Tremors in Taiwan’s Banks

Taiwan has been Asia’s Rock of Gibraltar in the past year, having escaped the economic troubles that engulfed its neighbors. Credit its billions of dollars in foreign reserves, low debt and a trade surplus. But now the government in Taipei is having some problems: A recent run on a bank, bad loans, the beginnings of a credit crunch and bankruptcy in two finance companies all zap public confidence.

This is not a crisis, but the problems expose a potentially dangerous vulnerability in the financial system. The government has taken steps to provide temporary relief, but they do not address underlying structural problems. For instance, although most of Taiwan’s 40 commercial banks still have a strong capital base, Moody’s Investors Service Inc. downgraded the rating of 10 major banks last month due to “structural weaknesses in the banking sector.”

Taiwan’s banking policies were liberalized in the 1990s, and private commercial banks have blossomed. Many are controlled by business groups. Now, with Taiwan exports slumping, some banks have been reluctant to make loans, and some owners have taken undue liberties with bank assets. Depositors at Taichung Business Bank, a mid-size regional institution, made a run on the bank last month when they learned its chairman had borrowed $227 million to buy stock in his own company in order to boost the value of its shares on the stock market. The bank has since been placed under government administration.

Other commercial banks are experiencing an increase in problem loans or are less willing to lend as Taiwan’s economic growth slows. Bad loans also are a problem at rural-based credit cooperatives and at many finance companies, including the two that failed.

The government and banking authorities have set out on a patchwork approach to the problems. Financial institutions have been asked to extend short-term loan deadlines by six months to help struggling businesses. An emergency stabilization fund was created to help the economy or stock market if needed.

The worry is that these are merely Band-Aids. Should the problems worsen, they could push the slowing Taipei economy into a recession just as other troubled Asian economies begin to stabilize. If that scenario holds, Taiwan and its Asian neighbors all will suffer.