The past year was certainly a bad one for the nation's banking sector, with record losses incurred from bad consumer loans coupled with corporate scandals that ravaged several financial institutions, including two under the powerful Koo family.
Unfortunately, this year started no better. The corporate strife under the Rebar Asia Pacific Group appears to have spread and hurt creditor banks and the banking sector as a whole.
It all started with the Taipei District Court's approval of insolvency protection for China Rebar Co and Chia Hsin Food & Synthetic Fiber Co on Thursday, after the two companies reported a total liability of around NT$40 billion (US$1.23 billion) as of the end of September and sought the court's permission to reorganize.
In one day the financial troubles of Rebar Group quickly expanded to other members of the conglomerate as the public lost faith in the group's poor corporate governance.
On Friday night, The Chinese Bank was forced to ask the Financial Supervisory Commission for an immediate government takeover, after a bank run depleted more than NT$15 billion in cash from the Rebar subsidiary in one day.
The request was soon followed by the discovery of a funding gap of NT$1.7 billion in Great Chinese Bills Finance Corp, another Rebar subsidiary. On Saturday night, the commission ordered the takeover of Great Chinese Bills Finance Corp by two banks, to solve the firm's serious capital problem.
These stopgap activities came on top of other emergency moves by the regulator. On Friday -- five hours before its takeover announcement of The Chinese Bank -- the commission ordered the Central Deposit Insurance Corp to take over management of the financially-troubled Enterprise Bank of Hualien.
While the government's move to bring the smaller Hualien bank under its control didn't quite enjoy the same level of news attention as The Chinese Bank case, it will likely take a similar toll in taxpayer funds. The Central Deposit Insurance Corporation will have to spend some NT$35 billion in taxpayer money to bail out these two institutions.
What is particularly disturbing is that the collapse of both China Rebar and Chia Hsin are expected to cost state-controlled Mega Financial Holding Co, their largest creditor, an estimated loss of NT$5.4 billion. This is in addition to the billions in losses that will have to be borne by other state-owned creditor banks, such as Taiwan Cooperative Bank, Chang Hwa Commercial Bank, Hua Nan Financial Holdings Co and First Financial Holding Co. Again, the buck stops with the taxpayer.
Even so, there is widespread support for the financial regulator's bailout activities. The later the commission takes action, the bigger the cost to taxpayers. There are, however, concerns regarding the commission's misjudgment about The Chinese Bank's financial problem.
These incidents can be expected to put a damper on financial market sentiment and hurt investors, but at least the interests of depositors will be fully protected. However, just how much money is still available in the government's financial restructuring fund is worrisome, given that four debt-ridden lenders are still on the regulator's bailout shortlist.
Moreover, investors demand a much higher standard of corporate governance among publicly listed companies than the Rebar Group appears to have demonstrated. The case deserves a full-scale investigation. We've only just seen the beginning.
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