Taipei Times: What is your view on Taiwan's financial sector consolidation?
Banko: Taiwan is overbanked. With 53 commercial banks and over three hundred fisherman and farmers co-operatives, the banking sector suffers from severe overcapacity. Given the propensity of the Taiwan people to save, banks have been flush with funds and scrambling to make loans. Local bankers have been willing to take on higher credit risk supported by questionable real estate and share collateral.
Too many banks have led to many debts, too many of which are unsettled. But of course everyone knows this by now. The local headlines are obsessed with reporting on bad loan portfolios, the level of non-performing loans has become a national guessing game, the rating agencies dictate a negative outlook for Taiwan, and series of stop-gap measures have failed to halt the decline. To make the point even clearer, the international press has mercilessly analyzed and reported on the weaknesses of the financial system to a global audience.
PHOTO: AMERICAN CHAMBER OF COMMERCE
TT: Do you think the government's current policies will help create consolidation?
Banko: The government's response, and supposed panacea, is consolidation. But, in order for a merger to be effective the emerging entities must either complement one another with differing business lines, geographic strengths or significantly reduce operational cost, principally accomplished by closing competing branches and reducing personnel. There are lessons to be learned from Japan and Thailand, and that is that Big Bank/Small Bank consolidations and Good Bank/Bank Bank mergers don't work unless there is real synergy to improve competitiveness and soundness. Thus far, the announced mergers haven't been based on either synergy or streamlining. If financial consolidation is going to work in Taiwan, the government will have to be ready to accept pain. If the government is serious about bank mergers it should not burden good banks with the problems of bad banks. The government must seriously weigh the long-term benefits of allowing insolvent banks to fail.
TT: Can you tell us some of your views on the financial sector liberalization in Taiwan?
Banko: I believe by liberalization you are referring to the government's most recent efforts to rewrite banking law. Specifically, the government has taken on a Herculean task of overhauling the financial services sector with new laws written into the Financial Institutions Merger Act, the Financial Holding Company Act, the RTC Bill and the Financial Supervisory and Management Committee Act. I understand that the Ministry of Finance has been researching the formulation of this new law based on the experiences in the US, Europe, and more recently in Southeast Asia and Japan.
I think this is all very necessary and important, but the key concern right now should be on how to effectively rid the system of non-performing loans. First, of all there must be transparency. Everyone should know just how big the problem is. Reports on the size of bad debt, as officially reported at 5.34 percent, are at odds with the analysts and academics who conjecture that the NPLs are levels two to three times higher than official reports. This gap creates a crisis of confidence.
TT: So what would real reforms mean?
Banko: Real reforms would mean that the regulators would force the banks to write off NPLs completely, seize collateral, sell it at market value, take a hit in earnings, and clear up their loan books. This has real implications for badly managed corporations who are overextended and in default on their loan obligations. It would depress the share and property markets and accelerate the bankruptcy proceedings, but until the banking system is healthy, the entire economy would flounder. A healthy financial sector can only be created if bank shareholders are forced to take the losses from the bad loans they created.
TT: So the government should rewrite the bankruptcy law?
Banko: An important part of the liberalization process that has been overlooked in a rush for more complex solutions, is the need to rewrite the bankruptcy law. The AmCham/ECCT Foreign Bankers Committee has repeatedly urged the Ministry of Finance and the Ministry of Justice for comprehensive bankruptcy reform.
TT: What is the purpose of bankruptcy law?
Banko: The purpose of any reorganization law is to provide a mechanism for identifying insolvent companies, which are potentially viable, then reorganizing those companies to permit their long term survival. The foreign bankers here have repeatedly suggested reforms centered on training auditors, appointing independent administrators separate from pre-petition management, on public notice and interim orders, fraudulent preference, and reorganization planning and the establishment of separate bankruptcy courts. An effective Reorganization Law identifies viable companies, utilizes third party objective administrators, protects creditors and shareholders and contributes to a sound banking system.
TT: So how are the foreign banks dealing with the current economic downturn?
Banko: The number of foreign banks operating in Taiwan has been shrinking over the last several years. There are two principal reasons for this. The first is the process of consolidation that has been taking place in the West. American banks have been effectively merging by acquiring and consolidating new product synergies, expanding into new geographic areas, and creating efficiency where there is overlap. The same is true for many European banks, and there have been trans-Atlantic mergers as well. Consequently, the number of major banks has been reduced and their branches consolidated. Recent examples exist in Taiwan, for instance, Bank of America/Security Pacific/Continental/NationsBank, Chase/Chemical/Manufacturers/JP Morgan, HSBC/Republic of New York, and Deutsche/BankersTrust. The second reason for the shrinking foreign bank presence is the 1997 Asian financial crisis, which resulted in many banks taking a hard look at the risk and reward of maintaining a international network of off-shore branches. Numerous banks have closed their Taipei branches as part of a international downsizing: Bank of Boston, Royal Bank of Canada and National Australia Bank.
TT: So how big is the foreign bank market share in Taiwan?
Banko: Foreign banks have always had a relatively small, less than 5 percent market share in Taiwan. Containment was part regulatory design and internal credit standards. US banks lend on the basis of transparent audited financial data and on future projected cash flows, unlike their domestic counterparts, which make loan decisions almost solely on the basis of collateral. Consequently, I do not think that the foreign bank branches, which are active in the corporate loan market here, will have significant NPL's. As long as problems persist in the market, they will continue to be very prudent lenders.
TT: While this is an old question, but can you see how Taiwan compare to other neighbouring countries as a financial hub?
Banko: To put this question into perspective, one must look at the major financial centers of Asia. Tokyo has a vast infrastructure for both the debt and capital markets, Singapore allows the free flow of capital and foreign exchange, and Hong Kong has created a level playing field for all market participants, regardless of nationality. Foreign bank participants in the Taiwan market, who have a minimal market share, represent the world's largest, most innovative and profitable banks. Yet these institutions are limited by parochial regulation. Balance sheet size has been constrained by the amount of branch capital, even though the parent company, with a huge capital base, stands behind the integrity of its branches. Taipei lacks a mature and transparent interbank market, which is a fundamental structural weakness for the industry. Expansion via a branch network has been onerous. Foreign bank exclusion from regulatory permissions, such as mini branch operations, does not serve Taiwan's international image.
TT: What is the positive side of Taiwan's banking sector?
Banko: On the positive side is the increasing interest these global banks have taken in expanding their presence through retail banking, and recent legislation allowing increased foreign ownership of local banks. Global banks can bring much needed innovation to compete against their domestic counterparts. The Internet provides an arena of significant opportunity for innovation and will break down the traditional domestic borders of regulatory prejudice. Just as Taiwan has created a reputation as a high-tech "player", it should capitalize on its IT prowess and take the lead in Internet banking in Asia. If the future is "banking without borders" then Taiwan should encourage the globalization of the financial markets.
TT: What factors will affect the future of Taiwan's financial service sector?
Banko: The downturn in the US economy, decreased volume of world trade, consumer and investor confidence, acrimonious political debate and deadlock, growing dependence on high-tech, all of which place more pressure on the asset quality of banks. Given Taiwan's strong foreign exchange reserves, low level of foreign debt and current account surpluses, it is in better condition to meet these challenges than other Asian economies. President Chen said in an address to American Chamber in Taipei: "Taiwan needs reform to establish an open financial market, for without reform, there will be no sound or open financial environment."
I am cautiously optimistic that the government can clean-up the banking system and promote financial liberalization. There has been plenty of debate on how to address the issue by using public funds to allow corporations to fail and be placed into bankruptcy, but now is the time for concrete action.
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