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### Viewing cable 05TAIPEI2546, TAIWAN: NOT ENOUGH FUNDS FOR BANK RESOLUTION

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05TAIPEI2546 | 2005-06-10 01:47 | 2011-08-23 00:00 | UNCLASSIFIED | American Institute Taiwan, Taipei

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

    100147Z Jun 05

` `

    UNCLAS SECTION 01 OF 03 TAIPEI 002546

    SIPDIS

    STATE PLEASE PASS AIT/W AND USTR

    STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA

    USTR FOR SCOTT KI

    USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
    USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT

    TREASURY FOR OASIA/ZELIKOW AND WISNER

    TREASURY PLEASE PASS TO OCC/AMCMAHON

    TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
    GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

    E.O. 12958: N/A
    TAGS: EINV EFIN ECON TW
    SUBJECT: TAIWAN:  NOT ENOUGH FUNDS FOR BANK RESOLUTION

    ¶1.  (U) Summary: On May 31, 2005, the Legislative Yuan (LY)
    provided additional funding to extend the life of the
    Financial Reconstruction Fund (FRF).  Much of the additional
    funding is earmarked for specific uses, including a bailout
    of shareholders in a credit association favored by the
    opposition Party.  The remaining funds are unlikely to be
    sufficient to resolve existing problems at financial
    institutions.  Prior to July 10 the Financial Supervisory
    Commission must designate institutions eligible for FRF
    funding.  This deadline may encourage some additional bank
    consolidation.  On a positive note, this same legislation
    caps the size of accounts eligible for deposit insurance
    coverage.  This move may instill some market discipline in
    the banking sector.  End Summary.

    New Funds for Bank Resolution
    -----------------------------
    ¶2.  (U) On May 31, 2005, the LY passed amendments to provide
    additional funding of NT$110 billion to temporarily extend
    the life of the FRF.  First established in 2002 with NT$140
    billion, the FRF was to address Taiwan's banking crises of
    2001, but has been plagued by under funding and legislators'
    efforts to direct support to particular financial
    institutions.  Three quarters of the additional funding,
    barely ten percent of the NT$1.05 trillion requested by
    authorities in 2002, is already designated for specific
    uses.  The remainder is well short of funding needed to
    resolve existing problems at financial institutions.  Prior
    to July 10 the Financial Supervisory Commission (FSC) must
    designate institutions eligible for FRF funding.

    Lingering Financial Problems
    ----------------------------
    ¶3.  (U) Taiwan's widespread banking crisis in 2001 caused
    severe losses in a wide range of institutions, including
    banks and credit associations.  Four years later, many of
    these losses have yet to be resolved.  The insolvent
    Fengshang Credit Cooperative Association (FCCA) is a case in
    point.  Under procedures and criteria established by Taiwan
    banking officials, FCCA shareholders (and those of other
    insolvent institutions) would not receive compensation for
    losses.  Depositors, on the other hand, are guaranteed to
    receive full compensation for all deposits in the banking
    system in the event of an institution being shut down for
    insolvency.  Opposition Nationalist (KMT) Party legislators
    have repeatedly stalled efforts to increase funding for the
    FRG until compensation is provided for FCCA shareholders.
    The May 31 legislation provides NT$500 million compensation
    specifically for FCCA shareholders.  In April 2004, FCCA had
    a non-performing loan (NPL) ration of 45% and negative net
    worth and was placed in receivership.  In July 2004,
    ChinaTrust Commercial Bank won a bid to take over FCCA and
    received NT$1.1 billion from the FRF as part of the deal.

    ¶4.  (U) Besides the NT$500 million set aside for the FCCA
    shareholders, the amendments specify that NT$58 billion is
    to be used to finalize the last bank resolution undertaken
    by the FRF.  Chong Shing Bank (CSB) was placed in
    receivership in March 2001 and had outstanding liabilities
    of NT$58 billion in inter-bank loans.  In December 2004, the
    Union Commercial Bank (UCB) bid on and won the right to take
    over CSB.  FRF paid UCB NT$7 billion in the deal, exhausting
    FRF's original funding of NT$140 billion.  The NT$58 billion
    in outstanding inter-bank loans remained on the books of CSB
    (now part of UCB) and the creditor banks until such time as
    the FRF receives additional funding and disburses payment.

