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One Year On: Economy - DPP rolls up sleeves on bank reform, but the heavy lifting has yet to begin

When the DPP government took office last May, observers worried whether the relatively inexperienced party would be overwhelmed by the excesses in the financial system.

Last year, as non-performing loan (NPL) ratios jumped to record highs, analysts came out with scary figures, revealing that the official figure was but a fraction of the actual size of the dud loans.

As a consequence, the banking system lurched dangerously close to a crisis last year -- thanks to the slowdown in the global high-tech sector, which coincided with a hard landing in the US economy.

The possibility of reforms, however, triggered hopes for investors, who saw it as a blessing in disguise. But fears loomed for both depositors and bankers.

The government announced a series of measures, including the decision to revise NPL figures to bring them more in line with global standards. The government also passed the Financial Institutions Merger Act to help facilitate mergers and acquisitions within the financial industry, although the act was the brainchild of Paul Chiu (邱正雄), former KMT finance minister.

The move was aimed at helping address Taiwan's biggest headache: over-banking. Taiwan has 53 domestic banks and 39 foreign banks. Many now blame the saturated banking market on the rush to deregulate in 1991.

The good news is that several mergers have already occurred.

The Taiwan Cooperative Bank (合作金庫) has taken over troubled Chinfon Bank (慶豐). That was followed by a merger between First Commercial Bank (第一商業銀行), Dah-An Commercial Bank (大安銀行) and Pan-Asia Bank (泛亞銀行). The government has also organized a triumvirate merger between three state-owned financial institutions, the Bank of Taiwan (台灣銀行), Land Bank of Taiwan (土地銀行) and the Central Trust of China (中信局).

To cope with increasing competition, some local financial groups have also joined with foreign counterparts. Fubon (富邦) has joined with Citibank to create a joint venture. As Daniel Tsai (蔡明忠), chairman of Fubon Insurance, put it: "Hiding behind a big rock, we thought, was the best strategy to cope with this financial storm."

The mergers were good news, but it's a far cry from the government's goal to create ten big financial institutions in Taiwan. Meanwhile, mergers alone won't help. "Everyone has said that the major problem is over-banking," says Anthony Lok, regional bank analyst for Nomura Securities. "It is not. The major problem is that the government owns too many banks."

Indeed, many are arguing that Taiwan must make the current downturn an opportunity for a more radical reform. But first thing's first. The total NPLs of domestic banks increased from NT$660.1 billion at the end of 1999 to NT$773.5 billion at the end of 2000 -- pushing the NPL ratio from 4.88 percent to 5.34 percent.

The latest figures show that the NPLs in the banking system has continued to climb, as the total outstanding NPLs of Taiwan's seven largest banks reached a record high of NT$416.4 billion as of the end of March 2001, an increase of NT$149 billion from February.

"Bad loans are a function of economic performance," says Sophia Cheng of Merrill Lynch.

To this end, the government proposed the establishment of Asset Management Corporations (AMCs), which will help buy problem assets from banks and sell them at a discount. The first AMC, spearheaded by the ROC Bankers Association has been formed with a capital injection of NT$16 billion by a consortium of 33 banks.

The government has also drafted a financial holding company law, which will give banks more leeway to carry out various mergers and acquisitions. The Legislative Yuan is expected to pass the latter soon. While the legal groundwork has been laid, not much action has taken place so far.

The restructuring also comes as a double whammy for the DPP government, as its ability to carry on serious reforms is hindered by a sharp correction in the domestic economy, particularly the global high-tech sector.

As unemployment rises and the demand for social programs increases, the government has no choice but to waffle on the tough decisions often associated with corporate and financial restructuring.

While mergers are integral to any restructuring, they also mean doing away with redundant workers, which will not help the rising jobless rate.

All in all, the government has begun the hard job of restructuring the banking industry, but the difficulty, it seems, is in carrying it forward.
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