Top banker says island safe from financial crisis

The China Post staff

While observers are increasingly concerned about further weakening in the economy, Taiwan’s top central bank official yesterday said the island is not any where near a financial crisis.

Perng Fai-nan, governor of the Central Bank of China, said he saw absolutely no chances of Taiwan stumbling into a financial crisis despite rising unemployment and sagging exports. To support his argument, Perng said the island faces no inflationary pressure despite a depreciating New Taiwan dollar, and no foreign debt but a healthy balance of payment.

He added that most of Taiwan’s banks have a capital adequacy ratio of higher than eight percent, the lowest required level.

To deal with a worsening fiscal situation, Perng added, the treasury has decided to unprecedentedly issue 30-year government bonds in the third quarter.

The central banker was speaking at a seminar on the island’s financial reforms.

Perng said the main challenges confronting Taiwan’s banks is that companies are relying more on the capital market rather than financial institutions to raise funds, resulting in stagnant growth in bank lending.

Also, he added, banks as well as the grassroots financial institutions are plagued by an overdue loan ratio that keeps rising while their profitability has been declining.

United Evenings News cited central bank statistics as saying that Taiwan’s financial institutions had written off NT$370.46 billion worth of bad loans from February 1999 to June 2001.

Perng confidently said the financial institutions will be able to write off the remainder, which some estimated at close to NT$1 trillion, in two and a half years.

Worries prevail that the worsening asset quality of Taiwan’s financial institutions will plunge the island into a banking crisis, if not a financial crisis.

In line with a sharp deterioration of the economy, bank loans are turning sour faster than they are written off as many companies as well as individuals are unable to service their debts due to falling profit, a result of the global downturn, or being thrown out of jobs.

Perng reiterated the government’s determination to tackle the bad loan problem.

He said the government plans to set up a financial restructuring fund, valued at NT$140 billion, that will be designed to clean up bad loans within grassroots financial institutions, notably the farmers and fishermen associations.

Part of the NT$140 billion fund will be financed by the government.

Perng said taxpayers must share part of the cost for cleaning up the banking system.

He said the amount of money used to write off bad loans in Taiwan is only 1.4 percent of the island’s gross domestic product, which is considered very low compared with 15 percent in South Korea, 13 percent in both Malaysia and Japan, and five percent in the United States.

The average non-performing loan ratio of the community financial institutions is estimated at around 15 percent, while that of banks is believed to have exceeded seven percent.

For banks, Perng added, the government has introduced the asset management companies system that will buy collateral, a majority of which are houses, from banks and resell them in the market.

While several local banks have planned to form AMCs with foreign banks, none has progressed significantly thus far due to the island’s moribund real estate sector.