In a bold move aimed at ending government intervention on behalf of ailing banks, the incoming finance minister yesterday suggested troubled financial institutions should be terminated through market forces.
"If a bank's performance is inferior, it should be closed through market mechanisms, provided that it doesn't provoke a crisis in the system," said Finance Minister-designate Shea Jia-dong (
Shea made the comments during a meeting with several dozen legislators to discuss a number of issues regulated by the Ministry of Finance.
Shea also said that to depend on the administration's proposed Financial Supervisory Board (
Analysts say Shea's initiative to close down problematic financial institutions is the right way to handle the issue. However, it is unlikely that the new administration will be able to shut down any financial institution that has a large number of bad loans before the current deposit insurance mechanism is improved.
Currently, personal savings in commercial banks are protected by the nation's Central Deposit Insurance Corporation (CDIC, 中央存保) for deposits of up to NT$1 million.
In dollars and cents reality, Shea's idea for "curing the ills" of the industry may not be financially feasible.
"Before Shea becomes too serious about closing down any commercial banks, he first has to increase the insurance premium holdings of the CDIC," said National Chengchi University banking professor Norman Yin (
"Total insurance premium holdings of the CDIC are approximately NT$20 billion (US$700 million). The closure of a large bank like Chang Hua Commercial Bank (
According to Yin, the benchmark on whether to shut down a bank or not should be determined by the net-capital of the institution.
"In Chung Shing Bank's case, about two-third of its net-capital has been eroded by the bad-loans. And according to the Banking Law, any bank that exhausted more than one-third of its net-capital during operations should be restructured or shutdown" Yin said.
"Chung Shing Bank has certainly breached that regulation, and the Ministry of Finance will have to choose one of these solutions to fix the problem," he said.
Under the current circumstances, closing Chung Shing Bank might not turn out to be a long-term solution for the industry as a whole.
"The CDIC itself does not have the resources to clean up the mess, so it may be better to allow Chung Shing Bank to be taken over by other financial institutions" Yin said.
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