Michelle Hsu, The China Post
Financial shares performed relatively strongly amid the feeble stock market last week mainly on expectation that the Legislative Yuan will review and hopefully pass six financial bills in an extraordinary session this Wednesday and Thursday. This is bullish news to the stock market because the six bills are widely regarded as critical for Taiwan’s financial reform.
The six bills slated for the extraordinary session are the financial holding company law, regulation of the financial restructuring fund, bill finance management law, and revisions to existing business tax law, insurance law and deposit insurance regulation. Among the six bills, the most notable is the financial holding company law, that would allow the operation of financial holding companies in Taiwan. The law would provide an essential legal basis for existing financial institutions — which are currently mostly focused on particular business categories — to get involved with the businesses of other financial fields through reinvestment or shareholding in other financial institutions.
The financial market is divided into the three major sectors of banking, securities, and insurance. Since the American financial crisis of the late ’20s and ’30s it has been a worldwide practice to strictly prohibit a financial institution from one sector getting involved with the businesses of other sectors, in order to ensure that the operation of a given sector would not be subject to “contagion” from other sectors. So-called financial firewalls were built to strictly confine the operations of a given financial institution within a certain field. Such practices, however, were gradually regarded as too conservative to catch up with the development of modern financial markets. Great Britain, an important center for the world’s investment banking businesses, pioneered the removal of firewalls in its “Big Bang” of the late ’80s, allowing financial group to set up financial holding companies that can pursue higher operational efficiency by integrating the various businesses of its member companies. While financial holding companies have now been operational in European countries for years, the U.S. and Japan started to propose and finally passed the legislation to deregulate their own financial systems in the late ’90s. Financial reform Since it has become a worldwide trend for successful finance companies to consolidate, the expected passage of the financial holding company law is regarded a critical step for the modernization of Taiwan’s finance markets.
Since the bill failed to pass the last legislative session ending on May 30, President Chen Shui-bian filed a special request for an extraordinary session for the Legislative Yuan to review it and other five major financial bills. Otherwise, it may be too late for the bills to go through the legislative procedure during the next session from September to the year-end in accordance with the government schedule for financial market reform. As many local financial commentators put it, it will be ironic that the government has set this year as the first year of Taiwan’s financial marker reform if the financial holding company law fails to become effective during this period.
Regarding the importance of the law to financial market development, it seems to have become a consensus among the various political parties that the bill should be passed by the Legislative Yuan during the extraordinary session. The bill is likely to encourage foreign financial groups to expand their operations in Taiwan. Meanwhile, several local financial institutions have expressed the intention of transforming themselves into financial holding companies as soon as the law becomes effective.
The International Bill Finance Company has even reached a decision to apply for transformation into a financial holding company in July, based on the belief that the bill should “definitely” go through the legislative procedure during the extraordinary session in June.
Other interested financial institutions include China Development Industrial Bank (CDIB), Chinatrust Commercial Bank, Fubon Commercial Bank, Taihsin International Bank, United World Chinese Commercial Bank, Bank Sinopac, E.Sun Bank and Cathay United Bank (an affiliate of Lin Yuan group). The share prices of these banks performed relatively well last week, mainly due to their proposed transformation into financial holding companies.
Some financial scholars, however, are worried that the Legislative Yuan may hasten to pass the financial holding company bill at the expense of its quality, especially since there are six bills to be reviewed during the two-day session. A common concern is that the proposed bill still lacks regulations on the closure, disbanding, restructuring and share transfer of financial institutions. Without proper regulations, a financial holding company will still encounter the same problems prevalent under the existing financial system. Financial monitoring Should there be no complete package to comprehensively cover the detailed issues, some local financial scholars pointed out, both the government and private institutions will face problems with monitoring and management.
“Without clear definitions, it will arouse disputes when the law is put into practice,” warned an editorial in the United Daily News.
To prevent the operation of the financial holding companies from running out of the government’s control, some legislators proposed adding a bill on monitoring financial holding companies to the agenda of the extraordinary session. They will invite Premier Chang to report to them about the current financial monitoring system. Should it be found insufficient for regulating the operation of financial holding companies, they may insist on having the financial holding company monitoring bill reviewed together with the financial holding companies legislation.
In fact, a financial monitoring bill was proposed for review during the last session. When the Legislative Yuan decided to open an extraordinary session to review the six financial bills, some scholars urged it to include the financial monitoring bill on the agenda to ensure a better legal structure for Taiwan’’s financial system. Critically, defects have also been found in the other five bills to be reviewed during the extraordinary session. The revision of the deposit insurance law proposes the removal of the NT$1 million ceiling on insured deposits. After becoming effective, it may expose the current deposit insuring system to great risk. The paid-in capital of the deposit insurance companies totaled only NT$20 billion while the bad loans in Taiwan’s financial system are estimated at over NT$2 trillion.
Doubts have also been raised about the potential effectiveness of the proposed financial restructuring fund in helping to restore a healthy financial system. Under the proposed regulation, the government will allocate 2 perce