Local banks insulated from turmoil

Over the past month, Taiwan’s Premier Liu Chao-shiuan has twice praised domestic banks for containing losses caused by the global financial turmoil that has engulfed several international financial giants.

“Taiwan’s banks are not completely internationalized, but ironically this has served as a firewall,” helping them stave off any negative impact from abroad, Liu said.

The island has US$281.13 billion in foreign exchange reserves.

The government estimated the local banking sector had lost NT$25 billion (US$771.6 million) in the wake of the U.S. subprime mortgage crisis, and its exposure to Lehman Brothers, the bankrupt U.S. investment giant, was around NT$40 billion. “The amount was marginal if compared with the huge losses seen in the United States and Europe,” said Mars Hsu of Grand Cathay Securities.

While some attributed the result to simple luck, others put it down to tight state regulation requiring banks to maintain a loan/deposit ratio of around 80 percent, compared with up to 400 percent at some European banks.

The higher the ratio, the more the bank must rely on borrowed funds, which are generally more costly than most types of deposits.

“During the boom years, the higher loan/deposit ratio meant higher profits for the banks, but should a credit crunch hit, it could spell disaster,” Hsu said.

Local banks began restructuring in the early 2000s in an effort to write off debts caused by the 1997 Asian financial crisis. Outstanding loans were cut to below 5.0 percent from a peak of more than 10 percent. The government has also fully guaranteed all domestic savings but analysts warned that the worst could be yet to come.

“The banks may have gone through the first wave of fallout. The problem is can they escape a second wave,” said Kenneth Lin, professor of economics at National Taiwan University.

He said that as the export sector lost momentum and unemployment rose, more and more people would be unable to repay their mortgages, a key component of local banking business.

The unemployment rate hit a three-year high of 4.27 percent in September, mainly due to business closures or downsizing, the government said. In September, 464,000 people were jobless, up 12,000 from last month.

Taiwan’s export orders grew at their slowest pace in more than six years in September amid slowing demand from the United States and China, the economic ministry said.

As a pre-emptive step, Taiwan’s bank association said its members will extend the repayment duration for mortgage borrowers for up to five years, local newspapers said.

Norman Yin, professor of economics at National Chengchi University in Taipei, said local banks “should adopt aggressive mergers or acquisitions and look to the international markets as the domestic market is too small”.

He urged the government to privatise state-owned banks to improve efficiency. Taiwan has 37 retail banks, seven of them fully or partially controlled by the government.

However, Lin said that for the moment the Financial Supervisory Commission should tighten regulations rather than pressing for another comprehensive round of reforms.

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