Sat, Nov 25, 2000 - Page 1 News List

Merger law to ease bad debt burden

FINANCE The legislature has approved the law that will enable foreign banks to own majority stakes in local firms and should help bring order to the `overbanking' of the island

By Tsering Namgyal  /  STAFF REPORTER

The government's goal to clean up the banking system got a big boost yesterday after the legislature approved the much-sought after Financial Institutions Merger Law.

Minister of Finance Yen Ching-chang (顏慶章) said that the new law will provide a "legal basis" to allow foreign firms to take majority stakes in local lenders and give regulators the power to force mergers in the industry.

The new law also allows troubled banks to sell their problem loans to asset management companies before merging with stronger counterparts.

Lawmakers hailed the passage of the bill as a major victory for the government's goal to restructure the system. KMT legislator Chu Li-lun (朱立倫) welcomed it as "the legal groundwork to thoroughly solve the long-existing rot" in the financial industry.

While the overdue loan ratio has officially reached a record high 6.5 percent, or NT$1 trillion, unofficial estimates put it at two or three times that figure.

Taiwan Ratings (中華信評), the local partner of Standard & Poor's rating agency, said last week that at least "four domestic banks are very likely to run into trouble," though it declined to name them.

It is little wonder then that officials have long pushed for mergers to clean up the overburdened system. The number of banks has increased from 17 in 1991 to 48 at present, while the number of bank branches has gone up from 756 branches to 2,408 during the same period.

"What we are trying to do through this law is increase the incentives and reduce the obstacles for financial institutions," said Vice Minister of Finance Sean Chen (陳沖) at a press conference yesterday.

But the relative strength of the financial institutions -- thanks to a strong economy -- have given them an excuse to delay their consolidation.

Analysts, however, expect to see some merger activities in the next 12 months, assuming the economy continues its downward descent and non-performing loans continue to rise.

"I would expect to see something by the second half of next year," said Patrick Pang, an analyst who covers Taiwanese banks for Lehman Brothers.

Analysts believe that many international banks -- such as Standard Chartered, Chase Manhattan, and HSBC -- may be interested in snapping up domestic banks at fire-sale prices.

Foreign banks are only willing to buy at a steep discount, analysts say, though actual pricing will be determined by the quality of assets and their operational strength.

Indeed, observers believe the new law may reduce the number of banks in Taiwan, though some say it may require "a mini-banking crisis" to accelerate the reform measures. "It usually wakes up the management," says Lehman's Pang.

Michael Ding (丁予嘉), chief investment officer at International Investment Trust Ltd, said that the merger law may help spawn between three to five dominant banks.

To clean up the bad loans, the government, meanwhile, has said it will encourage domestic financial institutions to set up asset management companies with foreign banks.

Chinatrust Bank President Jeffrey Koo Jr (辜仲諒) said on Thursday the bank will announce in "one to two weeks" the details of its plan to set up an asset management corporation in joint venture with the US bank Goldman Sachs and the Ministry of Finance.

Koo, however, said that while setting up asset management corporations may be easy, making them work would be a far more difficult task.

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