    ¶5.  (U) Another NT$22 billion of the FRF's additional
    funding is earmarked for resolving ongoing financial issues
    at the credit arms of Farmers and Fishermen Associations
    (FAs).  There are 278 FA credit arms operating 1,146 offices
    island-wide.  FA credit arms are small, accounting for only
    three percent of Taiwan's lending markets.  However, their
    NPL ratios average 14%, much higher than the 3.7% for
    domestic banks and the 3.3% for credit cooperative
    associations.  Taken together, the designated amounts of
    NT$500 million for FCCA, NT$58 billion for CSB and NT$22
    billion for FA credit arms, total to NT$80.5 billion.  The
    FRF is thus left with NT$29.5 billion to tackle the
    financial losses left over from the 2001 banking crisis.

    Funding Insufficient
    --------------------
    ¶6.  (U) Taiwan's banking community tells AIT/T that NT$29.5
    billion is insufficient to deal with financial institutions
    that report higher than average NPL ratios and lower than
    average capital-adequacy ratios.  However, there is
    consensus that "it is better than nothing."

    ¶7. (SBU) AIT/T believes that there are at least seven
    institutions requiring immediate attention, including four
    domestic banks, two credit cooperative associations, and a
    trust company.  These seven institutions have NPL ratios
    above 10% and capital adequacy ratios below 10% as of March
    ¶2005.  Their combined NPLs totaled NT$82 billion, far more
    than NT$29.5 billion available to FRF.  These problem
    institutions are likely to be designated for assistance
    under the requirements of the May 31 legislation.  Following
    designation of an institution, FRF involvement in a
    designated institution can go well beyond the July 10
    deadline.

    ¶8.  (U) Without sufficient funding for the FRF, we expect
    Taiwan authorities will urge problem institutions to improve
    their quality by increasing capital or merging with better-
    quality banking institutions.  There could be efforts to
    inject new at-risk capital and increased merger activities
    prior to the July 10 deadline.

    FRF Out of Business
    -------------------
    ¶9.  (U) FRF will pay non-deposit liabilities, such as inter-
    bank loans, only for institutions put under receivership
    prior to July 10.  FRF compensation must be paid by July 31,
    ¶2005.

    Deposit Insurance Capped at NT$1 million
    -----------------------------------------
    ¶10.  (U) One provision of the May 31 legislation seeks to
    mitigate future banking problems.  Taiwan's Central Deposit
    Insurance Corporation (CDIC) currently provides unlimited
    coverage for bank deposits.  Starting from July 11, 2005,
    CDIC will only cover up to NT$1 million per depositor.  The
    LY and banking regulators hope that by reducing the level of
    insurance coverage, bank customers will be more stringent in
    choosing a bank.  Banks with bad reputations could suffer a
    loss of deposits and thus face greater pressure to consider
    merging with other, stronger, banks.

    FRF Financing Mechanism Extended
    --------------------------------
    ¶11. (U) Much of the FRF funding has come from extending the
    collection period for the Gross Business Receipt Tax (GBRT).
    This tax, formerly set at 5%, had been due to expire.  The
    original FRF legislation directed that the FRF funding would
    come from a temporary extension of the GBRT, which would be
    set at 2%.  The extended 2% GBRT will now continue for an
    additional four years until December 2010.  The additional
    funds collected between 2006 and 2010 will go to the CDIC
    and increase its deposit insurance reserve.

    Comment
    -------
    ¶12. (SBU):  The now four-year long saga of the FRF
    illustrates a longstanding political struggle between the
    ruling Democratic Progressive Party (DPP) and the opposition
    parties, in particular the KMT.  By delaying funding for the
    FRF since 2002, the opposition has continuously stymied
    efforts to resolve the banking crisis of 2001.  Insolvent
    financial institutions that should have been shut down or
    sold off long ago have been allowed to continue doing
    business.  The LY has declared victory by establishing an
    end date for the FRF, but has provided far too little in
    funding to handle the outstanding losses.  The end result is
    that resolving these losses will drag on for some time.  The
    longer it takes for resolution, the less pressure individual
    bankers will feel to make needed reforms and the longer it
    will take for Taiwan to develop an efficient banking sector.
    End Comment.
    PAAL

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