To enhance the local financial sector’s understanding of the nature of recent global financial turmoil and the importance of risk management, Central Deposit Insurance Corp (CDIC) organized an international seminar on September 5th to share insights by experts from Switzerland, the US, Hungary and South Korea. Participants to the seminar included officials from the Financial Supervisory Commission and the Central Bank and representatives from domestic banks and Taipei-based foreign banks.
THE INTERNATIONAL SEMINAR STARTED WITH TWO KEYNOTE SPEECHES:
PHOTO: CDIC
Fred Chen (陳上程), CDIC chairman, said that, following the US subprime crisis last summer, which triggered a global stock and property slump, governments and central banks in the world have taken actions to reform their own financial industries, attempting to enhance the sector’s strength in risk management. International financial organizations such as the Basel Committee on Banking Supervision and the Financial Stability Forum have also come up with suggestions and measures of “Enhancing (the financial) Market and Institutional Resilience,” addressing issues such as the management of collateralized mortgages and their supervision, accounting standards for financial institutions and the operation of rating agencies. He added that, the deposit insurance mechanism has an important role to play in the handling of problematic financial institutions, and hence how to improve the deposit insurance system’s function of avoiding financial crises or preventing such financial crises from spreading, is an issue that has increasingly attracted the attention of each country’s financial supervisory authorities as well as international organizations.
Founded in 1985, CDIC has aimed at safeguarding rights for financially unsophisticated depositors and helping maintain the nation’s financial orders, Chen said. The deposit insurer has also taken part in the nation’s financial reform by bailing out 54 domestic financial institutions, since 2001, Chen concluded.
During his address, Gordon Chen (陳樹), FSC chairperson, also stressed the importance of risk management in maintaining the financial market’s stability. He further shared his commission’s plan, which contains 217 projects, to build Taiwan into a regional financial hub. He said that for the past seven years, the local financial sector has been contributing to 10 percent of the nation’s domestic gross product (GDP), which, however, is relatively low compared to other countries. But the local government has earmarked financial industries to be the flagship pillar of expanding the nation’s service sector, which has taken up a 70 percent of the nation’s GDP. Chen added that his commission will help accelerate the sector’s integration in intellectual capital, that is, financial talents while adopting deregulatory measures to create a market without red tape for business management and transactions. His commission will also put forward measures that encourage financial institutions to upgrade their innovation and implement corporate governance in pursuit of business integrity and growth. In the infrastructure’s facilitation, Chen added that it has always been the government’s priority to help the financial sector to build a sound mechanism to manage and control financial risk as well as a well-intended exit system, which helps bail out failed financial firms.
TOPIC 1: ACTIONS TAKEN BY INTERNATIONAL FINANCIAL INSTITUTIONS TO REACT TO THE RECENT FINANCIAL TURMOIL.
Inscoe of IADI started by giving a brief on the international organization. Founded in 2002, IADI aims to contribute to the enhancement of deposit insurance effectiveness by promoting guidance and international cooperation. IADI has grown from 25 founding members including CDIC in Taipei to 51 members, as of this March, Inscoe said. Six central bank associates, 10 non-profit institutional partners including the International Monetary Fund (IMF) and six observers participate in the world body’s activities. Inscoe further revealed the world organization’s 21 core principles for an effective deposit insurance system. Following the recent financial turmoil, Inscoe said G10 countries have set up task forces, seeking “to identify the underlying approaches to ‘banking safety net’ issues…and the role played by deposit insurance in that wider context.” The Basel Committee on Banking Supervision also requires enhancing Basel II capital treatment of complex structured credit and off-balance-sheet activities by categorizing more risk levels and adjusting loan-to-value ratio for mortgage loans, he said. The Committee further drafts 17 principles with an objective to raise banks’ resilience to liquidity stress while preparing contingency plans. The standardized framework also includes instituting an explicit capital requirement for operational risk and increasing mechanism for disclosure and transparency, he added. TOPIC 2: CHALLENGES AND FUTURE STRUCTURE OF SAFETY NET IN THE EUROPEAN UNION.
Dr Fekete-Gyor from Hugary attributed causes of the US’s financial turmoil bad US underwriting practices, US authorities’ weak oversight, a lack of disclosures by US mega banks and poor risk management tool wordwide. He said that, following the US government’s reaction to crisis, the European Parliament and Commission have also made coordinated efforts to pass legislative proposals by the end of November this year so as to come with concrete measures to address the financial crisis. Fekete-Gyor said that these measures will aim at enhancing prerequisites for the continent’s effective regulatory and supervisory arrangements and seeking financial stability while avoiding systemic risk.
According to him, the EU regulators, in 2009, will impose capital requirements on all firms operating in the financial markets, require higher capital for complex financial products and derivatives and improve risk management by rejecting to rely only on computerized mathematical models to analyze risks in both quantitative and qualitative ways. The EU will also require disclosure of off-balance-sheet items while fostering transparency and clarity on complex financial products and securitization process on the European market, he said. In addition, the EU will ask investors to be aware of risks by evaluating and monitoring risk of complex financial products while increasing the financial transparency of publicly-traded companies on the over-the-counter (OTC) market. The EU, moreover, will require financial companies to their disclose remuneration policies and packages while imposing new fines and penalties on any possible financial irregularities, he said. He added that the EU will further introduce a small special tax on all financial transactions in European countries although the rate of such a tax is yet to be finalized by the European Congress later.
