On Sept. 26, the Cabinet’s Financial Supervisory Commission (FSC) suddenly announced that the state-owned Central Deposit Insurance Corp (CDIC) had taken over Chinfon Bank and that the Bank of Taiwan would be commissioned to manage it.
The CDIC said the bank was under the umbrella of the government’s Financial Restructuring Fund, and all depositors’ rights would be fully protected. But the commission’s sudden move is worrisome. Has the domino effect of financial institutions going bankrupt already spread to Taiwan?
That Chinfon had been poorly managed is hardly news. The bank has long been a target of the government’s financial reform. It attempted to save itself by attracting foreign capital and even selling its profitable Vietnam branch, but both attempts failed. Media reports said that by the end of July Chinfon Bank had the nation’s highest non-performing loan ratio at 29.26 percent, with a negative worth of NT$7.7 billion (US$240 million).
In light of the ailing environment in the banking sector, it could hardly survive and seemed likely to go into bankruptcy sooner or later. Unfavorable gossip caused a bank run, serving as the straw that broke the camel’s back.
To treat Chinfon as an isolated case, however, would be to overlook the underlying problem. Since the second half of last year, the financial storm caused by the US sub-prime mortgage crisis has worsened, gradually spreading to the global financial market. Over the past few weeks, two of the top five US investment banking giants — Lehman Brothers and Merrill Lynch — and insurance giant American International Group (AIG) have all succumbed. Although the pressure has been relieved somewhat by the massive injections of capital from governments in the US and other countries, there may be more financial bombshells waiting to explode.
Most worryingly, the market does not know which institution or enterprise might be the next to go into bankruptcy, and can only wait in fear. Concerned for their own safety, healthy institutions dare not reach out a helping hand to those in need, nor are they willing to continue financing companies that might have financial problems. Amid this vicious cycle, financial risk will spread from large to medium and small financial institutions and on down to regular companies, leading to a liquidity crunch in the market. So there is little room for optimism as to when the global financial crisis will bottom out.
So far in Taiwan, although the stock market has been hard hit and some firms have suffered a knock-on effect from structured notes, financial institutions overall have not been very seriously affected and there is sufficient capital available in money markets. Still, the financial crisis has caused a loss of confidence and it has been difficult for some poorly performing institutions to borrow money. Also, because of the economic downturn, banks dare not extend existing loans to companies and house buyers. This in turn has pushed up interest rates for private-sector loans, propelling Taiwan’s financial markets toward a liquidity crunch.
Recently, Taiwan’s Central Bank cut key interest rates for the first time in four years, while extending more repurchase agreements to financial institutions in an attempt to avoid a possible loss of liquidity. But in the face of the severe global financial situation, the government’s financial and economic agencies must work hard together and take appropriate and cautious measures to ensure that Taiwan can weather the storm unscathed.
Chu Haumin is a professor in the Department of Money and Banking at National Chengchi University.
TRANSLATED BY EDDY CHANG
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