Taipei Times: Has the recession in Taiwan made the government hesitant to put more bite into its financial reforms such as the shutdown of bad banks or the elimination of redundant staff resulting from banking sector consolidation?
Yen Ching-chang (顏慶章): That is possible. Your question reminds me of an experience I had while at the July 2001 APEC financial minister's meeting in Suzhou.
Ministers from several countries congratulated me on our strong determination to undertake financial reform during an economic slowdown, saying the move would create much healthier financial markets and become the cornerstone of continued economic development.
PHOTO: CHEN CHENG-CHANG, TAIPEI TIMES
Even though the job of reform during an economic slowdown is quite challenging, that is the most appropriate policy for the government to undertake. Over the last year, the reaction of our securities markets reflected the endorsement of our financial reforms.
The strong support of the Ministry of Finance by President Chen Shui-bian (
TT: What successes did the government have in terms of financial sector consolidation last year?
Yen: Taiwan's financial market is really over-crowded and therefore has long been fragmented. Also most financial institutions have a poor economy of scale and scope and so we think that Taiwan, in the course of globalization, must prepare to face the challenges from participation in the market of foreign financial institutions currently and in the future.
So that is the reason that we put a priority on encouraging our financial institutions to consolidate. We have been very successful in terms of getting the support of our legislature.
It passed the Company Merger Law (
In addition the holding company law also allows financial institutions to engage in cross selling [of shares] which can help increase their economy of scope.
So these laws provide our financial institutions with better opportunities to consolidate in accordance with Taiwan's globalization plan.
TT: So the boisterous legislature was cooperative on helping push through financial reforms?
Yen: The public in Taiwan is always criticizing the efficiency of our lawmakers. However in this particular area I need to extend my thanks to them.
They passed the six financial reform bills during the regular session by May of last year. And then, under pressure, went into a special session in November to deliberate financial reform bills and passed the holding company law. So last year was really a great success for the ministry.
We want to provide a world-class environment for financial institutions to change their structure on their own initiative via mergers or financial holding companies (FHCs). And that environment will accommodate large-sized financial institutions and still provide a good environment for niche players in the market as well.
TT: What progress did the ministry make last year on cleaning up bad banks?
Yen: A very impressive reform last year was the creation of Taiwan's Financial Restructuring Fund (
The only major measure the government could take was to ask a larger bank to take over their financial losses.
That certainly was not a good policy and that was unfair to [healthy] banks. And because the past government delayed the takeover of [ailing] institutions, that allowed their problems to grow bigger and bigger.
Through the support of lawmakers, the Financial Restructuring Fund was created in July and NT$140 billion in public funds was allocated for the next four years to tackle the problem.
On Aug. 10, just one month after the law was passed, we took over the 36 grassroots financial institutions. Even the media was surprised how fast we moved into action to tackle the problem.
What impressed me most were the results of the move. While the goal of the RTC is to takeover and evaluate the clean-up costs of the mess to the government, financial services of those [grassroots]institutions would be terminated.
That would create a great social burden both in terms of client inconvenience and job losses.
So my colleagues and I had larger institutions take them over while having the restructuring fund compensate their financial losses. Grassroots institutions were shut down, but client services were not interrupted.
TT: How much of the fund has been spent and is there enough money left to deal with non-performing loan (NPL) problems beyond the grassroots banks?
Yen: The fund has used NT$72 billion compensating the 10 commercial banks involved in the takeover of the 36 grassroots institutions, so about half of the money allocated has been spent. According to the statute for the fund the NT$140 billion [was allocated] for the clean up of all under-performing financial institutions.
TT: So what is the plan for the troubled Chung Shing Bank (
Yen: Chung Shing Bank has a network of 40 branches in Taiwan and should prove attractive to some financial institutions. The CDIC has had CPAs evaluate its net worth and is planning to meet with potential investors and explain the [opportunity] and then hold a public bid for the bank.
We are encouraging banks to consider the network value of that purchase. But the winner of the bid would have to take up the largest financial losses of Chung Shing Bank.
So through public bidding we can arrange a very transparent way to transfer Chung Shing Bank from the CDIC to the particular [buyer] institution.
TT: Is the remaining NT$70 billion enough to deal with the massive NPL problem of other financial institutions or will other funds be allocated?
Yen: For the time being I don't believe we need to allocate much more public capital to clean up under performing financial institutions. As I mentioned the 36 grassroots banks with negative net value have already been cleaned up.
As for Chung Shing Bank, the amount of negative net value would be around NT$20 to NT$30 billion, so if we takeover the bank we have about NT$50 billion left. I don't believe we have too many problems left in the banking sector.
