Taipei Times: With Taiwan encouraging the formation of financial holding companies (FHCs), what are the pros and cons of the mega-bank idea?
Chen Chung-hsing (陳松興): One very simple reason for Taiwanese financial authorities to pursue the idea is because this is a highly competitive market place. You're actually seeing an over-banking situation with profit margins that have been too limited to rely on. Most banks' market share is less than 10 percent except for Cathay Life (國泰人壽) and Fubon Life (富邦人壽) -- and 10 percent is nothing. The number of commercial banks and trusts has increased from 32 in 1990 to 53 in 2001 with over two thousand branch offices. [On average] pre-tax profits were 0.59 percent in 1998, 0.49 in 1999 and 0.39 in 2000 -- it seems no one was making money. It's very difficult because everybody's competing. As a result, I think the market structure is too-highly competitive in banking. Moreover, with the over regulating, you're not able to pursue new products.
And even though there are some suggestions that the economy is coming back, we don't know exactly when. And I don't think there'll be a U-shaped recovery. So, there's a strong incentive for the government here to pursue consolidation. But, if we were to look at Taiwan's financial sector, I would say universal banking (綜合銀行) is a better [direction] rather than FHCs. (Universal banking includes not only services related to savings and loans but also investments). This is a European system, basically Germany and the Netherlands, which have smaller economies than the US. Taiwan's economy is similar to that of Netherlands.
PHOTO: CHEN CHING-CHANG, TAIPEI TIMES
When you compare the systems, something important is the cost of information. If you operate as a universal bank, basically I know you from your various accounts the day you started your operations. But if you were setting up segmental sectors [to provide] financial services, anytime I want to do a new business, I'll have to start a new credit check, which increases costs. So, I'm not sure if the FHC is the best option for Taiwan with [such] a small economy.
TT: Should the MOF be promoting FHCs?
Chen: My personal view is that the regulators seem to be over promoting FHCs and I'm not sure that's their responsibility. Actually, I think they're somehow mistakened here. Because, for regulators, your prime responsibility is market soundness, encouraging initiatives by putting out new products and providing a sound financial structure. As for the pace of consolidation, I may perhaps call it over-consolidation. My personal view is [that] the government should encourage consolidation among institutions from like industries. [The benefits] come from the cutting of costs, using the same IT system, eliminating redundancy and avoiding risk. Otherwise, what's the benefit of having a FHC? Moreover, the government has manipulated the pace of consolidation by changing some banking, insurance and securities regulations.
TT:What differentiates a universal bank from an FHC?
Chen: If I were doing universal banking, basically I am working with my customers. And they will have higher loyalty to the institution because we have been helping them all the way. But, look at Taiwan's customers. Who cares about loyalty? Every time a new service or product comes out, they change institutions. The current structure in financial services does not encourage loyalty and does not save on operational costs. The formation of FHCs, therefore, can only add operational and information costs.
TT: Now that more than 10 FHCs are to be formed, what should their strategies be, and do you think the finance ministry has issued too many licenses?
Chen: It is almost sure to happen. Consolidation actually creates value, but, if you look at some of the announced [FHC] candidates, you really don't see any value being created. Just look at small players, for example, International Bill Finance (
Secondly, you identify the right targets and you go after the transaction, meaning you bargain for the price. Afterwards, the complicated part becomes: how are you going to implement your business plan and minimize potential risks?
TT: Where is the job loss going to come from with the formation of FHCs, elimination of redundancy or small and medium players?
Chen: I think in the short term the small players will be eliminated from the market. In the medium term, [the governmant] will recognize that some of these FHCs will not be able to compete and recognize that FHCs may not be such a good idea. But by then there may be a change of government and people anyway.
TT: How important is the creation of a financial supervisory board to oversee the future operations of FHCs?
Chen: You need to have strong, unified coordination among different regulatory bodies. Problems can occur when an arm of a FHC takes out money and injects it into another arm of the same group. By the time regulators find about the [irregularity], it'll be too late. So, they must have better regulatory coordination, especially when conglomerates operate segmented services. There's also another good reason for having a separate supervisory body: independence.
TT: What is the current status of the domestic banking industry's non-performing loans and will this impact financial consolidation?
Chen: Our estimates show that the banking sector currently has sufficient financial resources to resolve the challenge [of impaired assets]. If they are not looking at the issue carefully, in the longer term, the costs will add up and these costs will challenge the government's ability to sort out the problem.
Basically, if you look at the IMF's definition, Taiwanese authorities have seen 10 consecutive years of erosion. In the past five years, you actually have had a deficit. The longer it takes, the more the issue will cost the central government's budget. If you want to resolve the issue, fundamentally, you have to stick to basic teachings about [good banking] ? That's where moral hazard comes in: If your institution pursues [the right direction] you will survive. And if it fails, don't worry, the government will bail you out.
TT: Can authorities prevent additional hazards if they don't let banks collapse?
Chen: It's a short-term political solution because you want to win local politicians' votes. [The consequence is that] you are compensating credit fraud.
TT: What should the government's role be in helping banks reduce NPLs?
Chen: The total ratio of NPLs is about 15 percent in Taiwan. If you have high NPL [ratio], it doesn't mean you have high impaired assets. For example, the Overseas Chinese Commercial Bank (
TT: How satisfied are you with finance minister Yen Ching-chang's (
Chen: I think he's a competent minister, but [whether] he is professional enough as a banking supervisor -- that's another question. Obviously he definitely has a strong background in financial supervision, [shown by] the way he has pursued [reform.]
He is competent because politically, he is able to support the ruling party 100 percent. If you use that criteria, he is a strong guy. But, if you look at the market as a whole and ensuring that prudent regulations are not compromised, then I think I may have second thoughts. If he would stand out to safeguard and speak for the financial service sector, he would garner more support from the industry.
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