TOPIC 3: US SUB-PRIME MORTGAGE CRISIS AND ITS ON-GOING RESOLUTION
Hanc of the US Banking Research and Consulting likened the US sub-prime crisis to the burst of mortgage bubbles, which triggered the US housing market’s slump, after a large volume of sub-prime loans were made and related securities were issued without an adequate recognition of risk. He said that investors of such securitized investments had no clue since such financial products are highly complex. Before the burst of bubble, the reduction in “price of risk” have long centered in large banks operating in the US subprime mortgage market, but also in the European and other countries. It’s a recognized fact that sub-prime borrowers tend to borrow loans that they can’t afford. But the spreading use of “originate to distribute” banking model creates a long chain of interdependent investor, who also share the risk since innovative financial instruments often impose opaque risks. Investors and borrowers often misunderstood risks and sometime were misled, he said. Hanc said that rising delinquencies and foreclosures on sub-prime loans, losses at major banks and future write-downs led to a liquidity crunch in the US, which is aggravating the US economic slowdown. The US, however, has taken actions following the Federal Reserve’ (Fed) massive interest rate cuts and liquidity. While the Congress adopted measures to re-finance homeowners, market participants also pressed with on-going efforts to restore damaged reputations and avoid future losses. But Hanc said that the US government should have stepped in earlier and he believes that the worst is yet over.
TOPIC 4: THE CURRENT STATUS AND DEVELOPMENT TREND OF FINANCIAL MARKET IN TAIWAN.
Yeh of Taiwan’s FSC detailed the local government’s past efforts in solving the financial sector’s over-banking problem. The number of domestic banks have dropped from 53 in 2001 to 37 currently although the total number of their branches remains as high as 3,235 nationwide, the commission’s statistics showed. But the sector’s return on asset currently averages below 0.5 percent down from 1 percent in 1993, which represent the difficulty for most domestic financial institutions to be money-making with their spread and net interest margin narrowing, Yeh said. Yeh noted that his commission aims to build Taiwan into a regional financial center with a niche to becoming the Asia Pacific region’s funding center by exploiting the nation’s strong economic and high tech base while providing top-tier financial services to facilitate future listing plans. The commission has vowed to attract around 200 overseas companies to list on the local stock market or over-the-counter market in four years, Yeh said. Taiwan also stand a good chance of becoming the region’s wealth management hub although its asset under management (AUM) totals at only US$349 billion, much lower than Hong Kong’s US$1.24 trillion and Singapore’s US$778 billion. Yeh said that the government will start by encouraging Taiwanese businesses to repatriate their assets parked overseas. He added that his commission has vowed to boost the nation’s AUM to nearly double to around NT$20 trillion in four years.
TOPIC 5: GLOBAL FINANCIAL TURBULENCE AND OTHER FACTORS AFFECTING DEPOSIT INSURANCE IN KOREA
Kim, as Korean deposit insurer’s head researcher, expressed confidence in his nation’s financial safety net after having weathered through the 1997 Asian Financial Crisis. He revealed that Korean financial institutions had an exposure of US$434 million, or 0.9 percent of total sub-prime investments linked to bankrupt Bear Sterns in July as well as an exposure of US$550 million, or 0.16 percent of total investments linked to the troubled US mortgage giants Fannie Mae and Freddie Mac. The Korean financial sector’s total sub-prime exposure appeared to be relatively low, he said, adding that JP Morgan’s acquisition of Bear Sterns and the Fed’s provision of emergency liquidity minimized the possibility of wider losses on Korean financial firms. But the Korean government has been swift in addressing any possible threat from the sub-prime crisis by setting up committees to monitor its economic and financial conditions and share information with the general public. To address concerns over the nation’s increased provided fund (PF) loans, Kim’s KDIC has requested the financial regulator to improve its PF loan system since 2006 by lifting the bank’s ratio of loan loss provision and placing a cap on the bank to lend less than 30 percent of each borrower’s total loan.CREDIT RISK MANAGEMENT KEY TO FINANCIAL SECTOR’S HEALTH
CDIC president Howard Wang (王南華) reiterated the importance of risk management on a regular basis by installing an early warning system to detect problematic financial firms or loans that may soon turn non-performing as early as possible so as to cut losses. For example, the Taipei deposit insurer’s early warning system computerizes bank operation data on a regular basis, which will also be reported to the financial regulator and the central bank for review. On a daily basis, CDIC further asks domestic financial institutions to update their latest finances and business operation through the Internet while deploying account officers to look into the data and analyze for so-called dynamic management. Any irregularities, a warning will be given, which prompts either the CDIC or the financial regulator to re-examine the banking sector’s or any given bank’s health and financial transparency. The CDIC has been authorized by the Financial Restructuring Fund to take over failed banks under its conservatorship. But before any bail-out, the insurer will take any necessary action to ensure the banking sector’s viability by either talking to bank managements, taking part in their board meetings or requesting the access to the minutes of their board meetings afterwards. Wang also urged financial institutions in the world to reinforce corporate governance and stay alert to potential risk, which will also end up boosting their own business credibility.
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