Taiwanese Financial Reform

Huang, Chia-Teng (Ken)

Wu, Chia-Hsuan (Dominic)

Agenda Background on financial system in Taiwan

Current economic environment and problem recognition

Source of the problem— Lack of complete Financial regulation

Conclusion

BackgroundFirst financial reform: Before 1991, the majority of Taiwanese

banks were government owned. 18 private owned banks were established

during the First Financial Reform in 1991. In 2001, there were more than 447

financial institutions and 5,841 branches in the small island

BackgroundOver-banking over bad debt The lack of government monitoring, Asia’s

financial crisis, and market’s vicious competition result in over irrecoverable loans and credits.

Series bankruptcies.

Background:Asian financial crisis No debt/no deficit Foreign exchange reserves Fiscal policy: stable exchange rate in the

beginning to defeat foreign investors (Ex: Soros). Let market adjust the exchange rate later on.

Background:

Two rates in Taiwan are always stable after the first financial reform and the Asian Crisis

Foreign exchange rate are stable

Commit suicide rate is stably increasing

Background:Second financial reform in 2001 Release government owned banks to

public/release government holding shares of existing government banks to less than 20%.

Integrate over-existing financial institutions to financial holding corporations.

Background:Advantages of financial holdings: Reduce financial institutions Prevent vicious competition Reduce the over irrecoverable loans Synergy and better service Global competitive advantages Increase government monitoring ability

Financial Reform

14 financial holding companies in total in 2002 Net total capital over 333 billion U.S. dollars Only the strongest seven financial holding

companies were allowed to operate at the end of 2006

Aiming to be able to compete against foreign companies entering the domestic financial market through WTO framework

Problems of financial reform

Financial holding companies benefit from synergy (commercial banks, investment banks, insurance companies, securities/stocks brokers)

Efficient synergy of smaller companies was ignored by the government

To become the top seven, 14 financial holding companies would need to merge others or to be merged

Issues in financial reform

Only short period of time was given for financial holding companies to complete merger process

Government manipulation in merger process, benefiting certain financial holding companies

Misallocation of public fortune

Financial Holding Company Law

Established and became effective on November 1, 2001 for financial form

Major financial regulation for financial holding companies

FHC are only allowed to invest in new business and manage the invested ones

Total investment amount cannot exceed 15% of its own capital, and cannot hold more than 5% of the invested business.

Problems of the Financial Holding Company Law Only restricts financial holding companies,

but not their subsidiaries Possible cheating to cover their own

losses by subsidiaries Risky venture capital business are likely to

harm the bank depositors

Conclusion

By 2006, the total number of financial holding companies had to be reduced to seven

However, 14 financial holding companies still operating on the financial market

Government has lost control of the financial holding companies

Ineffective financial supervising system Unfair dealing with certain financial holding

companies by the government