Financial Restructuring

As introduced by the Yearbook of the Republic of China:

Taiwan's economy grew at a phenomenal pace throughout the 1970s and 1980s. The rapid accumulation of assets that accompanied this growth led to a tremendous increase in financial activity and brought about profound structural changes in the local financial markets. Increasing labor costs and the appreciation of the NT dollar in the 1980s sped up the globalization of Taiwanese capital by encouraging investments and other financial involvement in overseas financial markets. This trend, in turn, exerted competitive pressure on the domestic financial system and forced Taiwan to liberalize itself more to attract foreign investors and financial institutions.

Taiwan's financial system has been undergoing restructuring since 1987. Among many changes that have been made is the relaxation of restrictions on cross-border capital flows. Interest rates have also been gradually liberalized, beginning with discount rates on CDs and bank debentures, and extending to include deposit interest rates. In 1989, the revised Banking Act was passed, lifting all restrictions on interest rates and bringing an end to Taiwan's long history of interest rate controls. In addition, the island began developing its short-term money market and long-term capital market to help meet the requirements of supply and demand, thereby allowing market mechanisms to play a more active role in the financial system.

When Taiwan set up its money market in 1975, it was limited to inter-bank call loans and other short-term monetary instruments. Since then, it has evolved into the second largest money market in Asia with an annual turnover exceeding US$1.6 trillion. The size of Taiwan's bond market has also expanded drastically since 1989 due to the heavy issuance of government bonds for economic development. As for the stock market, the revised Securities Transaction Act of 1989 allowed new entries into the brokerage business and loosened restrictions on inward remittances of foreign capital for portfolio investment, thereby making Taiwan's financial markets more competitive internationally.

Taiwan has strengthened financial re-regulation and supervision in response to changes in the financial environment. The rapid expansion of financial markets, including the deregulation of financial activities, financial innovations, and new entries in the financial sector, as well as the possible disorder associated with financial realignment, have all made re-regulation necessary. In line with the Bank of International Settlements, Taiwan has set its capital adequacy ratio at 8 percent of risk assets. The government also established the Central Deposit Insurance Corporation (CDIC) in 1987 to provide a better safety net for depository institutions. The Banking Act of 1989, while allowing new entrants into the banking industry, also tightened regulations dealing with problematic banks. Regulating some areas while deregulating others has been the most important task of financial restructuring in Taiwan.

After a number of bank runs on local credit cooperatives in the past few years, the CBC and the MOF decided to form a temporary joint committee to monitor all banking institutions. The MOF also revised the Act of Deposit Insurance in 1999, requiring all financial institutions to participate in a system of compulsory deposit insurance.

To promote an active market of corporate bonds and to introduce more positive competition among banking institutions, the first credit rating company in Taiwan began operations in May 1997. With the passage of the Act of Futures Trading, the local futures exchange was opened in October 1997 and the Taiwan International Mercantile Exchange (TAIMEX) was inaugurated in July 1998. Trading on indices of electronic and financial stocks was opened in 1998 to make firms and individuals more flexible in hedging their risks against the volatility of commodity prices, exchange rates, interest rates, and stock prices. Some new financial instruments, including warrant contracts on approved stocks, exchange rate options, and foreign exchange futures, were also listed on the Taiwan Stock Exchange or allowed to be traded in the OTC market in 1997. To mobilize the domestic stock markets and prepare it for international competition, the MOF also gradually loosened regulations on foreign capital. The limit on the ownership ratio of domestic listed firms by a single foreign investor was raised from 15 percent to 50 percent, and by foreign investors as a whole from 30 percent to 50 percent, in February 1999. The MOF also raised the quota of portfolio investments by a single foreign investor from US$600 million to US$1.2 billion in November 1999, and even further to US$1.5 billion in October 2000. At the same time, foreign investors began to be allowed to participate in TAIMEX trading. To help firms with potential overcome the hurdle of listing regulations, a second board market, the Taiwan Innovative Growing Entrepreneurs (TIGER) for over-the-counter trading, was created in April 2000.

Based on the Act for the Establishment and Administration of the Financial Restructuring Fund, the government has established a quasi-Resolution Trust Corporation (RTC) mechanism to facilitate the restructuring or liquidation of poor-quality assets in the banking industry, and, if necessary, require insolvent institutions to cease operations and exit the market. Public capital totaling NT$140 billion will be used to support this mechanism, with NT$120 billion coming from business taxes expected to be filed by financial institutions over the next four years, and the rest coming from insurance premiums collected by the CDIC. In addition, in view of the rapid development of Taiwan's monetary markets, the Act Governing Bills Finance Businesses will help strengthen the clearing, settlement, and depository system for short-term bills, as well as provide a legal basis for centralization. It will also reinforce the operating structure of bills finance companies, enhance the functions of bills finance associations, and strengthen trading in the monetary markets. Under the new law, bills finance companies will be allowed to buy, sell, or underwrite bank debentures, in addition to dealing with short-term money market instruments. They will also be permitted to issue corporate bonds as a means to raise long-term capital and reduce their over-reliance on short-term funds.

Other accompanying rules have been issued and implemented by the MOF to make the market more conducive for banks to engage in relevant businesses, such as the Amendments to the Banking Act and the Trust Enterprises Act in 2000, and the Act Governing Bills Finance Businesses in 2001. These financial reform laws are aimed at improving the quality of assets, expediting the consolidation of financial institutions, and enhancing investor and depositor confidence in the banking system. It is hoped that these ongoing financial reforms will eventually elevate Taiwan's financial sector to a new stage of competitiveness.