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Challenges of Financial Reforms* |
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Lai
In-jaw (賴英照)** |
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It is my great honor to address such a distinguished
audience. This gathering, the 2001 Economic and
Financial Summit, co-hosted by the Institute of
Economics of the Academia Sinica and the Polaris
Cultural Foundation, comes at a pivotal time. Taiwan
today is in a phase of transformation in political,
financial and economic affairs. By bringing together
so many renowned national and international experts
and scholars, this event will help develop a sound
financial perspective for Taiwan in the new century.
I trust that your wisdom and advice will serve as
important references in my government's policy-making.
Therefore, before I go on, I would like to take
this opportunity to express my most sincere respect
and appreciation to all of you.
Last year, dramatic changes in the international
economic situation deeply affected Taiwan's economy,
and my government presently faces a number of financial
challenges. Today I would like to share with you
some financial reform measures undertaken by my
government.
Over the past decades, Taiwan's per capita income
has increased steadily, and naturally, demand for
financial services has risen accordingly. At the
beginning of the 1990s, following the global trend
of internationalization and economic liberalization,
the government substantially relaxed restrictions
on financial institutions, and a number of new institutions
were established.
Government policy on establishing new banks in
Taiwan has gone through four stages. In the first
stage, from 1945 to 1949, my government took over
and restructured the financial institutions established
during the Japanese occupation period. In the second
stage, from 1950 to 1959, banking licenses were
frozen. The financial institutions which had relocated
from Mainland China to Taiwan - except for the Central
Trust of China -- were not allowed to resume operations,
nor were new banks allowed to be set up. The third
stage began in 1960. On the one hand, the government
permitted the relocated financial institutions to
resume operations. On the other hand, it adopted
policies to approve the establishment of selected
banks and trust investment companies. However, banking
licenses were still not opened up for the private
sector. This stage lasted until 1990.
Thus, strict regulations concerning the establishment
of new banks were in effect for 45 years. During
this period, the government was frequently urged
to open up the banking industry for the private
sector, but this call from academics, business leaders,
and legislative bodies was only heeded toward the
end of 1980s. The Banking Law was revised in July
1989, adding, among other measures, Paragraph 2
of Article 52, which reads as follows: "The criteria
for setting up banks or financial institutions in
accordance with the Law or other laws shall be enacted
by the competent authority of the central government."
This amendment laid the legal foundation for opening
up the banking license to the private sector, bringing
Taiwan's financial development into the fourth stage.
The "Criteria for Establishing Commercial Banks"
were promulgated by the Ministry of Finance on April
10, 1990, and applications for setting up commercial
banks began to be accepted. On July 3, 1991, the
Ministry of Finance approved the establishment of
15 new banks, which began operations on December
30, 1991. By September 2000, the number of banks
in Taiwan had increased considerably, from 24 banks
with 953 branches to 53 banks with 2,690 branches.
In addition to the banking license, new securities
firms were allowed to set up in 1988. Their number
rose even more dramatically, from 28 firms in 1988
to 381 at the end of 1990. However, as a result
of merger and acquisitions, the number of securities
firms has subsided from that peak, to 196. In 1993,
new bills finance companies were allowed to open,
and their number has increased from 3 to 16. Besides,
the restrictions on new insurance company licenses
were lifted in 1992, and the sector has expanded
from 45 insurance companies at that time to 62 today.
Nonetheless, after the liberalization of the
new institutions, their operational environment
deteriorated. This was due both to the excessive
number of new entrants and to the rapid expansion
of existing institutions. Lacking innovative financial
products -- or professional skills to operate such
products -- led most financial institutions to engage
in price wars in traditional markets. For instance,
most of the new banks were commercial banks concentrating
on the savings and lending business, and most have
not shifted their business focus over the past years.
