13th Conference on Pacific Basin Finance, Economics and Accounting
PBFEA 032
TAIWAN’S FINANCIAL REFORMS
Thomas M. F. Yeh
Vice Chairman
Council for Economic Planning and Development
Executive Yuan, Taiwan, R.O.C.
June 10, 2005
CONTENTS
I. INTRODUCTION
II. FIRST-STAGE FINANCIAL REFORMS
A. BACKGROUND
B. MAIN MEASURES
C. ACHIEVEMENTS
III. SECOND-STAGE FINANCIAL REFORMS
A. BACKGROUND
B. THE PLAN TO DEVELOPE TAIWAN AS
A REGIONAL FINANCIAL SERVICES
CENTER
C. SUPPLEMENTARY MEASURES
IV. CONCLUDING REMARKS
2
I. INTRODUCTION
A GLANCE at TAIWAN
CHINA
JAPAN
Taiwan
PHILIPPINES
3
A GLANCE at TAIWAN
• Location: The island is located to the southeast of China.
• Area: 36,000 square kilometers (roughly equal to the size of
the Netherlands).
• Population: 23 million.
• Foreign Trade: 341.9 billion US dollars in 2004.
•
(Top-fifteen in the World.)
• World top-three supplier of 28 items:
Number One: 18 items
Number Two:
6 items
Number Three: 4 items
• Global market share of major products:
Recordable Optical Disks: 77％
Motherboards: 72%
Notebook computers:
72％
LCD Monitors: 68％
4
“The global
economy couldn’t
function without it.”
Source: Business Week,
May 16, 2005.
5
II. FIRST-STAGE FINANCIAL REFORMS
A. BACKGROUND
Contraction of banks’
Spike in NPLs
Lending and Investment
The NPL ratio of depository institutions 3% in 1995
 Surge in troubled
8.8% in march 2002
Increasing Moral Hazard
Financial Institutions
institutions had a negative adjusted net worth
Challenge of
Combating Financial
Crimes
10% by the end of 2001
Taking appropriate action to
deal with asset stripping
activities, such as illegal
transfers of assets by top
executives or senior
managers of financial
institutions, while striving to
minimize moral hazard.
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B. MAIN MEASURES
1. Helping financial institutions accelerate
the reduction of their NPLs
The slashing of the Gross Business-Revenue Tax
(GBRT) from 5% to 2% in 1999.
The introduction of asset management
corporations (AMCs) as a mechanism for
speeding up the disposition of NPLs.
The implementation of Measures for Accelerating
the Reduction of Domestic Banks’ NPLs.
The adoption of a new set of standards to make the
calculation of Taiwan’s NPL ratio consistent with
international practice.
7
2. expediting the process of dealing with
distressed financial institutions
The Financial Restructuring Fund was set up
in July 2001 to provide a mechanism and
funding for the withdrawal of ailing
institutions from the financial market.
The provision of help to liquidate and
consolidate troubled financial institutions,
with 45 poorly performing community
financial institutions and 2 banks taken
over by 13 domestic banks.
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AMCs & The Financial Restructuring Fund (FRF)
Financial Institutions
Negative
Net Worth
NPL Ratio Higher Than the
Regulatory Requirement
FRF
Compensates
Losses
Diposal of NPLs
Diposal of NPLs
3.3 billion US dollars
(113 billion NT dollars)
Received or Merged by
Financial Institutions
AMCs
Since the first AMCs
were established in
2001, they have
45 poorly performing
purchased bad
community financial
debts from banks
institutions were taken
amounting to some
over by 11 domestic banks. 15 billion USD.
Diposal of NPLs
Kaohsiung Medium Business
Bank and Chung Shing Bank
were taken over by E. Sun Commercial Bank and Union Bank of Taiwan respectively.
9
3. Government Task Force
The government launched financial reforms
in July 2002.
