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Council for Economic Planning and Development Executive Yuan, Taiwan, R.O.C. June 10, 2005

13th Conference on Pacific Basin Finance, Economics and Accounting PBFEA 032. TAIWAN’S FINANCIAL REFORMS. Council for Economic Planning and Development Executive Yuan, Taiwan, R.O.C. June 10, 2005.

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Council for Economic Planning and Development Executive Yuan, Taiwan, R.O.C. June 10, 2005

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  1. 13th Conference on Pacific Basin Finance, Economics and Accounting PBFEA 032 TAIWAN’S FINANCIAL REFORMS Council for Economic Planning and Development Executive Yuan, Taiwan, R.O.C. June 10, 2005 Thomas M. F. Yeh Vice Chairman

  2. CONTENTS • INTRODUCTION • FIRST-STAGE FINANCIAL REFORMS • BACKGROUND • MAIN MEASURES • ACHIEVEMENTS • SECOND-STAGE FINANCIAL REFORMS • BACKGROUND • THE PLAN TODEVELOPE TAIWAN AS A REGIONAL FINANCIAL SERVICES CENTER • SUPPLEMENTARY MEASURES • CONCLUDING REMARKS

  3. I. INTRODUCTION A GLANCE at TAIWAN CHINA JAPAN Taiwan PHILIPPINES

  4. 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％

  5. “The global economy couldn’t function without it.” Source: Business Week, May 16, 2005.

  6. A. BACKGROUND II. FIRST-STAGE FINANCIAL REFORMS • Spike in NPLs Contraction of banks’ Lending and Investment The NPL ratio of depository institutions 3% in 1995 8.8%in march 2002 Increasing Moral Hazard • Surge in troubled Financial Institutions institutions had a negative adjusted net worth 10%by the end of 2001 • Challenge of Combating Financial Crimes 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.

  7. B. MAIN MEASURES 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 thecalculation of Taiwan’s NPL ratio consistent with international practice.

  8. 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.

  9. 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 AMCs 3.3 billion US dollars (113 billion NT dollars) Since the first AMCs were established in 2001, they have purchased bad debts from banks amounting to some 15 billion USD. Diposal of NPLs Received or Merged by Financial Institutions 45 poorly performing community financial institutions were taken over by 11 domestic banks. Kaohsiung Medium Business Bank and Chung Shing Bank were taken over by E. Sun Commercial Bank and Union Bank of Taiwan respectively.

  10. 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

  11. 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.

  12. 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.

  13. The Most Important Items of Legislation Main Finance-related Laws Enacted from 2000 through 2004

  14. C. MAIN ACHIEVEMENTS 1. Decreasing Domestic Banks’ Past-Due Loans & Increasing lending and investment Unit: billion NTD banks’ Lending and Investment Growth ％ Past-Due Loan Ratio 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 2001 2002 2003 2004 2005

  15. 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(%) ROA = Return on total Assets. ROE = Return on stockholders’ Equity. CAR = Capital AdequateRatio. Source: The Financial Supervisory Commission

  16. 3.Enlarging the Scale of Financial Markets Sources: CEPD & FSC

  17. 4. Enhancing the Confidence of Foreigners Total Accumulated Net Inward RemittanceUnit: US$ billion Abolished the screening system for qualified foreign institutional investors (QFII) The Proportion of Institutional Investors’ Trading Value on TSEC Market (%) Jan. ~ May Source: FSC

  18. 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

  19. Weakness Strength • 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 • Transnational enterprises will need more financial services • Higher foreign exchange reserves, and less external debt • Abundant capital of overseasTaiwanese Threat Opportunity • Facing competition from international conglomerates • Need for strengthening and integration of regulatory environment in step with financial sector development. • New pension fund system helps develop asset management business • Vigorous capital market paves the way for developing Taiwan as a Regional Financial Services Center 2. SWOT Analysis of Taiwan’s Financial Markets

  20. 3. Current Development of Financial Services Industry in Taiwan Main Financial Centers in Southeast Asia Sources：CEIC

  21. 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 Sources：International Chinese Newsweekly, June 13, 2004. Compiled by the Council for Economic Planning and Development

  22. B. The Plan to Develop Taiwan as a Regional Financial Services Center 1. Guidelines and Strategies • Five Strategies • Developing sound macro- economic environment • Forming a regional fundraising center • Promoting asset management business • Developing diversified financial services • Strengthening financial market competence. New Guidelines: 1. Maintain openness 2. Foster innovation 3. Strengthen efficiency Approaches: 1. Strengthen financial supervision 2. Improve corporate governance

  23. 2. Main Plans • 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. • Strengthening the cultivation of financial talent and • elevating the professional level of the financial industry • as a whole. • Building a competitive financial taxation environment • in line with international practices. • Stepping up the pace of financial liberalization through • speedierde-regulations. • Strengthening risk management and promoting financial • discipline and information transparency.

  24. 3. Specific Targets for Promoting Consolidation • For our three biggest banks to each have a • market share of 10% or more by the end of 2005. • The number of government-owned banks should • be reduced from twelve to six by the end of 2005 . • The number of financial holding companies should • be halved from fourteen to seven by the end of • 2006. • 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 .

  25. 4. Anticipated Results • For the financial services sector to raise its share of GDP • from11.3% 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 • totalmarket 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 • morethan 30% over the same period

  26. C. SUPPLEMENTARY MEASURES • Supplementing and amending related laws and regulations • Privatization of state-owned banks • Enhancement of corporate governance

  27. Supplementing and amending related laws and regulations Financial Services Industry Bills Slated for Enactment or Amendment

  28. Timetable for Privatization of State-Owned Financial Institutions • Privatization of state-owned banks

  29. 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.

  30. CONCLUDING REMARKS 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. Promoting financial consolidation has been the top priority work for the government to improve the over-banking situation in Taiwan. 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.

  31. We welcome foreign investors to establish new financial institutions and invest in domestic banks in Taiwan. THANK YOU！

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