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.
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.
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