Taiwan's bank restructuring is the latest buzzword in the Asian financial grapevine, although bankers say that the government has yet to come up with clear-cut guidelines on how to handle weak banks without hurting the economy.
Last week, Minister of Finance Yen Ching-chang (顏慶章) said he is not likely to let weak banks with "normal operations" collapse for fear of potential repercussions on the banking system as a whole.
Rather, the government has expressed its interest in bringing in international investment firms to smooth the otherwise rocky road of restructuring. Leading international investment banks -- Lehman Brothers, Goldman Sachs and Deutsche Bank, among others -- are now vying to establish asset management companies (AMC) in Taiwan, Chinese-language media reports said.
Independent analysts estimate Taiwan's overdue loan ratios now top 10 percent, although official figures put it at slightly over 5 percent or NT$1 trillion. While most of the loans are backed by collateral, the poor health of the property sector makes it difficult to clean up the system, analysts say. Bruce Richardson, head of Asian financial institutions research at Indosuez WI Carr Securities in Taipei, believes that the non-performing loan ratio would be much higher if it were calculated according to more rigorous international standards.
A Chinese-language economic daily reported on Saturday that Chinatrust Commercial Bank (中信銀) has also expressed its interest in joining with a foreign partner to set up an AMC to help clean up domestic bad loans.
Responding to the report Chinatrust officials acknowledged their interest but cited "ambiguous government regulations" as an obstacle. In theory, AMCs will buy up bad assets -- at at least a 50 percent discount to face value -- from weak banks and then resell them on the market at a profit. In Thailand, for instance, AMCs bought loans at around a 70 percent discount, according to analysts.
Many bankers and analysts, however, believe that the process is more complex and riskier than it appears on the surface.
"What if banks are not willing to acknowledge the quality of their assets?," questioned Dominic Lin, an economist and fund manager with China Investment Trust Corporation.
Selling the property into the market will be detrimental to the health of the already weak real estate sector, analysts say. "The last thing about collateral is that it is usually useless," says Richardson of Indosuez. Former Minister of Finance Paul Chiu concured with the rational saying, "The property market is quite bad," particularly in Central and Southern Taiwan.
While Taiwan's average overdue loan ratio is low by Asian standards, several local banks have bad loans in excess of 20 percent. "They are literally bankrupt," because their capital is not enough to cover up for the loss, Lin of China Securities Investment Trust, said.
Indeed, economists believe that the government should set up a ceiling for all financial institutions and then "force" the banks with bad loans in excess of that level to be taken over by AMCs.
Andy Xie, chief economist for Asia Pacific at Morgan Stanley Dean Witter, believes that Taiwan "has to make a lot of important decisions," particularly in terms of restructuring while the high-tech sector is still competitive.
However, given the magnitude of the problem, the government must play a bigger role, particularly in terms of offering incentives, analysts say. "Such gestures will encourage participation from the private sector to resolve the issue," said Patrick Pang, a bank analyst for Lehman Brothers in Hong Kong.
While most Asian banks have gone through painful reforms, particularly in the aftermath of the Asian economic crisis, restructuring in Taiwan has remained slow-paced, thanks mainly to its strong financial health.
Analysts believe that the apart from the AMCs, a US-style Resolution Trust Corp (RTC) -- entirely funded by the government -- may be set up to deal with the domestic credit unions and other financially-challenged regional level banks.
But the government's ability to come up with the money for an effective RTC, given its skyrocketing budget deficit, remains uncertain.
Assuming only half of Taiwan's estimated NT$1 trillion is not recoverable, the government must come up with at least NT$812 billion to rescue the banking system, according to Indosuez WI Carr.
But the actual figure, if calculated based on more rigorous international standards, is expected to be much higher. Solving the local banking fiasco with a US-style RTC may be difficult, analysts say, because the non-performing loans during the 1980s savings and loan crisis in the US only accounted for 1 percent of the GDP. Taiwan's non-performing loans account for around 9 percent of the GDP.
The consensus view among industry analysts, however, is that Taiwan will weather the restructuring storm fairly well given the robust high-tech sector which is still offering solid support to its export-driven economy.
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