The setup of the Financial Reform Task Force
(FRTF)：
Five Working Groups
─ Banking
─ Insurance
─ Capital Markets ─ Community Financial Institutions
─ Combat Financial Crimes
The FRTF identified 23 financial reform issues and
made 63 concrete recommendations, of which those
already approved by the Legislative Yuan include:
─ The creation of a new financial supervisory body (FSC)
─ Increasing punishment for financial crime
─ Setting up a sound agricultural finance system
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4. Re-regulation
increasing punishment for financial crimes
Amendments to the Banking Law, Financial Holding
Company Act, the Act Governing Bills Finance Business,
the Trust Enterprise Act, the Credit Cooperatives Act, the
Securities Exchange Law and the Insurance Law have
been passed and enacted, providing for financial crime to
be punished by:
─ Imprisonment for up to 10 years
─ Fine of up to NT$500 million (US$1.5 million)
 Enabling speedy invalidation of illegal asset transfers
Further amendments that (1) will enable the courts to invalidate
any transfer of assets by a CEO or senior manager where there
are reasonable grounds for suspecting that such transfer is in
violation of the law, and (2) will establish a procedure for a
speedy hearing and decision by the judicial authorities in such
cases, are currently under deliberation by the legislature.
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5. De-regulation
Facilitating Financial Market Consolidation
14 financial holding companies (FHCs) have
been established since the end of 2001, with 89
financial institutions (including 15 banks, 14
securities firms, 8 insurance companies , and 6 bills
finance companies) incorporated into these FHCs.
 Broadening market access and attracting
foreign investment
The abolishment of the 12-year-old QFII
system in September 2003 meant that Taiwan’s
stock market was fully opened to foreign
investment.
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6. The Most Important Items of Legislation
Main Finance-related Laws Enacted from 2000 through 2004
Date of
Promulgation
Nov. 2000
July, 2001
Name of Law (Act)
Financial Institutions Merger Act
Six Financial Reform Bills, including:
Statute for the Establishment and Management
of the Executive Yuan's Financial Restructuring
Fund;
Financial Holding Company Act ;
Act Governing Bills Finance Business; Value-added
and Non-value-added Business Tax Act; partial revision
of the Insurance Act; and partial revision of the
Deposit Insurance Act.
July, 2002
July, 2003
Financial Asset Securitization Act ；Statue for the
Protection of Securities Investors and Futures Dealers
Organizational Act for the Executive Yuan’s
Financial Supervisory Commission
Real Estate Securitization Act
Agricultural Finance Act
June, 2004
Securities Investment Trust and Consultants Act
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C. MAIN ACHIEVEMENTS
1. Decreasing Domestic Banks’ Past-Due Loans
& Increasing lending and investment Unit: billion NTD
End of Year Past-Due Loans
2001
1,087
2002
864
2003
631
2004
433
March 2005
432
10
8
6
％
5.89
7.79 7.48
8.04
6.47
7.48 7.12
1.52
0
-2
-4
2001
6
9
7.90
7.33
4.94 5.44
4.33
3.45
2.72
2.03
4.14
1.26
3.54
2.78
-0.96
-2.09
3
8.61
6.12 6.11 5.68
5.62
0.98
-0.07
NPL Ratio
7.48
6.12
4.33
2.78
2.74
banks’ Lending and
Investment Growth
4
2
Loans
14,527
14,131
14,563
15,558
15,766
12
-1.37
-2.79 -2.83 -2.70
3
6
9
12
2002
Past-Due Loan Ratio
3
2003
6
9
12
3
2004
6
9
12
2.74
3
2005
14
2. Improving Asset Quality
A substantial improvement in the profitability of
Taiwan’s banks is likely to be further strengthened by
the industry’s improving asset quality and the continued
robust performance of Taiwan’s financial markets that
most forecasters expect.
Basic Financial Data on Taiwan’s Banking System
End of
Year
1998
1999
2000
2001
2002
2003
2004
(%)
2005
(1~3)
ROA
0.60
0.50
0.48
0.27
-0.48
0.22
0.63
0.18
ROE
8.00
5.90
6.19
3.60
-6.93
3.52
10.30
2.88
CAR
10.58
11.17
10.75 10.40
10.63
10.07
10.69
─
ROA = Return on total Assets.
