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Editorial: FSC might be trying too hard

In the 26 months since its establishment, the Financial Supervisory Commission (FSC) has been periodically consumed by the question of whether it will allow market forces to play a greater role in shaping the financial sector. Last week, it seemed to compromise on this issue by making another policy turnabout by proposing to tighten the regulations on financial holding companies' investments.

In response to public concern over the development of the domestic financial market in relation to the consensus reached in July at the Conference on Sustaining Taiwan's Economic Development, the commission last week announced draft amendments to regulations on financial holding companies' investments, especially in the case of hostile takeover bids.

The draft amendments require financial holding companies launching hostile takeovers to submit plans to the commission explaining how they plan to acquire the required 25 percent controlling stake in the targeted entities. These details must include their funding proposals, the means of share purchase, consolidated financial statements, a proposed timeframe for the merger and contingency measures if they fail to complete the takeover.

Basically, the commission is asking financial holding companies to prove their ability to launch a takeover bid and guarantee they can complete a takeover within a reasonable period. If the takeover bids falter, the companies are urged to negotiate instead of making direct appeals to their shareholders. The commission's proposals will decrease the likelihood of hostile takeover bids being launched.

To many in Taiwan, hostile takeovers are often viewed as brash US-style capitalism. Mergers among financial firms remain a sensitive issue, and one in which politicians have frequently been prompted to intervene. Recent attempts include China Development Financial Holding Corp's bid for Taiwan International Securities Corp and Chinatrust Financial Holding Co's interest in Mega Financial Holding Co.

The commission has been hesitant to ease restrictions on hostile takeovers as it wants to protect the domestic market from imprudent financial practices. Raising regulatory barriers to hostile takeover bids may postpone inevitable changes that could help consolidate the fragmented financial sector.

As Fitch Ratings has put it, banks in Taiwan are operating in a tough environment where severe market fragmentation and flat yield curves have continued to depress their interest margins; where they are struggling to approach corporate lending opportunities amid the unsecured consumer lending debacle; and where sluggish economic growth persists at home while the government's constraints on cross-strait expansion remain.

In this environment, consolidations are major opportunities for the financial sector. The government's willingness to allow market forces to shape the banking system has become particularly crucial in helping speed up the sluggish pace of this much-needed consolidation.

The commission's latest move, however, shows how the line is blurring between policy aimed at establishing precautions against a possible calamity and action that interferes with business operations.

It reflects a larger debate about how much government intervention is good for the industry and the economy as a whole. Maybe it should be asked whether the commission has offered enough incentives to facilitate the pace of industrial consolidation through mergers, or has imposed too many constraints. The commission should consider the costs and benefits of its proposed changes prior to implementing them.
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