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Merging banks must be done cautiously

Recent decisive actions taken by the government bodies responsible for financial policymaking -- including stationing representatives in 36 grassroots financial institutions in order to jump-start reform mechanisms -- are worthy of endorsement. Nevertheless, a number of structural problems remain.

First of all, it is doubtful that the NT$140 billion available for implementing the "three financial reconstruction statutes" is sufficient to counteract all the bad debt accumulated by grass-roots institutions (at least NT$210 billion). In the future, if the cleanup expands to include not only grassroots institutions but also others such as ordinary commercial banks, then the size of the fund will obviously be insufficient.

A wave of drastic corrective measures is still in the ascendant. To be sure, earlier revisions to the deposit insurance laws guarantee the rights and interests of depositors. But if we avoid all negative repercussions, then the effectiveness of reforms will be greatly reduced.

For example, the Ministry of Finance's move to require the Taiwan Cooperative Bank (合庫) to absorb the Changhua Fourth Credit Cooperative (彰化四信) -- a decision which was overruled by the Council of Grand Justices -- illustrates why the next step in cleaning up financial institutions should be watched carefully.

The legal basis for mergers has already been provided for by the Financial Institutions Merger Law (金融機構合併法). On top of this are the oft-repeated policy pledges made by senior financial figures about "the first year of financial mergers." These have raised concerns that the bad debt and bad assets of many grassroots institutions will be shifted to healthy and well-managed banks.

Since privately managed banks must be responsible to their shareholders and face pressure from international credit-rating agencies and other institutions, they should be able to refuse a disadvantageous merger.

But what about the state-owned banks? The finance ministry announced at the beginning of this year, "If bank directors are stubbornly uncooperative, there will be no option but to replace them. The Ministry of Finance will not hesitate to do this."

When faced with losing their positions, how can the directors of state-owned banks refuse instructions from above to "fulfill the social obligations of financial institutions?"

Mergers shouldn't be used as a policy tool and they certainly are not a good method for solving the problems of overdue loans and bad debt. These problems must be solved by changing the underlying system. Otherwise, we are merely passing problems off on others and delaying their onset.

The first order of business should be to strengthen the overall capital resources of financial institutions, requiring them to maintain a capital ratio equal to the international standard of at least 8 percent. Otherwise, the government should require them to increase their capital, restrict their services or change their senior management.

Second, after the next session begins at the Legislative Yuan, the legal framework for a financial supervisory system should also be quickly set up in order to nip problems in the bud.

Introducing asset management companies and resolution trust corporations from abroad is only one possible mechanism. We shouldn't expect that they will be able to completely solve the problem. In particular, demanding that healthy banks merge with unhealthy ones will only bring down the overall quality of the post-merger banks. It is essential to proceed with caution.

Hong Chi-chang is a DPP legislator.

Translated by Ethan Harkness
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