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Asia-PacificJuly 1 2003

Reconstruction plans in trouble

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Dennis Engbarth reports on how political tussles are stalling attempts to rescue Taiwan’s ailing banking system.Recent efforts to clean up Taiwan’s troubled financial system have suffered a major setback as the national legislature failed to approve a major replenishment of the official Financial Reconstruction Fund (FRF), an entity similar to the resolution trust companies used to combat the US savings and loans crisis in the 1980s.

A draft bill for a boost in FRF funding and for expansion of its scope was not even sent to the floor as opposition legislators and finance ministry officials failed to reach compromises on key obstacles. The long-awaited statute to establish an unified financial services supervisory committee and a draft bill to revamp the troubled grassroots agricultural finance system also failed to make progress.

The major obstacle to passage of the reform bills was the balance of power in Taiwan’s national legislature and intensifying manoeuvring for political advantage in the run up to next March’s presidential elections.

Political problems

The allied conservative opposition, composed of the former ruling Kuomintang (KMT – National Party of China) and the People First Party, enjoy an outright majority in the 224-seat Legislative Yuan. They have 112 seats compared with the 101 held by the governing Democratic Progressive Party (DPP) and its sometimes allied Taiwan Solidarity Union, with the remaining seats held by independents. But no less of an obstacle was the system of party-to-party consultation, which virtually requires a prior consensus to be reached before bills can be sent for a final floor vote.

Before the current legislative session began in late February, finance minister Lin Chuan had earmarked draft revisions of the statute to establish and manage the official NT$140bn ($4bn) FRF the draft organic statute to set up an integrated cabinet-level “financial services supervisory commission” and a draft agricultural finance law as priority bills.

The FRF has already used up most of its initial funding in the takeover of more than 40 credit departments of farmers’ associations and credit co-operatives financial institutions. Finance ministry officials estimate that at least NT$100bn will be required to deal with the Chung Hsing Commercial Bank and the Kaohsiung Medium Business Bank, both of which now operate under receivership of the official Central Deposit Insurance Corp.

As approved by the DPP-led cabinet last year, the draft revisions would have bolstered the FRF’s war chest to NT$1000bn, mainly through self-financing measures. This would have allowed the fund to take a more active role as a special investor in troubled banks to spur faster retirement of bad loans, improve Bank for International Settlement capital adequacy ratios and promote mergers to consolidate Taiwan’s atomised financial sector. But opposition lawmakers declined to grant approval to the proposed authority for the fund to buy non-performing liabilities and invest in “special stock” in poorly managed banks that had not yet suffered an open crisis.

PFP legislator Norman Yin says the proposed new powers would mark “a reversal of the process of privatisation” of Taiwan’s formerly state-controlled financial system. He says his party’s version, sponsored by PFP lawmaker Liu Yi-ju, aims to establish “a transparent and effective mechanism for the operation of the fund”.

Mr Yin, a professor of finance at Taipei’s National Chengchi University, says: “There is now no real difference between the FRF management committee and the official Central Deposit Insurance Corp. We propose establishing a special and distinct FRF management committee to ensure professional management of the fund and set up a transparent process for its operations.”

In the face of conservative opposition, the finance ministry took the initiative to withdraw the planned amount of funding for the special stock role, thus trimming the proposed funding to NT$680bn, but PFP legislators preferred to cut the fund’s size even further.

Minister’s warning

On June 3, Mr Lin issued a last-minute appeal warning that “the pace of bank restructuring efforts would be stalled” if the bill did not pass in the session that ended June 6. He said that NT$310bn of the funding would be covered by payments of the gross financial business tax by banks and other financial institutions, and thus would not add to the government’s fiscal burden. The remaining NT$270bn would be derived from sales of non-performing assets, a process that would also spur the development of the financial market.

The lack of the new authorisation would block the establishment of an effective mechanism for the market exit of failing banks and would result in a monthly haemorrhaging of NT$260m in losses from the Kaohsiung Business Bank and the Chung Hsing Bank, he said. And the bill for coping with these failed financial institutions would rise.

Mr Lin says that without the FRF replenishment and revisions, the finance ministry would be unable to meet the official “2-5-8” target of reducing the average domestic bank non-performing loan ratio (NPLR) to 5% and lifting the average capital adequacy ratio to 8% within two years.

According to finance ministry data, the narrowly defined official NPLR continued to edge down to 6.08% (NT$852.4bn) by April 30, compared with 6.12% at end-2002 and 7.48% at end-June 2002.

But the average figure hides a vast difference between eight banks with NPLRs lower than 2.5% and six banks, including the Kaohsiung Business Bank and Chung Hsing Bank, with bad loan ratios higher than 15%. If loans under observation were included, the broader NPLR would have been 8.82% at end-February, compared with 8.85% at end-December and 10.79% at end-June 2002.

Despite the appeal, consultations on the bill have failed to resolve the deadlock, resulting in a spate of mutual recrimination. “The finance ministry refused to follow our suggestion and separate the budget and the revisions to the FRF statute because the government wanted to use it as a weapon to accuse the opposition of blocking reform,” says Mr Yin.

The conservative KMT-PFP alliance “blocks any measure that could be seen as adding credit to the government”, says DPP legislator Chiou Tai-san, who was also on the finance affairs committee. He predicts that the political armlock on reform bills may not be resolved until the March 2004 presidential poll and the next set of legislative elections in December 2004.

Sinopac Holdings senior executive officer Daniel Chen says: “The failure of the legislature to pass the RTC bill will definitely hurt Taiwan’s international credit standing, just as the government’s retreat on the reform of grassroots financial institutions after the major farmers’ associations demonstration last November.” But he says the delay would “not be fatal”.

Taiwan Thinktank chairman Chen Po-chih says: “The delay in passage will add some risk in the unlikely case that another bank crisis breaks out, but there should be other methods available to deal with such an event.”

Threat of delay

Mr Chen, a former chairman of the Cabinet-level Council for Economic Planning and Development, says: “The more serious effect will be the delay in alleviation of the current capital squeeze on loans to business as it will slow down the pace by which banks are retiring bad loans.”

Initially proposed by the former ruling KMT government in the 1990s, the proposed statute to form a cabinet-level unified “financial services supervisory commission” (FSSC) also remains mired.

The DPP’s Mr Chiou says: “While the FSSC is critical to the long-term health of the banking sector, it is more urgent and feasible to secure passage of the FRF revisions and use that to pressure financial institutions to improve their internal risk controls and management.”

He say there are concerns that new financial tools, such as real estate securitisation, will not prove effective so long as the long-standing structural problems in Taiwan’s financial system continue, especially the legacy of five decades of incestuous government, KMT party, banking and business links known as “black and gold” money politics.

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