Last week, China Development Financial Holding Corp and Cosmos Bank received approval at their shareholder meetings for their planned merger, paving the way for the first commercial bank merger in this nation in the past six years.
The deal is likely to be completed by the end of July, if the Financial Supervisory Commission gives the go-ahead.
There are 37 domestic banks, down from 53 in 2000. The number has remained steady since then, although the banking system is still fraught with the problems of fragmentation and interest margin compression as a result of over-concentration.
It has been difficult to push financial consolidation in the banking sector since 2006, following the controversy related to the then-Democratic Progressive Party (DPP) government’s “second phase of financial reforms.” The scheme, designed to streamline the domestic banking system and boost local banks’ competitiveness, was halted in 2006 amid concerns that it might only benefit a few rich families and large conglomerates.
Earlier this year, the government started drumming up support for bank mergers, especially the integration of government-run or state-controlled institutions, in a bid to help domestic banks become bigger and stronger thus regionally competitive.
Last month, the Ministry of Finance said it would complete its evaluation of proposed mergers and acquisitions among state banks in two to four months, hoping the first deal will emerge this year.
Based on government data, the ministry has a majority control in the Bank of Taiwan, Land Bank of Taiwan, Taiwan Cooperative Bank, Export-Import Bank of the ROC, Hua Nan Commercial Bank, First Commercial Bank, Mega International Commercial Bank and the Taiwan Business Bank. Their combined assets of NT$17.13 trillion (US$569 billion) account for 47.2 percent of the total assets in the nation’s banking system, and the ratio rises to 51.7 percent after including the assets of the Chang Hwa Commercial Bank, which is 20 percent owned by the ministry.
Advocates of new mergers believe better synergies emerge when those with higher market shares take over those with less. Economists say the banking sector also needs to go global to become more competitive, instead of focusing on the domestic market.
The problem is that the government’s efforts to reduce its stakes in state banks or orchestrate bank mergers have been met with political and social opposition — especially increased hostility from bank employees and labor unions. As such, unwarranted competition will persist in the domestic banking sector until more constructive deals occur.
Thus far, the government has said that its policy for the financial sector this year is to expand the scale of domestic banks and enable them to compete in the regional market within three years. However, rather than just pushing for mergers, a fully transparent process when implementing this scheme is needed, not a secretive plan that leaves employees feeling they are being manipulated into joining the government’s plans.
Any meaningful merger that intends to raise efficiency must involve well-planned corporate restructuring and reform of bank governance. The restructuring plans must allow for a separation of ownership and management functions, enabling specialized managers to oversee daily business and develop new products based on their ability, while remaining free of pressure from the government and undue intimidation.