ROE = Return on stockholders’ Equity.
CAR = Capital Adequate Ratio.
Source: The Financial Supervisory Commission
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3.Enlarging the Scale of Financial Markets
March 2004 Growth
(Billion US$)
(Million US$) Rate(%)
The Market Value of Listed
383
470
22.7
& OTC’s Companies
Average Daily Bond
15.5
22.2
43.2
Trading Value
Total Assets of Mutual
57
79
38.6
Funds
Domestic Banks’ Deposits
619
795
28.4
Domestic Banks’ Loans
374
472
26.2
Total Assets of Insurance
90
180
100.0
Industry
Item of Scale
March 2002
Sources: CEPD & FSC
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4. Enhancing the Confidence of Foreigners
Total Accumulated Net Inward Remittance
100.0
80.0
60.0
40.0
20.0
0.0
Abolished the screening system for qualified
foreign institutional investors (QFII)
2.6 4.3
6.3
9.0
9.3
11.1
22.9
31.4 41.4 43.0
Unit: US$ billion
80.1
86.8
66.3
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Mar05
40
30
The Proportion of Institutional Investors’
Trading Value on TSEC Market (%)
20
10
5.9 6.5
8.1
10.7 9.3
10.2 11.8
13.9 15.6
29.1
20.9 22.5
16.8
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Jan. ~ May
Source: FSC
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III. SECOND-STAGE FINANCIAL REFORMS
A. BACKGROUND
1. Developing the Financial Services Industry
through Deregulations and the Launch
services and New Products
1st-stage
Financial
Reforms
2nd-stage Financial
Reforms
Following up on the major efforts that have been
made to overhaul the financial sector in recent
years, the government will be placing particular
emphasis on the developments of Taiwan’s
capital market：
1. fund-raising functions
2. asset management business
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2. SWOT Analysis of Taiwan’s Financial Markets
Strength
Weakness
 Transnational enterprises will
need more financial services
 Higher foreign exchange
reserves, and less external
debt
 Abundant capital of overseas
Taiwanese
 Relatively small scale of individual
financial institutions
 Limited liberalization of financial market
 Too many state-owned banks
 Lack of experience of cross-selling and
internationalization
 Synergy needs to be improved
 Insufficient financial professionals
Opportunity
Threat
 New pension fund system
helps develop asset
management business
 Vigorous capital market
paves the way for developing
Taiwan as a Regional
Financial Services Center
 Facing competition from
international conglomerates
 Need for strengthening and
integration of regulatory
environment in step with financial
sector development.
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3. Current Development of Financial Services
Industry in Taiwan
Main Financial Centers in Southeast Asia
Ratio of Financial services Ratio of Financial Services
sector output to GDP (%) Sector Employment to total
Employment (%)
1999
Hong Kong
Taiwan
Singapore
11.3
10.3
12.5
5.5
3.8
4.6
2003
Hong Kong
Taiwan
Singapore
11.8 (2002)
11.4
11.5
5.2
3.9
5.2 (2002)
Sources：CEIC
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The fragile financial market and the relatively
small scale of financial institutions hamper the
pace of product innovation and efforts to take
advantage of economy of scale.
Asia’s Largest 300 Banks by Assets
Number
Taiwan
Hong Kong
Singapore
South Korea
42
18
3
14
Share of The Average
Total
Asset Scale
Assets
Relative to
(%)
Taiwan’s
5.4
1.00
4.9
2.12
1.8
4.67
5.0
2.78
Sources： International Chinese Newsweekly, June 13, 2004.
