A big bang, or half-hearted reform in the Japanese mould? Certainly few would deny that the legislative measures passed by Taiwan's legislature late last month represent at least a step in the right direction for the nation's ailing financial sector. Most significantly, the package included legislation clearing the way for the establishment of financial holding companies. Legislators in June also approved the establishment of a NT$140 billion (US$4 billion) government-run bank clean-up fund.
That considerable attention was paid to passage of these measures is not surprising, and not just because a publicity-grabbing special session of the legislature was needed before the bills were approved. The legislation passed in June had been eagerly awaited by Taiwan's firms. Having greedily watched deregulation elsewhere in recent years -- particularly in the US -- local groups have for some time been pushing to be allowed the kind of cross-selling and synergy-building opportunities that have now been provided by the financial holding company bill. The establishment of the resolution trust fund has again raised hopes that the health of the nation's financial system will soon start to improve. Even according to official statistics, the non-performing loan ratio in the domestic banking sector reached 6 percent at the end of March this year. Other estimates put the figure much higher.
The Financial Holding Company Law is generally expected to lead to a consolidation of Taiwan's financial sector. Institutions such as Chinatrust (中信銀), China Development Industrial Bank (中華開發工業銀行) and Fubon Group (富邦集團) have already announced the intention to establish financial holding companies. In fact, some firms -- such as Fubon -- already look like diversified financial businesses. But the new law will allow these groups to deepen cooperation between existing subsidiaries, and to fill holes in their portfolio by acquiring others. In such an environment, firms choosing to stay independent face being marginalized. It therefore comes as little surprise that smaller financial firms in Taiwan are already actively seeking partners.
But as important as such a development is for the efficiency and international competitiveness of the financial sector, officials want the process of consolidation to be not just wide but also deep. In particular, the government hopes that the passage of the Financial Holding Company Law will be the spark that triggers the long-awaited consolidation of the over-crowded banking sector.
Such hopes have been raised before, most notably after passage of legislation last November removing apparent tax disincentives to bank mergers. The government has attempted since then to corral state-owned and state-linked banks into mergers, with Premier Chang Chun-hsiung (張俊雄) announcing two such tie-ups, and officials reviving a previously-aborted third merger plan. But despite such official attention, little progress has been achieved even in the public sector -- and not one purely private affair has yet been announced.
It is possible that things will be different this time. For one thing, the rule that has previously restricted one institution from owning any more than 25 percent of one bank does not apply to financial holding companies -- even if they are foreign. Several local banks are thought to have been talking about merging and foreign institutions are rumored to be actively seeking local partners. It is possible that either a tie-up between two quality local institutions, or the aggressive expansion into the market of a well-known international player will be enough to persuade less-prominent banks that staying small but independent is no longer feasible.
Still, the reforms announced earlier this month are far from a panacea for the financial sector.
Some observers question whether the financial holding company model -- an import from the US -- is even the most suitable framework for a small island economy such as Taiwan. Chen Chung-hsing (陳松興), president of the local Taiwan Ratings, suggests that the government may have been better off moving towards a universal banking model. Officials claim that the details of the new framework will not be at odds with such a European-style sys-tem -- but the all-important small print has yet to be released.
Anyway, Taiwan's strong pro-independence attitude -- toward the workplace rather than the country's political status -- could yet mess up the government's consolidation plans. In addition to leading financial groups, several other local institutions have already signaled they will set up financial holding companies. With everybody wanting to be the top dog, Norman Yin (殷乃平), a banking professor at National Chengchi University, expects two rounds of consolidation, with a more sustainable number of around just five local conglomerates -- together with a handful of foreign players -- taking perhaps as long as five years to emerge.
Progress is certainly unlikely in the short-term: the very implementation of the holding company law has been delayed until Nov. 1, by which time legislators are supposed to have agreed on a new regulatory structure.
And any improvement in the health of the financial sector will take even longer to be felt. The bank clean-up fund is to focus its attention on credit co-operatives and the credit departments of farmers' and fishermen's associations. Action to clean up these grassroots financial institutions is not before time -- according to the government the average bad loan ratio in this sector reached 17.2 percent at the end of March, with at least 30 having negative net worth. But many doubt the accuracy of the statistics, and so fear that the bank clean-up fund in its current form is not large enough even to sort out the problems in the grassroots sector -- let alone having the capacity to support any banks that may help.
Under-assessment of the size of the problem is clearly dangerous -- officials need to look no further afield than Japan for proof of this. And the suspicion that the authorities here are indeed in denial about the true extent of the problems fuels the frequent comparisons that are drawn between Taiwan and Japan. So does the government's "hands-on" approach to the banking sector, in particular the recurring calls made by officials for banks to maintain credit lines to "viable" institutions.
Given such activity, many believe the health of the financial sector depends as much on a change in the government's attitude as on the recently-announced institutional reforms.
Paul Cavey was previously a Greater China economist at the Economist Intelligence Unit. He is currently studying Chinese in Taiwan.
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