Pundits say that, while asset-backed securities will bring a number of benefits to Taiwan's economy, there are shortcomings in the legal framework of the current draft on securitization which could bring more problems ahead.
"Judging by the US experience, securitization should greatly benefit Taiwan's capital market and economy," said Joseph Hu (扈企平), the managing director of structured finance ratings at Standard & Poor's.
Hu made the comment yesterday in a seminar about asset securitization that was held by Taiwan Ratings Corp (
The US, which began securitizing assets in 1970, currently has a total outstanding balance of asset-backed securities amounting to an estimated US$4.7 trillion. That figure greatly surpasses US treasuries, corporate bonds, and state and local government debts combined, according to Hu.
Taiwan's government is at this moment in the process of proposing draft legislation that will legalize asset-backed securities, and is expected to submit the draft to the Legislative Yuan in the first half of the year, said Council of Economic Planning and Development advisor Lee Kao-chao (
Hu pointed out that a number of positive effects could be brought about by the new market.
"Taiwan's capital markets have always been far stronger in the equities sector when compared to the fixed-income sector," said Hu. To implement securitization at this juncture would be a great opportunity. A well-developed fixed-income market provides Taiwan's economy a critically needed "alternative means to raise funds other than stock issuance," according to Hu.
The new market may be able to reduce the huge non-performing loan (NPL) held by Taiwan's banking industry, which totalled NT$1.64 trillion at the end of 2001.
"Implementing securitization by packaging and selling NPLs through an asset-backed securities mechanism is an excellent way of killing two birds with one stone," said Hu.
"Taiwan can learn about asset securitization by doing it, and in the mean time address one of [the sector's] most urgent problems: marketing loans held by commercial banks." In addition, securitization can enhance efficient use of capital and raise living standards, according to Hu.
"One of the results of the liquidation of NPLs through securitization is that commercial banks will now be able to focus on making efficient use of their capital in new loan-origination and new investments," said Hu.
"Finance creates value."
One reason why Taiwan was able to grow rapidly during most of the 1980s and 1990s was that commercial banks made financing available to entrepreneurs for building factories, expanding production, financing inventories, and facilitating exports. Taiwan needs to resort to new financing techniques and regain its old efficiency in financing economic activities. By constantly creating value, the economy can continue to grow and raise the standard of living for its people, according to Hu.
However, legalizing the market might pose other problems.
"The current draft of securitization is not sophisticated enough to cope with the new market. If we do not make comprehensive laws regarding this market, we might be creating more problems than we solve," said Norman Yin (殷乃平), a PFP legislator and banking professor at National Chengchi University.
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