Engaged in a fierce price war, and not developing
new businesses, increasing their management efficiency,
or reducing internal costs, the banks could not
but lend more to survive. Real estate and stocks
became the major form of collateral taken by most
banks. But when the real estate and stock price
goes down, the banks have to liquidate the collateral,
thus driving both markets further downward. This
becomes a vicious cycle, in which the financial
institutions find themselves having an excessive
burden of payments receivable. Problems such as
non-performing loans and bad debts then surfaced
and caused difficulties to some financial institutions.
The following figures will give you a better understanding
of the situation:
1. Before 1990, each branch office of financial
institutions in Taiwan (including banks, credit
cooperatives, and credit departments of farmers
associations) served 7,431 people on average. The
figure dropped to 4,684 by September 2000. The fact
indicates an excessive number of financial institutions
and fierce competition.
2. In 1999, the assets of Taiwan's top five banks
accounted for only 29% of the assets of all banks,
far lower than Singapore's 95%, Canada's 88% and
Switzerland's 87%, for example. It shows that our
financial market has a low level of concentration
and fierce competition among banks.
3. In 1990, the average rates of return on assets
(ROA) and return on equity (ROE) were 1.2% and 28.89%
respectively. However, these levels decreased to
0.66% and 8.2% respectively by the end of September
2000. This indicates that the banks' profitability
has decreased significantly.
As to the securities business, license ban was
removed in 1988. Since then, securities houses have
been set up all around the country. As indicated
earlier, securities firms were mushrooming at a
dramatic speed. Meanwhile, individual investors
have put a vast amount of highly liquid capital
in the stock market, adding market volatility. The
weighted index of Taiwan Stock Exchange reached
a peak of over 12,400 points in February 1990, and
dropped to 2600 in September the same year. Due
to the saturation of the securities trading market,
brokerage houses also face severe competition. Moreover,
in recent years, online securities' trading has
become increasingly popular. These new settings
prompt the business transformation of securities
firms. Some opt to speedily merge with others in
order to cut costs; others may either develop themselves
into full-fledged integrative securities firms,
or diversify into other securities- or futures-
related businesses. Although small securities firms
are more flexible and agile, relative to the scale
of the market, they still need further integration
to increase their competitiveness.
Since the current administration took office
on May 20, 2000, it has fully taken hold of the
necessity for timely financial reforms. On October
17, 2000, Premier Chang gave the following instructions
in his policy report to the Legislature:
A. After the amendment to the Banking Law, which
was promulgated on November 1, 2000, investment
by banks in securities, and insurance, and other
financial services firms should be further liberalized.
B. The drafting of the Financial Holding Companies
Law should be completed within six months so as
to allow for the establishment of comprehensive
cross-sector financial services mechanisms.
C. Financial assets management companies must be
established in order to help with the management
of the bad debts of financial institutions.
D. Financial institutions will be actively encouraged
to merge in order to increase their competitiveness.
In his New Year's address, President Chen Shui-bian
announced six major policies for the government.
He ranked " reform of the financial system" as the
top priority. He pointed that out, with economic
globalization, trade barriers are dropping, national
borders are becoming ever more blurred, new forms
of regionalism are emerging, and the flow of information
technology is reaching to every corner of the world.
Taiwan is expected to join the WTO this year, and
its linkages with the international economy will
therefore continue to grow. Mr. President indicates
that Taiwan must respond to the changes in the international
economic environment. In addition, it also needs
to face the challenge of a gradual slowdown in global
finance, or even a potential new global economic
downturn. With foresight, President Chen stressed
to the nation the need for advance preparation by
actively reforming our financial structure. Clearly,
the financial reform has become the top priority
for my government.
To fulfil the reform policies, the government
has adopted several financial reform measures. They
include, but not limited to, the following:
1. Revising the Business Tax Law to reduce the value-added
tax (VAT) for the financial sector from two percent
to zero. This will facilitate the reduction of financial
institutions' bad debts and enhance the integrity
of the finance industry.
2. Promoting the legislation of the Financial Institutions
Merger Act and the revision of the Banking Law.
