Editorial: Retake on financial reform needed

It is difficult to figure out what is driving the government's stance on financial policy. Last week Vice Premier Tsai Ing-wen (蔡英文) said the Cabinet wants to put the brakes on reform efforts. But, instead of speculating who or what caused the policy turnabout, it is important to listen to Tsai's message, because it represents the government's formal admission that some of the reform targets have been impractical and unattainable.

Although Tsai said the government's policy of encouraging financial consolidation would remain unchanged, her message was seen as a retreat by many. It was only last October when former vice premier Wu Rong-i (吳榮義), the Council for Economic Planning and Development Chairman Hu Sheng-cheng (胡勝正) and former minister of finance Lin Chuan (林全) stridently defended the necessity of the government's banking reforms in a televised debate with opposition lawmakers.

Take the government's previous merger plan to reduce the number of financial holding companies from 14 to seven by the end of this year. Tsai refused to answer any questions about whether the government will halt or even cancel that plan.

For anyone who has watched the plan in action, however, this will come as no surprise. Currently, 11 of the 14 financial holding companies are run by private businesses, with only Mega Financial Holding Co, First Financial Holding Co and Hwa Nan Financial Holding Co under the government's full control. Even if the government can force these three state-owned financial institutions to merge, it cannot use its authority to coerce the remaining private financial holding companies to consolidate.

While the direction of the government's financial reform plan is correct -- the nation's fragmented industry needs further consolidation to stay competitive -- forcing integration has generated concerns that the state-owned shares in the holding companies will be sold too cheaply and that the move will create an industry dominated by a few conglomerates. In this context, it was not surprising to hear Tsai say that the government is going to review its consolidation timetable and will work to implement the plan more prudently.

Tsai and other officials seem to agree that the progress of financial reform should respect market forces. They suggest that the government's policy is to boost domestic lenders' global competitiveness. But it's not clear exactly how the government would know where the global or the regional markets are for Taiwanese financial institutions.

Can the government's reform plans help local banks expand business abroad while at the same time retain a tightly regulated domestic market?

Government officials often legitimize their call for financial consolidation by pointing out that Taiwan has an over-crowded banking sector. But the real problem is that the local market is too small and the business environment remains highly restricted. The result is that domestic banks are not able to offer innovative services for niche markets. They provide almost identical products to the same groups of customers, and have almost no hope of fulfilling their ambition to compete in overseas markets.

Tsai said the government was willing to fine-tune its financial reform scheme. Hopefully the move will not only to conform to public demands, but represents a light at the end of the tunnel.