But the Executive Yuan can [allocate capital] so there is some room to increase funding for the restructuring fund. If the necessity arises with a large bank, allocation of money would not be difficult.
TT: So no banks will be allowed to collapse as a measure to deter future moral hazard?
Yen: If you look at the 36 grassroots financial institutions, the restructuring fund required them to exit the market. Up to now [such a tough stance] has not existed in the market. We closed their doors.
TT: Is the creation of larger banks or financial holding companies the answer to financial sector consolidation?
Yen: If you look at foreign financial institutions, the more competitive ones are always larger, with a diversity of scope.
But I cannot say size will insure great success in the future; other challenges exist. More important is the quality of the [management's] internal control. Taiwan, en route to further globalization needs to open our markets more to foreign financial institutions.
Under the holding company law we provide 100 percent national treatment to foreign institutions. We allow them to acquire 100 percent of financial institutions in Taiwan and we also provide the chance for foreign financial holding companies to operate in Taiwan.
TT: Pundits have said universal banking may be more suitable for Taiwan than setting up large holding companies. What is your opinion of this proposal?
Yen: Universal banking is popular in Europe where a number of large banks engage in various businesses such as airlines, hotels etc, like Swiss Bank. I don't consider that [model] a good one for Taiwan. The concept of FHCs is much more advanced than universal banking.
TT: Pundits have said Taiwan is too small to need more than a half dozen FHCs. With the number of FHC applications now at 14, what is the ideal number for Taiwan?
Yen: I don't want to say how many FHCs Taiwan should have, that should be up to the market. The market mechanism should take its own course. There will be no limit on the number of FHCs.
TT: In the early 90s, the policy of not having a limit on the number of new banks triggered the formation of too many new market players, resulting in today's overbanking predicament. What is to stop the market from creating a similar situation with FHCs?
Yen: The Ministry of Finance will not repeat this unhappy experience of opening the market as the case is different. In 1991, the ministry approved the formation of 16 new commercial banks, creating the overcrowding. But the formation of FHCs restructures of existing institutions.
TT: Is outside monitoring of FHCs by the proposed financial supervisory board (FSB,
Yen: When the legislature reviewed the financial holding company law last June and July, it decided that a financial supervisory board should be created before the law became effective on Nov. 1, last year.
However, people jumped to the conclusion that we need to have a unified FSB in order to have the necessary financial supervision regarding financial holding companies.
From the view of the ministry, I really welcome this kind of thinking. We certainly welcome the creation of a unified FSB. However, the current trend for the creation of FSBs does not reflect the popular practice.
Up to now, nine countries in the world have FSBs. [The UK, New Zealand, Sweden, Denmark, Norway, Australia, Singapore, Korea and Canada].
The FSB is by its nature only responsible for financial supervision and does not engage in policy-making. That's the major difference. And that is what is currently being debated in the legislature.
Some lawmakers feel the current FSB draft is not good because, according to the government's [version,] the body not only enjoys supervisory functions, but it also is responsible for policy-making. In the nine countries that I mentioned, [foreign FSBs] are all under the jurisdiction of [the nation's] finance ministry.
That's where the debate is and why we don't have consensus or support from the legislature.
TT: Four major parties in the legislature are fighting over the right to nominate board members. Should board selection be made based on political considerations?
Yen: If board members come from political parties, that will be a disaster. If you look into details and practices in those nine countries, the reasons for them to create a unified FSB [are] first, they consider that a quasi-judicial function: they just engage in supervision.
If any financial institutions commit a [regulatory] violation then they will be penalized by that body.
In order to maintain autonomy, they should be an independent body without being subject to parliamentary interference.
But as I mentioned earlier, the body will be only responsible for financial supervision and not get involved in policy-making.
In order to keep [the board's] autonomy, legislators have to keep their hands off of it, which, however, is still under the jurisdiction of the finance ministry.
Also the head [of the FSB] is not as high ranking as the finance minister. And the finance minister needs to face the legislature in terms of policy-making or financial mergers. That's the organizational structure for those nine countries.
In Taiwan, the Cabinet's draft suggests that FSB is responsible for both financial supervision and policy-making.
So, under this kind of consensus, the FSB could not enjoy autonomy, and they will still be subject to the regular budgeting system that needs to be reviewed by our legislature.
Actually, people believe that if we have a unified FSB, that will improve the quality of financial supervision. But I don't think we can achieve such a goal under this design.
TT: According to your plan, would the finance minister be the natural chairman of the FSB?
Yen: I need to answer your question very carefully (laughs). Borrowing from the practices of those nine countries, you can see their FSB heads are either nominated by the finance minister or proposed by finance minister, and subject to the approval of, for instance, the premier or the president.
