 |
| |
|
| |
Central Banking Policies in Taiwan* |
| |
Yen
Chrystal Shih (施燕)** |
| |
|
| |
It
has been three and half years since the eruption
of the Asian financial crisis. To date, although
the worst of the crisis was over, it may take some
time before the Asian economy, especially the financial
sector, recovers from the lingering effects of this
financial flu. In the case of Taiwan, its real GDP
growth rate for 1997 was 6.7%. When the impact of
the crisis on the export sector became more evident
in 1998, Taiwan's economic growth rate fell to 4.6%.
In 1999, despite a severe earthquake, Taiwan's GDP
expanded a brisk 5.4%. Driving this growth was strong
external demand as well as a pickup in private consumption.
In 2000, the economic recovery has further gathered
momentum, and the growth rate is expected to reach
6.5%. While the performance of the real economic
sector has been satisfactory, financial developments
remain a major concern. The non-performing loan
problem has not been resolved yet. The recent depreciation
of the southeastern Asian currencies and decline
in Asian stock markets have also aroused some fear
of a possible resurgence of the Asian financial
crisis.
This paper provides a summary of Taiwan's exchange
rate policy, monetary policy, capital account liberalization,
and banking reform measures in the past three years.
|
| |
|
| |
1. Exchange Rate Policy and Monetary Policy |
| |
Taiwan's
exchange rate policy and monetary policy after the
outbreak of the Asian financial crisis can be roughly
divided into four phases. .
Phase I: from July 1997 to mid Oct. 1997
In the beginning of the Asian financial crisis,
the Central Bank tried to defend the Taiwan dollar
by actively intervening in the foreign exchange
market and raising the discount rate. However, as
a result of heavy intervention, our foreign exchange
reserves decreased by US$7 billion within four months.
At the same time, interest rates went up and stock
prices dropped. .
Phase II: from mid Oct. 1997 to Sep. 1998
In mid-October 1997, viewing that the crisis
showed no signs of abating, and that prolonged monetary
tightness and relatively strong Taiwan dollar might
undermine our real economic sector, the Central
Bank ceased defending the Taiwan dollar. Since then,
the Central Bank had only intervened in the currency
market occasionally and modestly. The Taiwan dollar
consequently exhibited a sharp downward trend from
mid-October onwards and reached a low of 34.5 in
mid-January 1998, depreciating by 17% within three
months.
The Central Bank also removed distortions in
the foreign exchange market, blocked speculators'
access to local currency funding, and encouraged
banks to enhance their exchange rate risk management.
In addition, the Central Bank initiated a real-time
reporting system for monitoring large-volume foreign
exchange transactions.
Among the measures, the ban on NDFs (non-delivery
forwards) in May 1998 was key to curb speculative
attacks. Since the outbreak of the Asian financial
crisis, NDF transactions had increased sharply,
and part of the increase was associated with speculation.
Some local banks sought to circumvent the ceilings
imposed on their net NDF positions in order to meet
the speculation needs of their clients . While selling
a large amount of US dollar NDFs to their clients,
these banks also purchased NDFs from and sold DFs
to some local enterprises who had no foreign currency
exposure so that these banks' net NDF positions
would not exceed the ceilings. However, these banks
had to purchase US dollars from the spot market
to hedge their own exchange rate risk. As a result,
the Taiwan dollar depreciated further as a self-fulfilling
expectation of depreciation set in. The Central
Bank therefore prohibited local enterprises from
engaging in NDF transactions .
Phase III: from Oct. 1998 to Feb. 2000
As Asian currencies rebounded strongly in September
1998, the Central Bank, under the prerequisite of
price stability, began to implement a more relaxed
monetary policy to stimulate domestic demand. The
key measures included lowering required reserve
ratios and releasing postal savings re-deposits
to provide the medium- and long-term funds needed
for both private investment and public infrastructure.
Domestic interest rates markedly fell subsequently.
.
Phase IV: from Mar. 2000 to present
Since the beginning of the year 2000, the economic
recovery has further gathered momentum while inflationary
pressure has gradually built up mainly because of
the run-up in oil prices. The Central Bank therefore
took a preemptive measure by raising the discount
rate by 0.125 percentage point on March 24. The
Central Bank made a further increase of 0.125 percentage
point on June 27 . The inflationary pressures eased
off during the course of the year, and the CPI inflation
rate is expected to be merely 1.3% for the year
as a whole. |
| |
| *
|
This
paper was presented in the 6th Asia-Pacific
Central Banking Conference, Singapore, 27-28,
July 2000, and was revised in December 2000.
|
| ** |
Director General, Economic Research Department,
The Central Bank of China, Taipei, Taiwan,
Republic of China. |
| |
|
|
| |
2.
