The government's failure to put teeth into its banking-sector reform plan will only embolden shaky banks to make more risky investments, Standard & Poor's said yesterday.
"The Taiwan government's recent takeover of 36 credit cooperatives, and full guarantee of their deposits, will help to maintain the stability of Taiwan's financial system. ... The guarantee, however, may insidiously heighten moral hazard in the banking system. Moral hazard refers to the likelihood that financial institutions will be predisposed to take on higher risks in the expectation that the government will come to the rescue," a statement from Standard & Poor's said.
The comments come following last Friday's raid by finance officials on 36 grassroots credit unions or cooperatives, most of which operate in southern Taiwan. Fourteen institutions deemed unfit to continue operating due to negative net worth handed over management to a NT$140 billion rehabilitation fund.
The remaining 22 firms will be supervised by the fund's management committee for up to two months and will be taken over by the fund if they show no improvement.
On Monday, Minister of Finance Yen Chin-chang (
The government action, while preventing further deterioration of the cooperatives involved, is expected to do little to deter banking industry staff from making the same mistakes again -- or the public from putting their hard-earned money into the wobbly cooperatives.
Ousted management of the 14 firms were reassigned to the Council of Agriculture -- the government body that overseas the sector. As for depositors, the government has promised no one will lose even a single NT dollar since the insurance deposit ceiling on bank accounts was removed as part of the financial reform package pushed through the legislature in late June.
Individual bank accounts in Taiwan are normally insured up to NT$1 million by the Central Depository Insurance Co (中央存保).
The Taiwan arm of Standard & Poor's -- Taiwan Ratings Corp (
"With the removal of the insurance cap, even the weak financial institutions can attract depositors and invest in risky ventures," the head of Taiwan Ratings Financial Services Group, Chiang Mei-hsiang (
Yesterday Fred Chen (陳上程), director of the central bank's Banking Examination Department agreed saying that covering 100 percent of all depositors "does increase the moral hazard facing the country's grassroots financial sector." But he stressed that the central bank will closely watch the situation to prevent that from happening.
In the end, the direction of the economic winds may have the final say.
"If the economy recovers quickly things may be OK, but if it recovers more slowly, that may pressure weaker banks to take risks," Chiang said.
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