On Nov. 1, the government began to accept licensing applications for financial holding companies. On the morning of that day, nine companies completed their registration procedures in a rare flurry of activity. This response shows that such companies are now in vogue. Over the next few years, the domestic financial landscape will change dramatically.
Under the framework of financial holding companies, subsidiary companies can manage a number of financial services -- including banking, bills finance, credit, insurance, securities, futures, venture capital and foreign financial institutions in which investment is approved by the authorities. This is unlike the situation in the past, when each industry was separately managed, separately listed its accounts and was separately monitored.
Systems of financial holding companies have been in place abroad, eg in the US, for years. Consumers, whether they are suppliers of capital or those seeking funds, can get more services from financial holding company groups. Those with savings can take advantage of the complementary services to find an ideal distribution of their savings among the various financial tools such as stocks, bonds, savings vehicles and so on.
Companies can raise funds by different means at different stages of production. A business might, for example, need venture capital in the early stage to get started; it needs bank loans in the growth stage; and in the expansion stage, it needs channels for going public.
Taiwan is on the verge of entering the WTO, and foreign financial institutions are looking on greedily while preparing for a fight. They are ready to vie for power in the domestic financial markets. If Taiwan's financial institutions fail to transform in a timely manner and prepare for battle by meeting international financial standards, then they will find it hard to match international institutions.
Taiwan's financial institutions are therefore all working frantically -- perhaps forming strategic alliances or merging -- for fear of being left by the wayside. This sense of crisis may indeed accelerate the pace at which financial institutions transform and confront the challenge. It is worth noting, however, that the establishment of financial holding companies does not mean competitiveness has been improved. Still less does it mean that Tai-wan's financial institutions have already improved in nature.
The measure of competitiveness is in responding to market demand. Consider the US, where financial institutions come in many forms, of which financial holding companies are just one. Financial institutions are not all from the same mold -- they vary with each state's develop-ment, industrial needs and regional particularities. Financial holding companies are not a prerequisite condition determining whether these institutions are competitive. Their scale may be large or small, and the services they offer may be complex or simple. Each has its own particular characteristics.
Different financial services are designed for different terms and have different risk levels. Once these services are combined, either directly or indirectly, it is necessary to have an appropriate firewall. The firewall mustn't be too low, or it will lose its function as a safeguard; but it also mustn't be too high, or the company will lose the flexibility to use capital efficiently.
For example, Article 47 of the Financial Holding Company Law stipulates that at the end of each fiscal year, financial holding companies should compile their financial statements, annual reports and business reports at the same time. The purpose of this is to avoid having each separate financial service claim the same funds as its own capital. Article 43 stipulates, "in services and transactions between them, joint promotional activities, information sharing, or common use of equipment or space for operations between financial holding companies and their subsidiaries or between different subsidiaries of the same company, client's rights must not be infringed upon."
Although the legal code contains plenty of regulations of this type, whether or not they can actually be implemented without giving rise to shady practices remains to be seen.
Shady financial practices are common in Taiwan. In light of these problems, once large-scale financial holding company groups are established, how will shady practices be dealt with when they arise? Surely we don't want to rely on drawing from one financial reconstruction fund after another to patch up all the leaks.
Thus, when the government examines the applicants' qualifications, they must carefully scrutinize the nature and performance of each related organization as well as the credit and reputation of the CEO. Licenses cannot be issued in a perfunctory manner. The experience of issuing licenses to private banks since 1990 should serve as a good example. There were cases of both success and failure among those newly established private banks that sprang up. One should always be cautious at the outset. Taiwan's financial industry is about to take a step that will draw a new blueprint for the coming era. Tread carefully.
Yang Ya-hwei is a research fellow at the Chung Hua Institute for Economic Research.
Translated by Ethan Harkness
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