Capital Account Liberalization |
| |
A key
factor in the Asian financial crisis was large and
sudden swings of foreign capital flows. For a long
time, advocates for free cross-border capital movements
have argued that free capital movements help channel
resources to their most productive use and thereby
increase economic growth and welfare-both nationally
and internationally. However, in the Asian financial
crisis we have come face-to-face with the reality
of free capital mobility and have learned that the
theorem of the gains from free trade in goods cannot
be fully applied to free movements in financial
capital.
To minimize the negative side effects, opening
of the capital account should first meet prerequisites
and should take place in an orderly way . Taiwan's
foreign exchange controls related to current account
transactions were removed in 1987. Following the
liberalization of the current account, restrictions
on the capital account were relaxed gradually with
careful planning in advance, especially in the case
of portfolio investment. Qualified foreign institutional
investors were allowed to invest in the local stock
market in 1990 with an overall ceiling of US$2.5
billion. The ceiling was raised several times, and
was removed in 1995. In 1996, the restrictions on
foreign portfolio investment were further relaxed
to allow both foreign natural persons and legal
persons to invest in the local stock market. In
addition, the percentage ceiling of foreign investment
in the shares of each listed company were removed
in November 2000, with exception made to certain
specific industries .
Perhaps one of the most important reasons for
the adoption of a gradual approach has been to give
us time to enlarge the scale of our financial sector.
During the process of gradual liberalization of
the capital account, the financial sector has grown
significantly. Since 1987, bank deposits have grown
more than three times, and the outstanding balances
of money market instruments, bonds, and corporate
shares have also exhibited high growth rates ranging
from seven to ten times.
Currently, for prudential reasons, there are
still some restrictions on capital flows. The annual
inward or outward remittance ceilings for each local
individual and company are set at US$5 million and
US$50 million, respectively. Each qualified foreign
institutional investor is allowed to invest up to
US$2.0 billion in Taiwan's stock market. Each foreign
natural person and each foreign legal person is
allowed to invest up to US$5 million and US$50 million,
respectively. |
| |
|
| |
１ The Central
Bank stipulates that net NDF position of a local
bank must not exceed one-third of that bank's foreign
exchange position.
２ Local exporters and importers were still allowed
to engage in forwards and swaps to hedge the exchange
rate risk.
３ At the same time, the Central Bank also lowered
the required reserve ratios for checking and time
deposits and raised the ratio for passbook savings
deposits. The move was aimed at adjusting the structure
of required reserve ratios for different types of
deposits to a more reasonable one, and did not result
in any significant change in the weighted average
required reserve ratio, which is currently 6.35%.
|
| |
|
| |
3.
Financial Reforms |
| |
Since
the outbreak of the Asian financial crisis, the
Central Bank and the Ministry of Finance have made
every effort to strengthen our financial sector.
The reforms in the banking system being carried
out include the following:
a. Improving the profitability
of banks .
The Taiwan economy has experienced a change in
the industrial structure as the growth of high-tech
industries persistently outpaces that of traditional
industries . Along with the change in the industrial
structure, the financial structure has also been
shifting from bank-based to market-based . The trend
of disintermediation has put banks in a disadvantageous
position. In addition, the entry of 16 new private
commercial banks, each with a paid-in capital of
over NT$10 billion, after the entry deregulation
in 1991, has gradually led to the overbanking problem.
The disintermediation trend together with overbanking
problem and the negative impact from the Asian financial
crisis on the corporate sector have resulted in
a decline in the profitability of banks. Both the
after-tax returns on assets (ROA) and on net worth
(ROE) declined from 0.9% and 20.1% in 1991 to 0.5%
and 5.9% in 1999, respectively. In such a disadvantageous
banking environment, the Central Bank raised the
interest rate paid on banks' reserve accounts three
times by a total of 1.6 percentage points within
the past two years . It is estimated that the most
recent 0.8 percentage point increase in interest
rate alone can generate an extra revenue of NT$4.8
billion per year for the banking sector.
b. Helping banks reduce
non-performing loan ratios
The Central Bank and Ministry of Finance have
also helped banks reduce non-performing loan ratios.
