Sun, Jan 14, 2007 page8

• Rebar case exposes shortcomings

  • By Norman Yin 殷乃平
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  Yet another family-run Taiwanese enterprise has collapsed amid scandal. China Rebar Co (中國力霸) and Chia Hsin Food & Synthetic Fiber Co (嘉新食品 化纖) announced their intention to restructure due to insolvency. The Chinese Bank (中華銀行) and Great Chinese Bills Finance Corp (力華票券金融公司) have been taken over by the government and local creditors. And Eastern Multimedia Group (東森媒體集團) has cut ties with parent Rebar Asia Pacific Group (力霸亞太企業集團) to protect itself.

  Depositors at The Chinese Bank have scrambled to withdraw their savings, creditors are trying to salvage their loans and investors are breathing down the bank's neck. Government officials hurriedly responded by guaranteeing depositors' ac-counts. But Taiwan has nonetheless entered another financial crisis.

  This time the family-run financial group made careful calculations to separate out its profitable businesses, gut its financial companies and stick the government with the problems ensuing.

  Meanwhile, the government is following the old formula of accepting everything without question, ultimately leaving it to taxpayers to foot the bill.

  This ugly case has highlighted all kinds of problems in the nation's economic and financial environment.

  First are the under-the-table deals between family-run enterprises and their subsidiary banks, through which families move around profit, losses and capital within the organization and suck subsidiary companies dry of money. Officials have turned a blind eye because high-level business and government representatives often collude, which further weakens government oversight abilities.

  The Rebar scandal is related to the role of the Ministry of Economic Affairs in managing businesses and financial groups. It also involves the functions of several bureaus under the Financial Supervisory Commission (FSC), including the Securities and Futures Bureau's (證期局) monitoring of financial manipulation by listed companies and their affiliates, the Bank-ing Bureau's (銀行局) oversight of banks and the Financial Investigation Bureau's duties (金檢局). It also has implications for how well depositors and investors are protected. An in-depth analysis reveals that almost every one of these links in the chain is flawed.

  In the present system for handling financial problems, deposit insurance companies can collect their fees without having to pay compensation. The government clearly lacks sufficient capital to fund major reimbursement efforts for banks with liquidity problems, yet at all levels officials say the government will take responsibility for all deposits. However, they haven't said where additional money will come from. Nor have they indicated how they will manage if the problem spreads and several bank runs occur at the same time.

  There are shortcomings in the nation's financial regulation system. In addition to the fact that the FSC has never func-tioned well since its founding, its Financial Investigation Bureau has been hampered by a lack of manpower and professional ability among its employees. Political pressure also makes it afraid to handle legal infractions by major financial groups, which has also hamstrung its operation. It also stood by and concealed financial organizations' serious problems, fearing it would get blamed. It has delayed taking action until the problem finally became irreversible.

  The IMF has pointed out that many countries are afraid to expose their scandals to the world and are unwilling to take immediate action on financial problems. More and more resources are embezzled as the delays drag on, increasing the cost of resolving them in the future.

  Article 64 of Taiwan's Banking Act (銀行法) stipulates that when a bank has depleted more than one-third of its capital, it must immediately report that to the regulatory bodies. The central regulators should then order these banks to replenish their funds. If they fail to do so within the allotted time, banks should be forced to halt operations.

  Articles 65 through 67 say that if such banks do not balance their accounts, they should have their licenses revoked and should be dissolved.

  There is no spare capital in the nation's financial markets, but many banks operating in the red are still around, including The Chinese Bank and six other troubled banks overseen by the FSC.

  Banks that have lost more than one-third of their capital should be handled according to the law, but many appear to be exempt. Financial regulators have legal powers but don't use them. They see the law as immaterial and do nothing while the state of financial organizations deteriorates. The nation's present financial problems are the result of years of inaction by financial overseers.

  The FSC's lack of professional leaders and staff with banking expertise has delayed and complicated the handling of these problems. The commission's chairman has made many slips of the tongue, such as saying that a takeover means incorporating the banks into the state and completely ignoring the fact that they are only taking over management of The Chinese Bank on behalf of the depos-itors. He also said that no taxpayers' money would be used to guarantee the deposits, even though the government's relief funds consist entirely of financial operations taxes, paid by taxpayers.

  Who knows how many other hidden problems and bad accounts have yet to be discovered? Who can confirm that the costs of guaranteeing the deposits won't supersede the current liquidity made available by the government? What happens if the government's check bounces? With all the problems confronting Taiwan's banks, how can we expect them to be resolved if the highest regulatory body is so inexperienced? How can we possibly contemplate financial reform under these conditions?

  Since the 1998 financial crisis, the government has never faced up to the existence of these issues. Instead there have been denials and lackluster attempts to address them.

  So far, "financial reform" is nothing but a political slogan. The longer we wait, the more difficult it becomes to fix the problems. The Rebar scandal should be a warning that if those in power aren't determined to face our financial problems, Taiwan's economy could get stuck in the same mire as Japan's in the 1990s, from which it will be difficult to escape.

  Norman Yin is a professor of financial studies at National Chengchi University.

  Translated by Marc Langer
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