The low interest rate spread is jeopardizing the profitability and operations of the banking industry, and any sudden increase in bad loans could result in bank collapses, a banking industry expert said at a seminar on the industry’s outlook yesterday.
SinoPac Holdings (永豐金控) independent director Sophia Cheng (程淑芬), a former managing director and head of research of Merrill Lynch Taiwan, said the interest rate spread — the world’s lowest at about 1 percent — has not only undermined domestic banks’ tolerance of risk but also affected their return on equity (ROE) and share price performance.
If there is another recession, even a mild one, the possible rise in non-performing loans could bring down some domestic banks, she said.
Taiwan’s interest rate spread of roughly 1 percent can only cover a bank’s expenses, but is not enough to account for the average cost of non-performing loans over the long term, Cheng said.
The interest rate spread is the difference between the average yield banks make on loans and investments and the average rate institutions have to pay on deposits and borrowing. It accounts for the major share of banks’ income.
Statistics from the central bank show that the interest rate spread among local banks was 1.18 percent in the third quarter of this year, compared with 2 percent in the same period in 2006.
Although the global financial crisis did not create large-scale systematic risks in Taiwan, it delivered a warning to the banking industry, Cheng said.
If no action is taken to improve the situation, the local banking industry will be less able to deal with an economic crisis.
She also said low interest rates have put huge pressure on insurance companies’ investment spread — the gap between their portfolio yield on invested assets and the interest rate credited on insurance liabilities.
Given that many countries ran up heavy debt to rescue financial markets during the crisis, there is limited room for governments to issue more debt, making it important to learn how to prevent future crises, she said.
On Thursday, the central bank left its key interest rates unchanged as had been expected, noting that inflation is not a concern at the moment.
The bank has left its key rates unchanged since Feb. 19, after having cut them by 237.5 basis points in September last year.
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