Scandal highlights banking sector's woes
Jonathan Adams
Asia Times, January 18, 2007
The latest financial scandal to rock Taiwan - and one of its biggest in recent years - has shown that despite much talk of reforming the banking sector, the island still has a long way to go.
The "financial storm", as Taiwan's media call it, began early this month when two subsidiaries of the Rebar Asia Pacific Group announced they had filed for insolvency. That led to a run on the Chinese Bank, a member of the Rebar group, on January 5.
The government quickly moved to take over that and another Rebar firm to calm panicked customers. Then it emerged that the chairman of Rebar had fled to China late last month, and was reportedly holed up in a Shanghai luxury hotel with his wife.
Last week saw an around-the-clock media frenzy as the chairman's relatives were hauled in for questioning, regulators scurried to contain the fallout, the head of the nation's financial watchdog stepped down, and politicians began pointing fingers over who else might be to blame.
Most analysts said the bank run would not impact the larger banking industry, Asia's fourth-largest. But it's just the latest in a series of troubles to plague the overcrowded sector.
Taiwanese banks remain frozen out of the mainland China market by the cross-strait political impasse. Meanwhile, plans to consolidate and reform the financial sector have stalled. The government hoped foreign investors would help shake up the industry by buying stakes in local banks, but so far such activity has been limited.
Now, the Rebar fiasco has highlighted some of the sector's dubious lending practices, and the need for better oversight of the island's financial firms.
"The run on the Chinese Bank is just a symptom of a larger issue, which is how do we deal with the banking sector?" said Chen Ming-chi, with the Institute of Sociology at Taiwan's National Tsing Hua University.
Dealing with it correctly has broad implications for the island's future. Taiwan is now a services-based economy (services account for more than 70% of gross domestic product and most of the island's jobs), which means further productivity gains and development depend on improvements in key service sectors such as banking and finance.
For several years, industry analysts have sent a blunt message: give Taiwan's banks an extreme makeover, or risk losing long-term competitiveness and becoming even more sidelined from regional economic integration.
"Without access to China in the medium term, the banking sector is structurally moribund," wrote consultancy Macquarie Research in a note last year. "We need the structure of the operating environment to change."
Access to mainland China appears to be off the table at least until May 2008, when a new president will take power in Taiwan.
The island's government bars its banks from providing anything more than consulting services in the mainland. The opposition sponsored a bill to change this last year, but it has gone nowhere, said Christina Liu, an opposition legislator and finance professor at both Taipei's National Taiwan University and Beijing's Tsinghua University.
She said that days after the bill passed its first reading in Taiwan's legislature, Beijing made it clear that it would only allow Taiwanese banks to open shop in the mainland if a cross-strait memorandum of understanding were inked.
The condition of such a memorandum is Taiwan's acceptance of the "one China" principle - a non-starter for the current independence-leaning government.
That roadblock has some Taiwanese tearing their hair out over lost opportunities. Taiwanese banks would seem to have distinct advantages in the China market, with their shared language and ties - particularly in commercially vibrant southern coastal provinces such as Fujian, which is the closest culturally to Taiwan. And they have a built-in customer base of Taiwanese living and working in the mainland.
But with Taipei-Beijing relations still frosty, the island's banks are left to gaze wistfully across the strait, as the big foreign players such as HSBC and Citibank get a rapidly growing head-start in the land grab in China.
"Taiwanese banks are stuck here - they can't do any business in mainland China," said Liu. "It's really a shame, because we [could] have so many customers there."
With the door to the mainland bolted shut for now, that leaves mergers and acquisitions as the way forward for the industry. Consultants have long bemoaned Taiwan's packed banking sector, which included more than 50 firms in 2000, serving only 23 million people.
In a 2005 report, the consultancy McKinsey argued that an ideal number would be about 15 at most, including one or two "regional champions" that would have the scale to compete in the mainland Chinese market. It urged Taiwan to follow South Korea's example and push ahead with the politically tough task of sweeping banking reforms - and to avoid Japan's example of merely "stapling" together bad banks to create bigger, but not necessarily better, players.
"Both industry and government could continue to pursue their incremental approach and hope the competitiveness of the financial sector and broader economy does not further erode," wrote McKinsey. "Or they could take bold steps to change the rules of the game and put Taiwan back on the Asian banking map."
The incremental approach appears to have won the day. The current administration has talked up consolidation and established ambitious goals, but the results have been modest.
Holding companies formed to spur consolidation have not performed as well as hoped. Taiwan now has 43 banks, with other mergers and privatization plans for state-run banks stalled.
Meanwhile, the government has worked to attract foreign interest in the sector, sending road shows abroad to lure big financial players into buying stakes. That campaign has had some success: last year several foreign firms bought stakes in Taiwanese banks, including Standard Chartered's bid for a controlling stake in Hsinchu International Bank.
But a more recent deal, Citibank's reported talks to acquire a stake of the Bank of Overseas Chinese (BOOC), have foundered amid vocal opposition from the bank's union leaders. And analysts don't expect many more such deals: both Hsinchu and BOOC are small banks, while the larger state-run banks are seen as less attractive targets.
All of this leaves many less than impressed with the government's reform efforts.
"Our government puts very strict limits on investment in China, while encouraging banks to merge and attract foreign investment as a substitute for going to China," said National Tsing Hua University's Chen. "I don't think the government formula can sustain itself, and it's not good for the banking sector. As long as there are limits on going to China, I think the problem will still be there."
Still, some see a silver lining in the cloud over Taiwan's banks. Wu Chung-shu, a research fellow at the Academia Sinica's Institute of Economics in Taipei, says the worst may be over for the industry.
It has rebounded from a credit bubble in 2005 and early last year, and its bad-loan ratio has come down from more than 8% in 2002 to just over 2% now. Now, Wu says the Rebar crisis will prompt the government to crack down harder on shaky firms.
"Rebar will push the government to deal with under performing banking companies by telling them to get out of the market or merge with other firms," Wu said. "You're going to see more consolidation in the banking and insurance industries. But the number of banks is not the main issue; it's how to get these banks to operate in a more efficient way."
Figuring out how to do that will be one of the most pressing questions for Taiwan's government in the coming years.
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