Anyway, the body itself needs to be responsible to the finance ministry. That's the philosophy.
TT: Last year asset management companies (AMCs, 資產管理公司) began setting up shop in Taiwan to clean up bad collateral at banks, but so far few banks have actually shed bad debt. Has the process stalled?
Yen: We created an article that provided the legal foundation for operating AMCs. The main objective of AMCs is to acquire NPL assets from commercial banks at reasonable prices determined by the market.
In the past, if our commercial banks tried to dispose of NPL assets they had to go through a burdensome and lengthy court procedure. So we developed a legal system that allows commercial banks to sell NPL assets through the so-called independent third party.
This helps banks create much more liquidity to clean up their NPL assets. AMCs are a very positive [development] for Taiwan. We offer AMCs the opportunity to learn by doing.
TT: What incentives do banks have to turn to an AMC and request help when disposing of stagnant loan collateral?
Yen: If commercial banks dispose of commercial assets via an AMC the financial losses they have to take up can be amortized over five years.
Some banks are currently working [on these kinds of plans]. And some foreign investment bankers are looking to start joint ventures with local banks here.
TT: What do you think about two recent auctions by Citibank to dump bad loan collateral?
Yen: That is one way of liquidating bad assets and I consider that it will probably serve as a very good model for other banks [in the future].
TT: According to international standards what is Taiwan's current NPL ratio and does the government plan to require banks to reduce their NPLs to a specific limit?
Yen: In 1997 Taiwan's NPL ratio was 3.93 percent with a very steady increase year by year. In the second half of 1998 we began to see some problems in our securities markets.
Some large-sized publicly listed companies began to show financial difficulties. The reason for that was simply that management engaged in too much risky investment.
But by last year the worldwide economic slowdown hit the banking sector and the asset quality continued to deteriorate. I don't believe that during a slowdown we can have a target to require reducing bank NPL ratios to a certain degree, but certainly we will continue to require them to write-off bad loans and we are very concerned about that ratio increasing.
The current NPL ratio stands at 7.97 percent, a very noticeable increase. In order to have a true reflection of the NPL ratio in Taiwan -- something foreign ratings agencies have long criticized -- we use a system of classification just slightly different from the US definition of NPLs.
In the US, when the principle and interest payments are overdue three months, a loan is classified as non-performing.
In Taiwan, when the principle is overdue three months that loan is classified as non-performing and when interest payments are overdue six months, a loan needs to be classified as non-performing. So there is a slight difference.
If we totally followed the US definition, Taiwan's current NPL ratio would be at 9.47 percent. Another measure that also brought criticism in the past was the providing of soft lending for enterprises with difficulty [making their loan payments].
The ministry has coordinated with banks to do some restructuring of loans. If we [classify] these restructured loans as NPLs then Taiwan's NPL ratio would increase slightly less than 2 percentage points.
One encouraging point is that last year some foreign media had speculated that Taiwan's banking sector would suffer a financial crisis. However that never happened.
The financial reforms undertaken have demonstrated the strong determination of the government and the observers never again questioned the possibility of a financial crisis.
Just last week a reporter from Business Week was here for an interview to exchange views on financial reforms. He apologized to me for writing an article in October of 2000 mentioning that Taiwan may suffer from a financial crisis.
TT: What kind of pressure has WTO membership put on the financial sector?
Yen: The ministry was one of the ministries that were well prepared for accession to WTO. Actually I was a pioneer scholar on GATT (the general agreement on tariffs and trade) in Taiwan. I based my studies in the US particularly on this subject and taught in university on this subject.
In addition I also served as a government advisor at the time of Taiwan's GATT membership. I even published a book on the operations of GATT. Members are required to provide most favored nation treatment and national treatment to all members of the WTO.
We already did this for all foreign financial institutions. So we don't have any adjustments to make in this area, although we do need to open our financial markets to foreign institutions and welcome their participation.
Their entry will not only bring in capital but also advanced management know-how and that will help our financial markets as a whole. However the creation of a world-class environment must include the local players in the market as well.
Through our very determined financial reforms we have given a strong signal to the international community that we are serious about undertaking financial reform as quickly as possible.
And following those reforms you can see that foreign institutional investors are much more confident in the asset quality of our securities market.
One other important message is that Taiwan is trying to develop much more friendly economic relations with China.
So if foreign financial institutions really want to get involved in the retail-banking sector there, they will need to hire Mandarin-speaking bankers.
The only place that can provide quality banking staff is Taiwan. Therefore Taiwan will serve as a very important gateway for foreign financial institutions to participate in China's financial markets.
TT: With the Cabinet expected to be reshuffled today, do you believe you will be asked to stay on and serve the Chen administration?
Yen: (Laughs) No comment.
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