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Taiwanese Financial Reform

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. Background. First financial reform:

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Taiwanese Financial Reform

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  1. Taiwanese Financial Reform Huang, Chia-Teng (Ken) Wu, Chia-Hsuan (Dominic)

  2. Agenda • Background on financial system in Taiwan • Current economic environment and problem recognition • Source of the problem— Lack of complete Financial regulation • Conclusion

  3. Background First 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

  4. Background Over-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.

  5. 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.

  6. 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

  7. 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.

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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.

  13. 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

  14. 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

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