Mon, May 16, 2005 - Page 8 News List

Editorial: Financial reform needs action

It is a time to rethink but not to denounce.

The reference here is to what President Chen Shui-bian (陳水扁) called "a second stage financial reform" (二次金改) in which at least one local financial institution should be run by a foreign entity or have a majority foreign shareholder by the end of next year.

But the announcement by state-controlled Chang Hwa Commercial Bank (彰化銀行) on May 6 that it would indefinitely delay its planned global deposit receipt (GDR) issuance of 1.4 billion shares (because of differences between the bank and the interested bidders) has rippled through the nation's financial sector, with some people casting doubts on the government's determination in carrying through financial reform.

Critics said the failed GDR issuance not only raised concerns over the bank's difficulties in raising capital, but is also a lost opportunity for the government to engage experienced foreign strategic partners, if there are any, in revamping domestic banks with government ownership.

The idea of seeking foreign partnership is just one of the government's plans to help improve local banks' competitiveness.

The government also wants to increase the market share of three domestic banks to above 10 percent in terms of total assets. Other specific goals that Chen highlighted on Oct. 20 were halving the number of state-run financial institutions to six by the end of this year, and encouraging mergers and acquisitions to reduce the number of financial holding companies from 14 to seven by the end of next year.

With big tax incentives and accounting flexibility, local banks have made notable progress in resolving high non-performing loan (NPL) levels and strengthening their low loan-loss provision coverage. According to the Financial Supervisory Commission's latest statistics, the NPL ratio, including loans under surveillance, fell to 3.66 percent in March while the coverage ratio stood at 40.07 percent.

But these welcome developments are just the beginning. The government now needs to go further to see additional activity toward banking consolidation.

Therefore, the failure in Chang Hwa Bank's GDP issuance may not necessarily be viewed as a government setback on its mandate for banking consolidation, but it does pose an opportunity for the government to review its implementation strategy and even its reform mindset, before it is too late.

First of all, is the private buy-out through GDR issuance the only way that the government has to get rid of its shares in Chang Hwa Bank or in other state-controlled banks?

Some have suggested the successful experience at auction the Taipei City Government had in selling its ownership in TaipeiBank (台北銀行) in 2002 to Fubon Commercial Bank (富邦銀行). Others are mulling mergers among state-run banks to create a catalyst for industry consolidation.

Secondly, is the government's reform plan focusing mainly on quantity instead of quality, and is such a plan leaving no room for smaller players in sharing the nation's financial resources?

In a competitive environment, financial groups with good integration of group resources will naturally earn more while adding pressure to mid- and small-size financial institutions to become part of strong groups in order to survive in the long term. But industry consolidation should not necessarily pose a problem for smaller players -- if the latter continue sharpening their competitive edges and act as "financial specialty stores" on their own.

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