Both were done late last year. This measure is meant
to encourage voluntary mergers among financial institutions
so as to enlarge their business scale, increase
their volume of customers, diversify their services,
disperse their risks, and reduce their operational
costs. It will also strengthen risk management mechanisms
and therefore enhance operational efficiency and
international competitiveness.
3. The Executive Yuan has requested that the Ministry
of Finance and the Central Bank submit an initial
proposal for mergers of state-owned banks. As a
matter of fact, Taiwan Cooperative Bank and the
Chin Fon Commercial Bank have already announced
their merger plan. The government has also made
it clear that foreign banks are welcome to merge
or acquire local banks.
4. Assets management companies (AMC) are to be set
up to facilitate the process of handling the bad
debts and associated collateral of financial institutions.
The measure will also expedite the pace of modernization
of our finance industry.
5. Starting this year, banks, securities firms and
trust companies are permitted to provide discretionary
account services for handling securities in the
stock market.
6. Allowing securities firms to invest in venture
capital enterprises up to a certain percentage of
their net worth.
7. Promoting the securitization of bank assets to
increase the capital liquidity and efficiency for
financial institutions. There has been an undue
reliance on real estate as collateral for bank loans
in our financial institutions. By the end of September
2000, loans backed by real estate as collateral
accounted for 50.6% of total loans. The lending
period for these loans is as long as 10 to 30 years,
which affects the cash flow of financial institutions.
If the real estate sector experiences any economic
downturn, non-performing loans will not only increase,
but bank capital will also be frozen in the long-term
collateral loans with slow capital return. However,
if the receivables are securitized, the illiquid
claims will become highly liquid assets. As a result,
the banks can utilize their capital more efficiently
because of the high turnover rates of funds.
8. To expedite the pace of legislative process of
the Financial Holding Companies Act (FHCA). The
enactment of the FHCA will facilitate a holding
company to expand and diversify its businesses via
its affiliates of banking, securities, futures,
trust, and insurance subsidiaries. The holding company
may wish to back up its affiliates with sufficient
and coordinated assistance and support to pursue
greater corporate synergy.
9. In line with the integration trend in the financial
markets, the Executive Yuan will set up a new regulatory
agency to supervise the financial industry. The
new agency will be responsible for planning the
major steps of our financial system's modernization.
It will integrate all the financial supervision
power so as to maintain market discipline, and it
will actively promote efficiency.
10. To accelerate the resolution of troubled financial
institutions. With reference to the regime of the
US Resolution Trust Corporation（RTC）, the Executive
Yuan is contemplating revising the "Deposit Insurance
Act" to establish a government-endowed "Financial
Resolution Trust Fund". The Fund will be drawn for
the purposes of closing out the ill-managed financial
institutions, fully protecting the interests of
depositors, and hence promoting the integrity and
soundness of Taiwan's financial markets.
Distinguished guests, this year will be the action
year for financial reforms. Various regulations
related to financial reforms have completed in the
last year. The "Banking Law" was revised, the "Financial
Institution Merger Act" was promulgated, the "Trust
Law" and the "Trust Enterprises Law" were enacted.
Besides, the draft "Financial Holding Companies
Law" and several others are in the process of legislation.
Appropriate measures will be taken to carry out
our financial reforms. I am convinced that the integrity
of our financial institutions will be improved.
In the end, I would like to echo the main theme
of this 2001 EFS conference: " New Vision for Taiwan's
Financial Market Development". I firmly believe
that the conference will significantly contribute
to my country's ongoing financial reform. This afternoon,
we are focussing on the "Lessons of Financial Reforms
in Industrial Countries for Taiwan". Certainly,
we all know that good advice may help us overcome
our own shortcomings. I expect that this conference
will bring forth concrete recommendations as to
how to help Taiwan realize its future international
finance vision. I would like to take this opportunity
once again to express my sincere respect and gratitude
to the organizers and participants of this conference
for your hard work and foresight. |
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Addressed
at the 2001 Economic and Financial Summit,
18 January, 2001, Taipei International Convention
Center, Taipei, Taiwan, Republic of China.
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Vice Premier, Republic of China. |
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