Corporate Government and Financial Intermediation

Yin-Hua YehGraduate Institute of Finance,

Fu-Jen University, Taiwan

Yin-Hua Yeh, Fu-Jen University 2

The Myth of Financial Institutions’ Size

Big means good ?Good must be big ?

FIs are more likely to enlarge their size through M&A Corporate governance ? Risk management ? Bring much risk ? FIs should enhance competitiveness through CG and RM

before launching M&A for the purpose of size augmentation.

Yin-Hua Yeh, Fu-Jen University 3

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

0.0 0.2 0.4 0.6 0.8 1.0

CR3

ROE

The relationship between the concentration (CR3) and ROE of the largest three banks

Yin-Hua Yeh, Fu-Jen University 4

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4

ΔCR3

ΔROE

The relationship between the variation of concentration (△ CR3) and variation of ROE

(△ROE) of the largest three banks

Yin-Hua Yeh, Fu-Jen University 5

The Problems of CG to Taiwan FIs

The function of boards needs to be substantially improved 17% shareholdings control more than half of board

seats (around 60%) serve the post of chairman and/or CEO.

Crises embedded in risk management Has been written off NT$1.5 trillion NPL in 2000-2005. The turmoil of over-financing credit/cash cards in the past

two years Consecutive events of operational risk and internal-control

flaws

Yin-Hua Yeh, Fu-Jen University 6

The Problems of CG to Taiwan FIs

Information disclosure needs to be substantially improved The controlling shareholders of FIs tend to use the insuranc

e companies, banks, securities houses and oversea subsidiaries under their control to launch M&As at same time.

Many banks dispose the losses from factoring NPLs to AMCs on assets. It is legal bur go against GAAP to apportion the losses in five years.

The assets of the state-controlled banks comprise around 50% of the total assets of all banks

To Strengthen the Competitiveness through CG and RM

INPUT

CapitalIT/ Fix AssetHuman Resource etc.

OUTPUT

LoanInvestmentOff-Balance-Sheet Activities etc.

Create value

PerformanceValue

Efficiency Return

Risk Management

CreditLiquidityMarketOperation etc.

Sound Corporate GovernanceYin-Hua Yeh, Fu-Jen University

Yin-Hua Yeh, Fu-Jen University 8

To enhance the function of board of directors

To require at least one third independent directors on the board

the profession of directors must be helpful and useful for the future developing of FIs

The Board of Directors should set up audit committee and risk management committee to take charge of the information transparency and risk management.

Audit committeein financial holding company

External Auditors Internal Auditors

Bank Security Insurance

External Auditors

To unitize of financial and risk information in financial holding company

CFO

Internal Auditors

CFO External Auditors

Internal Auditors

CFO External Auditors

Internal Auditors

CFO

Yin-Hua Yeh, Fu-Jen University

Board of Directors

Risk Management Committee

CEORisk

Management Committee

Bank Security Insurance

Risk Management

PolicyMonitoring

Risk Management

SourceMeasureManagement

DivisionRisk

Management

DivisionRisk

Management

DivisionRisk

Management

Audit Committee

Cooperation

Yin-Hua Yeh, Fu-Jen University

Yin-Hua Yeh, Fu-Jen University 11

The role of government in a state-controlled financial institution

To improve the CG and RM of State-controlled FIs

Being the early adopter of high CG standards Enhance the expertise and incentive of board mem

bers and top managers Enhance the function of audit committee/RMcom

mittee One-shot privatization- the cession of sharehold

ings and control in once and for all