Compiled by the Council for Economic Planning and Development
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B. The Plan to Develop Taiwan as a Regional
Financial Services Center
1. Guidelines and Strategies
New Guidelines:
1. Maintain openness
2. Foster innovation
3. Strengthen efficiency
Approaches:
1. Strengthen financial
supervision
2. Improve corporate
governance
Five Strategies
 Developing sound macro-




economic environment
Forming a regional
fundraising center
Promoting asset
management business
Developing diversified
financial services
Strengthening
financial market
competence.
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2. Main Plans
(1) Integrating finance related laws and regulations, and
drafting Financial Services Act.
(2) Promoting consolidation in financial sector.
(3) Encouraging financial innovation and adopting negative
listing for the review of new financial services and
products.
(4) Strengthening the cultivation of financial talent and
elevating the professional level of the financial industry
as a whole.
(5) Building a competitive financial taxation environment
in line with international practices.
(6) Stepping up the pace of financial liberalization through
speedier de-regulations.
(7) Strengthening risk management and promoting financial
discipline and information transparency.
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3. Specific Targets for Promoting Consolidation
(1) For our three biggest banks to each have a
market share of 10% or more by the end of 2005.
(2) The number of government-owned banks should
be reduced from twelve to six by the end of 2005 .
(3) The number of financial holding companies should
be halved from fourteen to seven by the end of
2006.
(4) At least one domestic financial institution should
be run by a foreign-owned entity or be listed on
an overseas stock exchange by the end of 2006 .
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4. Anticipated Results
(1) For the financial services sector to raise its share of GDP
from 11.3% in 2003 to 13.0% by the end of 2008 .
(2) For one to three financial institutions to become established
as representative regional operators by the end of 2008.
(3) For stocks held by foreign entities to rise as a percentage of
total market capitalization from 18.8% to 25.0% in 2008.
(4) For the amount of funds raised in Taiwan by multinational
corporations and international institutions to double by the
end of 2008
(5) For the issuance of asset-backed securities to grow four-fold.
(6) For the assets of financial institutions as a whole to grow
more than 30% over the same period
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C. SUPPLEMENTARY MEASURES
Supplementing and amending related
laws and regulations
Privatization of state-owned banks
Enhancement of corporate governance
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1.Supplementing and amending related laws
and regulations
Financial Services Industry Bills Slated for
Enactment or Amendment
Law
Major Content
Use of the same criteria by different
Financial
financial industries undertaking asset
Services Act
management.
Heightening the flexibility of corporate
operations; helping to attract long-term
domestic and foreign capital into the
venture capital industry.
Establishment of a single set of rules
Reorganizatio for corporate reorganization and
n and
bankruptcy, to speed up the review of
Bankruptcy Act corporate reorganization application
and bankruptcy cases.
Amendment of Adoption of person/place policy for tax
Income Tax
levies.
Act
Limited
Partnership
Act
27
2.Privatization of state-owned banks
Timetable for Privatization of State-Owned
Financial Institutions
Governing
Authority
Name of Institution
Date Set for
Privatization
MOF
(Ministry of
Finance)
Bank of Taiwan
December 2006
Land Bank of Taiwan
December 2006
Central Trust of
China
December 2006
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3.Enhancement of corporate governance
 the Policy Agenda and Action Plan to
Strengthen Corporate Governance
The key points of focus of the action plan :
1. The strengthening of companies’ internal
controls.
2. The orderly establishment of a system of
independent directors.
3. The protection of investor interests.
4. The reinforcement of public disclosure
requirements.
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IV. CONCLUDING REMARKS
1. The goal of Taiwan’s second phase of
financial reforms is to develop Taiwan as
a free, open and efficient regional
financial hub through the efforts of
deregulations and initiatives.
2. Promoting financial consolidation has
been the top priority work for the
government to improve the over-banking
situation in Taiwan.
3. Financial reform and corporate
governance should be carried out at the
same time. The earlier this can be
achieved, the higher its benefits will be
and the lower its costs for the society as
a whole.
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We welcome foreign investors to
establish new financial
institutions and invest in
domestic banks in Taiwan.
THANK YOU！
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