Financial Reforms

As introduced by the Yearbook of the Republic of China:

Financial reform has been one of the key policy directions under the Challenge 2008 National Development Plan inaugurated by the Executive Yuan in 2002. The plan covers political, fiscal, and financial reforms.

As a response plan to the worsening finance and economy, the Economic Development Advisory Conference (EDAC) was held in August 2001. At this conference, a consensus was reached for setting a new course and direction for development, thereby boosting economic confidence. In order to thoroughly implement and carry out these tasks, the Council for Economic Planning and Development (CEPD) conducts quarterly examinations and reviews on progress. By January 2003, 39 bills were passed among 59 submitted to the Legislative Yuan for revision or amendment, 77 administrative orders were in practice out of 80, and 417 administrative measurements were completed out of 486. Meanwhile, the government continued its financial reforms. A special parliamentary session was held in June 2001 to review six financial reform bills, including the Act for the Establishment and Administration of the Financial Restructuring Fund, the Financial Holding Company Act, and the Act Governing Bills Finance Businesses. These developments indicated that the government was determined and committed to solving the ever-increasing non-performing loan problems and modernizing the financial sector to match up with those of more advanced countries.

The primary objectives of financial reform are (1) to establish a financial monitoring system in accordance with international norms and standards; (2) to make the securities market stronger and healthier; and (3) to accelerate the disposal of NPLs to enhance Taiwan's financial competitiveness. A Financial Reform Task Force has been formed under the Executive Yuan to combine the wisdom and experiences of government agencies, scholars, and experts. In order to be more focused on specific issues, there are five sub-committees under the Task Force in charge of banking, insurance, capital markets, community financial institutions, and combating financial crime. In 2002, the Financial Reform Task Force held a series of meetings in which it directed 22 financial reform issues and 62 concrete reform suggestions. Most of these issues and suggestions are expected to be achieved within three years. Issues related to banking include (1) establishing an effective mechanism to deal with NPLs; (2) accelerating the process of handling financially troubled financial institutions; (3) fostering a favorable environment for the financial industry; and (4) enhancing financial supervision and regulation.

The cause of huge bad loans is the over saturation of banks. The Republic of China, a nation of 23 million people, is crowded with 52 domestic banks, 36 foreign banks, and more than 300 other types of financial institutions offering various monetary services. Cut-throat competition has seriously impaired the banks' ability to increase profits. In addition, numerous regulations that were intended to make the sector sound actually hindered growth and competitiveness. To remedy the situation, the government began to liberate the market by relaxing restrictions in 1989 and approving the entry of 15 private commercial banks into the market in 1991. The credit cooperatives were further permitted to transform into banks in 1997.

According to the BOMA, Taiwan's overall NPL ratio climbed from 3 percent at the end of 1995 to a record high of 8.78 percent in March 2002, an increase of NT$351.5 billion to $1.4 trillion (US$10.2 billion to $40.7 billion) in bad debt. Among the worst offenders were the grassroots credit cooperatives and the credit departments of the farmers' and fishermen's associations, which had NPLs registering at 18.5 percent in June 2001.

In January 2000, the passage of the Financial Institutions Merger Act heralded the launch of a reform battle. In June of the following year, the Legislative Yuan went into a special session and passed a package of six financial laws. In addition to further revisions of the standing insurance and business-tax laws, this package put in place the Financial Holding Company Act and the Resolution Trust Corporation (RTC) Act for setting up and managing a NT$140 billion (US$4 billion) Financial Reconstruction Fund aimed at cleaning up the bad loans troubling the grassroots financial organizations within three years.

Since 2002, domestic banks have been obliged by the authorities to reveal their loans on probation (loans overdue for between three and six months). The MOF is tightening the screws on banks to achieve greater transparency of their lending information and make statistics better reflect reality.

These reforms, to be complemented with the passage of the Act Governing the Organization of the Financial Supervisory Commission pave the way for the establishment of asset management companies (AMC) and financial asset services companies (FASC), allow the purchase and union between banks and other financial institutions, and permit further diversification of financial organizations' product menus and investment portfolios. By the end of 2002, these companies had purchased bad assets worth NT$161.2 billion (US$4.7 billion) from domestic banks. Meanwhile, to help banks write off their bad loans, the MOF has cut the business tax from 5 percent to 2 percent since 1999 and agreed to reduce the banks' reserve requirement ratios. It is expected that local banks will be able to reduce their NPL ratio to below 5 percent within two years and maintain a minimum capital adequacy ratio at no less than 8 percent, as required by the Bank for International Settlements.

In 2002 alone, according to the CBC, domestic banks wrote off bad loans amounting to NT$413.9 billion (US$12 billion), reducing the total NPL ratio to 6.12 percent, or 8.86 percent if loans on probation are included. Under a series of financial reforms, motivated bankers now rely more on credit scoring -- accessing the prospects, management, and cash flow of enterprises, rather than collateral they provide -- when making loans.

Meanwhile, the MOF and related agencies have reduced their shares in the Mega Financial Holding Company, which includes the state-run Chiao Tung Bank, from 33.32 percent to 11.49 percent. Government shares in the First Financial Holding Company will be sold after the completion of legislative reviews.

Furthermore, in April 2003, the MOF announced a four-grade, reward-penalty measure that will govern the bank's operations based on their NPL ratios. This measure punishes banks with NPL ratios above 5 percent. Banks with NPL ratios higher than 15 percent will receive the extra penalty of having their top management dismissed from duty. So far, seven banks have fallen into this category, led by the Chung Shing Bank with NPL ratio at 64.8 percent. On the other hand, banks with an NPL ratio below 2.5 percent will be rewarded with nine regulatory privileges.