Mon, Jul 11, 2005 page10

• RTC expiry good for banks: analysts

  LESS HAZARD With the end of the bank bail-out fund, experts said that customers will now choose their banks more carefully, which will help the sector consolidate

  • By Jackie Lin / STAFF REPORTER
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  After four years of bailing out banks in the nation's crowded financial sector, the government's Financial Restructuring Fund (金融重建基金), also known as the RTC fund, expired on schedule yesterday -- a development that analysts say could help facilitate the sector's consolidation.

  Since the fund's establishment in July 2001 with an initial amount of NT$140 billion (US$4.4 billion), it has allocated NT$90 billion to rescue 47 struggling institutions.

  In late May, the legislature passed the amendments to the Resolution Trust Committee Fund Regulatory Provisions (金融重建基金設置及管理條例) and approved an additional NT$110 billion for helping flailing banks.

  The Financial Supervisory Commission has said that the additional money will help save the beleaguered Chung Shing Bank (中興銀行) and seven other debt-ridden institutions.

  The NT$110 billion capital will come from a two-percent business tax on financial institutions that will be extended to 2010, based on the new rules.

  Some have questioned whether the expiration of the RTC fund will dent investor confidence or hamper efforts to streamline the nation's financial services sector.

  But Taiwan Ratings Corp (中華信評), a local arm of Standard & Poor's Ratings Service, said that the impact on the market will be limited.

  "Taiwan's stable economic environment and the revitalized banking industry will also help mitigate any loss in investor confidence related to the exit of the RTC," Taiwan Ratings said in a report released last week.

  Financial regulators have emphasized that the RTC fund was only a temporary, expedient measure and that such a fund easily gives rise to a moral hazard problem, since institutions and customers take more risks than otherwise if they know they will be bailed out in the event of bankruptcy.

  Regulators have now replaced the fund's blanket guarantee with more limited protection. The public's deposits in banking institutions will now enjoy a maximum compensation of NT$1 million per bank account, instead of full-amount settlement, if the institutions go bankrupt.

  The protection only applies to those banks which participate in the Central Deposit Insurance Corp's (CDIC, 中央存保) system.

  The CDIC will now take over the RTC fund's role of dealing with the nation's problematic financial institutions.

  As of the end of April, CDIC-guaranteed deposits accounted for 45 percent of overall deposits, the report said.

  "The return to a limited-coverage deposit insurance system from a blanket guarantee system is likely to force depositors to more carefully consider risk factors when evaluating deposit products," thereby helping the market mechanism return to normal, the ratings agency analyzed.

  According to financial regulators, CDIC has improved the deposit insurance mechanism by drawing on the experience of advanced countries, with key points including prompt corrective action, the promotion of public disclosure of information and an accelerated accumulation of a deposit insurance reserves fund.

  In addition to the CDIC, other informal support mechanisms will remain in place to help stabilize the financial markets, Taiwan Ratings said in its report, adding that the nation's financial holdings companies also play a role as informal system stabilizers.

  There are currently 14 financial holding companies nationwide.

  With their stronger financial mechanisms, these financial holdings groups are capable of incorporating or merging poorly performing players to enhance their market share, as proven recently by E.Sun Financial Holding Co (玉山金控), which took over the Kaohsiung Business Bank (高雄企銀) and Chinatrust Financial Holding Co (中信金控), which acquired Fengshan Credit Cooperatives (鳳山信用合作社).

  Taiwan Ratings, however, pointed out that the government's unpredictable behavior poses a risk, since the state may continue to intervene in the markets in order to stabilize the banking sector.

  The government will need to strike a balance between stabilizing and reforming the banking industry, it said.
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