We can let faultering banks go bankrupt

Due the run on the Chung Shing Bank (中興銀行), the Ministry of Finance on April 28, 2000 appointed the Central Deposit Insurance Corporation (CDIC, 中央存款保險公司) as caretaker of the bank on grounds of inappropriate personnel appointments and involvement in the Taiwan Pineapple Corp (台鳳) loan scandal. The Commercial Times (工商時報) pointed out last week that [the bank's] bad loans today stand at NT$80 billion -- money that in the end must be put up by the Financial Restructuring Fund (金融重建基金).

What's the bank is not grateful, and last Tuesday, former bank chairman Wang Yu-yun (王玉雲) said that the bank's net realizable value now is negative, and that he suspects improprieties on behalf of the CDIC, which has no experience in managing banks.

Facing poorly managed banks, "let those that should go bankrupt do so" (該倒的就讓它倒) is an argument that is often criticized as the opinion of unrealistic scholars. However, the takeover of the bank shows that if the government doesn't act correctly, it is very possible that in the end everything will turn into a mess.

The main purpose of that article is to crush the fear of letting bad banks fold even though there is unique leeway in Taiwan's unique industrial organization for adopting such a policy.

In the 1980s, the US experienced the closure of a large number of financial institutions, but the problem was solved very quickly. In contrast, the Japanese problem with inferior management of financial institutions has been dragging on for over a decade, and there is still no light at the end of the tunnel.

How should we interpret these two diametrically opposed experiences? The difference does not necessarily mean that the Americans are more capable of decisive action than the Japanese (let's not forget the Japanese harakiri and kamikaze attack squads). It's probably more to do with the fragmented structure of the US financial industry.

US policies attach importance to professionalism, so the financial industry is kept separate from industrial circles. As a result, US banks are much smaller on average than those of Japan.

Recently, politicians in Taiwan frequently take "reforms may cause public discontent" as an excuse for not implementing reforms. In fact, they have underestimated the people's wisdom and are scaring themselves. For example, the government has stopped using government funds to boost the stock market, so as not to take on the responsibility. But the public has not blamed it for the stock market's decline.

Another reason for implementing the "let those that should go bankrupt do so" policy is that Taiwan just accomplished its first power transition [in 2000]. Since the DPP is a first-time ruling party, it has no obligation to the vested interests of the old policies.

Moreover, if the ruling party can implement reforms to eliminate those old, bad habits, it can not only increase government efficiency and public support but also sweep away the opposition's "vote captains." It's a win-win situation for both the party and the public. This is also the people's expectation for the power transition.

In a word, perhaps the "let those that should go bankrupt do so" policy is relatively infeasible in Japan or some other countries. But there are several major advantages for Taiwan to implement such a reform plan today.

The ruling party is not just a coward but an unwise coward if it still lacks the determination to push reforms forward.

Chang Ming-chung is a professor of economics, National Central University. TRANSLATED BY PERRY SVENSSON AND EDDY CHANG