Law imposes on commercial banks that invest in other financial services companies are out of date," Chen said. "The US financial modernization act promulgated on Nov. 12 last year deregulated the restrictions that prevented bank holding companies from affiliating with securities and insurance companies. The act now permits banks to affiliate with securities or insurance companies through their affiliates or subsidiaries."

As a result, Taiwan's government has also decided to change its regulations and remove the restrictions on the investment behavior of commercial banks, Chen said.

According to the amendment, commercial banks will be able to invest in financial services that include finance bills, futures, securities, credit cards, insurance, financial leasing and trust services.

The amendment also sets clear restrictions on the number of financial service companies in which commercial banks may invest. Unless specially permitted by the regulatory authority, a commercial bank may only invest in one company in each financial service sector.

But while the deregulation is being welcomed, analysts also have their reservations.

"The initiative of this amendment is good," said Norman Yin (殷?D?), a banking professor at National Chengchi University. "But without a complete regulatory mechanism and consumer privacy protection, it could be disastrous for the integrity of the financial industry."

The US financial modernization act has strict regulations on the protection of consumer privacy, financial analysts said. It allows affiliated finance companies to share customers' personal data with each other. But consumers have the right -- by written request and with some exceptions -- to stop the companies from sharing their data with firms outside the corporate group, such as telemarketers.

It also requires finance companies to disclose their procedures for protecting consumers' personal data.

"Without this kind of protective mechanism, the amendment could generate conflicts of interest between commercial banks and their customers," Yin said. "Worst of all, several large financial conglomerates in Taiwan could utilize the loopholes in the regulations to take advantage of their customers."

As a result, Yin disagrees with the passage of the amendment in its current form; rather, it should come with a "full package of regulations to prevent the loopholes."

"The timing of this amendment is also questionable," said another banking analyst, who declined to be named.

The appendage of the amendment to the draft Banking Law at such a late stage in its passage through the Legislature is a rare procedure in the legislative process, the analyst said.

"This amendment is highly beneficial to commercial banks, which constitute a powerful industry with a large number of employees," he said.

As a result, the amendment could be yet another ticket for the ruling party in the presidential election to be held in March, the analyst said. "It could certainly win the strong support of the banking industry in this election," he said.

At the same time, he said, "If the ruling party were to lose the election, all the problems generated by this amendment would be somebody else's problem."