The Central Bank cut required reserve ratios and
issued NCDs with a favorable interest rate to freeze
the to-be-released high power money in February
1999, and the Ministry of Finance also lowered the
gross business receipts tax (GBRT) rate for banks
from 5% to 2% in July 1999. The extra bank profits
derived from these two measures, estimated to be
NT$35 billion per year, were required to be used
exclusively to write off bad loans. In addition,
relevant regulations were revised to enable banks
to speed up the process of writing off bad loans
and to issue preferred stocks to improve their ability
to bear losses . From July 1999 to October 2000,
banks have already written off a total of NT$271
billion bad loans. The Ministry of Finance continues
to closely monitor progress of individual banks
in writing off bad loans. The non-performing loan
ratio of domestic banks at the end of October 2000
was 5.49 percent .
c. Strengthening prudential
regulation
The agency problem is the intrinsic weakness in
banks. Bank directors and senior management must
be sufficiently accountable to shareholders and
creditors for overseeing the operation of their
banks. The required qualifications of directors
and senior management of banks were revised in November
1999. In the revision, the proportion of directors
and supervisors with professional background was
required to increase, chairpersons of the boards
were required to have professional background, and
restrictions on the directors and senior management
of banks to hold concurrent positions were clearly
defined.
Besides that, stricter restrictions on related-party
exposures will be imposed in the new revisions to
the Banking Law, and the practice of using surrogates
to obtain loans will also be strictly restricted.
The penalty for violation of the Banking Law and
other regulations by directors and senior management
will be raised substantially.
d. Strengthening market
discipline on banks
Market discipline on banks has been strengthened
via enhancing financial transparency and improving
ownership structure of banks. The Central Bank started
to issue quarterly reports on operational performance
of individual banks in 1998. All banks engaging
in commercial paper guarantee business were also
required to be rated by rating agencies before the
end of 1998. As of the end of September 2000, bank
assets of rated banks accounted for 95.5% of total
bank assets. With greater financial transparency,
depositors, creditors and investors can be better
informed and more capable of making assessments,
which in turn increases market discipline on banks.
A state-owned bank carries with it a risk of an
implied government guarantee, thereby reducing market
discipline. The policy of bank privatization has
been carried out since 1998. So far, there have
been 7 banks being privatized. The market share
of state-owned banks has declined significantly
from 39.5 % at the end of 1997 to 18.0% at the end
of September 2000 in terms of deposit-taking.
e. Introducing a risk-based
premium system for deposit insurance
To safeguard the interests of depositors, the
Central Bank and the Ministry of Finance established
the Central Deposit Insurance Corporation in 1985.
In January 1999, participation in the deposit insurance
system changed from a voluntary base into a mandatory
base with a view to providing a favorable financial
environment. However, deposit insurance can give
rise to moral hazard and reduce the effectiveness
of market discipline. To alleviate moral hazard
problems and encourage self-discipline among insured
banks, a risk-based insurance premium system has
replaced the previous flat rate system since July
1999. Banks with relatively high operating risk
are required to pay a higher insurance premium .
In addition to the differential premium system,
banks are urged to enhance their internal controls
and risk management systems as a way to further
strengthen self-discipline.
f. Encouraging bank mergers
and acquisitions
Consolidation has become an important trend in
financial developments, and it allows banks to achieve
the economy of scale and synergy to increase their
competitiveness. Consolidation also helps resolve
the overbanking problem. To encourage consolidation,
tax incentives are included in the Regulation Regarding
Mergers and Acquisitions of Financial Institutions,
passed by the Legislature on November 22 2000. In
addition, this regulation also provides a legal
ground to breakthrough the barrier of resolving
the problem of insolvent community financial institutions.
The Ministry of Finance is also working on merging
state-owned banks. As announced at the end of December
1999, three major state-owned banks, including Bank
of Taiwan, Land Bank of Taiwan and Central Trust
of China, will be merged. Once the merger is completed,
the bank may rank among the world's top 75 banks
in terms of assets.
g. Unifying the work of
financial supervision under the auspices of one
single agency
Currently, supervision for banks, insurance companies
and the securities market is divided among different
authorities. The work of examination in the case
of banks is also shared by the Ministry of Finance,
the Central Bank and the Central Deposit Insurance
Corporation. The government has decided to consolidate
the work of financial supervision by setting up
a general financial supervisory agency that reports
directly to the Premier.
