Tue, Nov 25, 2003 - Page 8 News List

Better financial oversight needed

By David Jou and Lawrence Lee 周國端, 李禮仲

Taiwan is experiencing scandals in its finance industry and problems in its state-owned financial institutions. These issues threaten to provoke a financial crisis, and also threaten Taiwan's economic development.

A recent series of scandals has encouraged Taiwan to consider reforms in its financial sector. The scandals include insider trading at First Financial Holding Company, the taking of banking assets by the chairman at Chung Shing Commercial Bank, the high ratio of non-performing loans (NPL) at the Bank of Overseas Chinese, and asset-stripping by president Won Da-min (翁大銘) at Kuo Hwa Life Insurance. These scandals have damaged the public's confidence in Taiwan's financial system.

In addition, inefficiency in money-losing state-owned banks, and non-performing loans, have been a problem. NPLs at state-owned banks and private banking institutions were between 5.94 and 6.39 percent in June. Moreover, the high ratio of NPLs has shown the weakness of governance of banking institutions.

These financial scandals have shown a need to strengthen Taiwan's financial supervisory framework. In theory, a financial sector requires a good legal structure, an unrestrictive financial regulatory regime, efficient financial institutions, a capital market, and a low level of government ownership in the financial sector.

The purpose of creating a comprehensive financial supervisory framework is part of a drive to reduce financial crises, which affect both international financial markets and economic development.

A well-developed financial sector can help define a path of economic development characterized by sustainable, long-term economic growth. A financial institution is not only an intermediary but also a way to allocate credit to the public, which needs capital for private needs and corporate transactions.

In addition, the relationship between economic development and financial institutions is one of interdependence.

Because of the need to maintain a stable financial system, financial institutions are among the most closely scrutinized businesses in the world. However, the transformation of financial services has increased financial instability and presented challenges in maintaining financial stability.

Structures for financial regulation and supervision differ considerably from country to country. Nevertheless, the goal of financial supervision is to enhance the stability, reliability, transparency and efficiency of the financial sector in order to reduce systemic risks.

In addition, financial supervision is able to prevent criminal abuses in the financial sector, with a view to protecting the interests of clients and investors by safeguarding their financial resources and supporting the stability of a national monetary system.

In order to reach the goal of good financial supervision, a supervisory system should be designed to carry out two functions. First, the supervision system should be designed to detect illegality and unsound practices and to provide early warning of potential failure. Second, it should provide an array of enforcement techniques to financial regulators to rectify problems that have been identified.

Financial stability requires several types of vigilance. Individual financial institutions have to be run prudently, markets have to be open and transparent, and the financial supervision framework has to be robust. Specifically, financial regulations ought to provide supervision that promotes a safe and healthy financial market.

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