On monday last week, a group of academics from the Academy of Promoting Economic Legislation visited President Ma Ying-jeou (馬英九) to suggest that the Cabinet establish a team to push for financial reform and relax restrictions on bank mergers.
In particular, they suggested that the government sell its stake in state-owned banks, effectively calling for Taiwan’s third major financial reform for the following reasons:
First, large financial institutions can improve the competitiveness of Taiwan’s financial industry. Second, the interest-rate spread in the financial sector is just 1 percent, and banks’ profit-generating capacity is low. Third, the financial sector’s contribution to GDP is lower than in Singapore and Hong Kong. Fourth, the performance of state-owned banks is unsatisfactory and their function as capital mediator is poor.
However, these points are illusory.
First, do large financial institutions guarantee high competitiveness? Consider Japan. In the 1980s, almost all the world’s top 10 largest banks were Japanese, but they failed to maintain their competitiveness. Despite a series of bank mergers, they suffered “two lost decades,” and none of them remains in the top 10. Most of the Japanese banks that went bankrupt during the financial crisis were large banks. In many cases, the excessive scale of a bank weakens its competitiveness, turning it into a national liability.
Second, why is the interest-rate spread low? One problem is high competition among banks. Another problem lies in insufficient domestic investment as more firms relocate abroad, no longer borrowing money from domestic banks. Yet a low interest-rate spread is not a bad thing, because it is beneficial to business investment.
Third, it is absurd to call for reform because the financial industry’s contribution to Taiwan’s GDP is lower than in Singapore or Hong Kong. Taiwan’s financial sector accounted for 6.27 percent of GDP last year, which was lower than Singapore’s 11.9 percent and Hong Kong’s 16.1 percent. Yet the figure for South Korea was 6.5 percent and for the US it was 5.1 percent. Japan’s figure of 4.9 percent in 2010 was even lower. The percentage in Taiwan seems appropriate to me.
Fourth, do the nation’s state-owned banks perform poorly? Taiwan has been open to foreign banks for several decades, and to private banks for more than 20 years. If state-owned banks really perform poorly, they would have been eliminated by the market long ago. While state-owned banks need to carry out government policy, such as providing bailouts and stabilizing the stock market, they have always risen to the challenge.
Today, state-owned banks account for a large part of the force stabilizing Taiwan’s financial situation. In the future, they are likely to become the driving force against Chinese banks.
The old saying goes: “People who live in happiness usually take things for granted and do not appreciate them.”
In recent decades, the nation experienced several global financial crises, but it passed through each crisis smoothly thanks to state-owned banks.
Do not destroy the force that stabilizes Taiwan.
Taiwan’s economic stagnation is not a result of the financial industry. It is the other way round: The low interest-rate spread and profitability are a result of the stagnant economy.
Right now, the government’s most urgent task is to boost business investment in Taiwan.
The establishment of a financial reform team is completely unnecessary, and it might repeat past mistakes, making the system even worse.
In that case, the whole nation will suffer.
Huang Tien-lin is a former presidential adviser.
Translated by Eddy Chang