The legislature is expected to pass the Financial Holding Company Law next week in a move that will speed up the long-awaited financial reshuffling and pave the way for universal banking in Taiwan, analysts say.
"This is the last of the three major steps aimed to pave [the] way for financial sector consolidation," said Michael Ding (
The Financial Holding Company Law comes after the passage of the Financial Institutions Merger Act and the establishment of asset management companies last month.
Analysts say that the consolidation will ideally create between three to five dominant financial supermarkets -- which will control between 60 to 70 percent of the total market share.
The Executive Yuan has already drafted the financial holding company law.
The move will help make the working of the financial institutions more transparent and streamline the complex cobweb of cross-shareholding within business groups -- which some analysts say often end up confusing investors.
"This is a global trend," says Norman Ying (殷乃平), a professor of banking at the National Chengchi University (政大), referring to the wave of mergers among banks in North America and Europe, which gave birth to such financial behemoths as Citigroup and ING Group.
Taiwan has close to 21 financial conglomerates currently, including Fubon (
While these groups are allowed to own stakes in other financial companies, "restrictive limitations" abound, analysts said.
These limitations prevent financial institutions from owning a larger chunk of financial institutions in a wider cross-section of sectors ranging from insurance to investment banking.
"This is why the Financial Holding Company Law must be passed before we see any mergers," said Damian Gilhawley, an economist at China Securities (中信證券), a brokerage arm of Koo's Group.
Having the Holding Company Law in place will help kick start the reshuffling that goes hand in hand with financial restructuring, economists said.
The Ministry of Finance said that the financial groups with total assets in excess of US$50 billion are allowed to become financial holding companies in the US.
While Taiwanese companies are far smaller in size, Taiwan has 27 financial groups that operate at least two financial companies. There are 11 groups with stakes in three main financial sectors -- securities, insurance and commercial banking, according to the financial ministry.
Last year, the US repealed the Glass-Steagal Act of 1933, which separated banking and brokeraging services. The US introduced a new law, Gramm-Leach Bliley Act, that allows banks, brokerage and insurance firms to merge, opening the way for universal banking.
According to the Taiwanese draft, any business -- which holds more than 25 percent of the shares in a bank (50 percent for insurance companies and securities companies) -- can establish a financial holding company.
The draft mimics the US model to assist financial holding companies to consolidate their subsidiaries when the ownership exceeds 90 percent.
In order to encourage domestic financial groups to become financial holding companies, a number of tax incentives are provided in the draft, including a waiver of the securities transaction tax, business income tax and a number of other tax waivers.
The draft specifically restricts cross shareholdings within one financial group. Any subsidiary will not be able to hold shares in its parent, the financial holding company.
Any sister company within one group cannot hold shares of another sister company and no voting rights are allowed between the subsidiaries.
A firewall mechanism is required between the holding company and its subsidiaries, the subsidiaries and their clients, and between the subsidiaries themselves, according to the draft, which will be presented to the legislature next week.
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