Bank Woes May Tarnish Taiwan’s Economic Luster

In a dangerous year of Asian economic turmoil and collapse, Taiwan has been one of the few places to steer clear of the abyss.

In fact, officials here predict the economy will end the year with a robust 5.1% increase in gross domestic product--by far the best performance in the region outside mainland China.

That’s why the recent struggles of several large Taiwan business groups, failure of two finance companies and panic by depositors on the regional Taichung Commercial Bank set off alarms here. Could it mean Taiwan has contracted the Asian disease?

No, Taiwan Finance Minister Paul Chiu said emphatically in a recent interview. “This situation is not directly related to the Asian financial crisis,” he said.

Other banking and financial experts agree, at least for the short term, but warn that unless the island’s banking system is consolidated and restructured, Taiwan could face serious economic problems by the middle of next year.

Unlike most of the other Asian trouble spots, Taiwan does not have a foreign exchange problem. It enjoys one of the world’s biggest foreign reserves, at $88 billion. It has almost no foreign debt, due at least in part to its political isolation. Despite a 9% decline in exports, it still enjoys a healthy trade surplus. And consumer prices have remained remarkably stable.

Taipei restaurants are full. Its department stores brim with customers, and there is little of the going-out-of-business-sale mania a visitor encounters in Bangkok or even Hong Kong.

However, some experts contend what Taiwan does have is a crisis in its banking system, marked by a dangerous proliferation of nonperforming loans. Too many of Taiwan’s new private commercial banks, brought into the system under banking liberalization policies in the early 1990s, are controlled by business groups that have dipped too far into bank assets.

“They’ve been raiding their own piggy banks,” commented one Western trade official.

The run on Taichung Bank late last month, for example, was started when depositors discovered that bank Chairman Tseng Cheng-jen borrowed the equivalent of $227 million to buy stock in his own group of companies, the Kuang San conglomerate.

Meanwhile, Taiwan’s unique system of “bills finance companies”--which underwrite and sell commercial papers issued by enterprises--and its rural-based Farmers’ and Fishermen’s credit cooperatives also are riddled with bad loans that are often politically motivated. Of the 16 bills finance companies, only two have “A” ratings.

As a result of these questionable banking practices, argued Thomas Lee, professor of banking at National Chengchi University, Taiwan risks a recession of its own making.

“The problem is really within ourselves, related to the safety and soundness of our own financial system,” Lee said. “If there is financial turmoil, it is going to be created by ourselves.”

Lee blames the problem on the overly rapid liberalization and expansion of the banking sector. “Our pace was too fast,” Lee said. “In 1992, return on equity for banks was about twice as high as it is now, 24% compared to 12%.”

Citing what it called “growing concern over the structural weaknesses in the Taiwanese banking sector,” Moody’s Investors Service Inc. last month downgraded ratings for 10 major banks.

Chiu, the finance minister, described the Moody’s action as unfair.

Chiu, who holds a doctorate in finance from Ohio State University, said most of Taiwan’s 40 commercial banks--”the backbone of the banking system”--are in good shape with a strong capital base.

Taiwan has an unusually high initial capital requirement of $320 million for its banks. In the major banks, most of which are state-owned or have implied state support, nonperforming loans are still only 4%, low by regional standards.

The government has moved quickly and massively to stop the bleeding in its banking sector. Early last month, the government issued a rescue plan calling for financial institutions to extend short-term loan deadlines by six months to give struggling businesses some breathing room.

Taichung Bank was placed under government administration, with Central Deposit Insurance Corp. guaranteeing deposits. Meanwhile, the government created an $8.7-billion emergency stabilization fund, to be injected into the economy or stock market where needed.

Critics contend that the government is just buying time with these actions.

“If everything goes well, then the nonperforming loans will be made good,” Lee said.

“But if people lose confidence in the banking system and create capital flight, it is another story.”

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Left Behind

Though Taiwan has escaped Asia’s crisis, its stock market has languished in recent months, even as most Asian markets have rebounded on optimism that the worst of the region’s economic woes have passed. Some analysts say a financial crisis could be brewing in Taiwan. Weekly closes and latest for the main Taiwanese stock indexes:

Thursday, Dec: 7,048.57

Source: Bloomberg News

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