Although reforms in financial markets are basically
not the direct responsibility of the Central Bank,
the Central Bank has to watch the developments of
financial markets very closely because the link
between the banking sector and financial markets
is getting close. The major market reforms, implemented
by the Ministry of Finance, include: applying capital
adequacy requirements to securities firms, enhancing
corporate governance of listed companies by imposing
heavy penalty on fraud and embezzlement cases and
setting comprehensive disclosure requirements, and
establishing an early-warning system to help the
supervisory authority detect financial difficulty
in individual listed companies in the early stages,
and so on. |
| |
|
| |
４ Important
prerequisites for capital account liberalization
include a sound macroeconomic policy framework,
a strong domestic financial system, and prudential
risk management of the economy, especially in terms
of the specific risks involved in capital flows.
The principle of the sequence is that the liberalization
of domestic financial markets should precede that
of the external sector, that the deregulation of
the current account should precede that of the capital
account, and that the opening of long-term capital
should precede that of short-term capital.
５ This is one of Taiwan's WTO commitments.
６ The share of heavy industrial and technology-intensive
products relative to total manufacturing output
went up from 65.8% to 79.2% between 1990 and 1999,
and high-tech exports leaped from 26.7% to 42.1%
of total exports.
７ A bank-based system is more efficient in financing
traditional industries, whose technology and business
strategies are well known, while a market-based
system is more desirable when the technology is
new and constantly evolving and investors want to
make their own decisions under the uncertainty.
８ In Taiwan, 60% of required reserves are remunerated,
and the present interest rate paid on bank reserves
is 4%.
９ Under the new regulation, effective from June
1999, once bank loans are overdue for a designated
period, banks with the approval from boards of directors
may write off the loans before collecting them.
１０ Currently, the non-performing loans of domestic
banks are around NT$777 billion.
１１ Currently, there are three different rates of
insurance premium 0.05%, 0.055% and 0.06%.
１２ The average daily transaction volume between
the Taiwan dollar and foreign currencies is around
US$540 million in the first half of 2000 |
| |
|
| |
4. Conclusion |
| |
First,
price stability has been the most important objective
of monetary policy in Taiwan. For this year, owing
to the run-up in the prices of energy, the Central
Bank has already raised the discount rate twice
this year as preemptive measures. Inflation has
been well under control. CPI inflation rate and
core CPI inflation rate for 2000 are expected to
be 1.3%, and 0.6%, respectively.
Secondly, from a long-term perspective, the disintermediation
trend and large swings of capital flows continue
to challenge the effectiveness of monetary targeting.
It is also noted that the development of electronic
money might not only reduce the Central Bank's seigniorage
but also reduce its controls over monetary base.
That might pose a new threat to monetary targeting.
Thirdly, asset markets play an increasingly important
role in financial stability, price stability and
economic performance. How to incorporate information
of asset market conditions into monetary policy
formulation is a big challenge to central banks.
Fourthly, the choice of exchange rate regime can
have significant implications for financial stability.
Taiwan adopts a managed floating rate regime. It
allows the Central Bank to pursue an independent
monetary policy and reduces the risk of persistent
overvaluation of the currency, and also provides
incentives for banks and businesses to hedge their
foreign currency exposure. However, the Central
Bank's interventions are still necessary when irregular
or seasonal factors result in excessive volatility
of exchange rates. Especially, Taiwan's foreign
exchange market is still thin, speculation by a
few market participants may trigger large fluctuations
in exchange rates .
Finally, it has become increasingly apparent that
financial stability needs to be supported by sound
macroeconomic policies, adequate financial regulation
and supervision, as well as sufficient corporate
governance and financial disclosure. Countries in
this region have learned the lesson in a hard way.
However, this is also a great opportunity for us
to give a thorough examination on the weakness of
our financial systems. Financial reforms will go
a long way towards promoting a robust financial
system. Taiwan will continue to carry out steady
and incremental financial reforms to fulfill this
long-term goal. |
| |
|
| |
 下載全文預覽列印 |
| |
|
| |
| |
|
| |
|
|
| |
|
 |
|
