Trust is the bedrock of finance, and a precondition for the smooth operation of trade. Financial institutions provide this trust. By submitting themselves to the government’s strict oversight they receive the trust of the market. This trust exists not only between individuals and individual financial institutions, it also exists between the market and its participants.
Competent authorities also play an important role. They must also ensure fairness, requiring all financial operators to respect and follow the same rules. This enables the healthy development of the industry and protects the rights and interests of society overall.
In the case of hostile takeovers, the acquirer must meet fundamental criteria, including capital adequacy, sound business operations, an international presence and corporate social responsibility.
Taishin Financial Holding Co and CTBC Financial Holding Co are vying to merge with or acquire Shin Kong Financial Holding Co.
In 2012, Taishin Financial had a double leverage ratio of 120 percent — higher than its peers. The Financial Supervisory Commission considered 110 percent to be the limit for a “sound financial holding company,” and so required Taishin to boost its capital strength. Taishin’s application to acquire a local unit of New York Life Insurance Co was rejected.
When Fubon Financial merged with Jih Sun Financial, it increased its capital by NT50 billion (US$1.56 billion) to maintain a healthy double leverage ratio. Clearly, the authorities view the double leverage ratio as a litmus test for determining whether a company has adequate capital.
The double leverage ratio reflects the risks posed by a financial holding company’s debt operations. When the commission reviews a merger application, it considers whether the merger would impact the public’s rights and interests. Suppose a financial holding company that is “too big to fail” has a double leverage ratio precipitously close to the upper limit: This would be a ticking time bomb.
According to a commission report in June, CTBC Financial had a double leverage ratio of 121.47 percent. CTBC has offered to buy 51 percent of Shin Kong Financial for NT$131.4 billion, including NT$95.4 billion in shares and NT$36 billion in cash, which would raise its double leverage ratio to more than 124 percent. Using a stricter definition that does not include special shares, the ratio could exceed the upper limit of 125 percent. CTBC Financial is a systemically important financial institution considered “too big to fail.”
The competent authorities’ consistency and policy conformity are of utmost importance to create a future “Asian asset management center” in Taiwan. Such a center would need to be founded on substantial trust and fidelity. It would also have to be supported by a fair and equitable supervisory system.
To entice foreign investment to Taiwan, supervisory bodies would need to guarantee market transparency and fairness. If double leverage ratios were used in the past as the basis for standard qualification for mergers and acquisitions, changing the rules would affect the international community’s perception of Taiwan.
Should auditing systems and bodies fail to retain strict adherence to codes and standards of integrity, this could damage the public’s trust in the government and chip away at support for the ruling party. Most important is that such a scenario could put a greater distance between Taiwan and the goal of transforming the nation into Asia’s asset management center.
Chiang Chung-yuan is an associate professor in the Department of Law at Shih Chien University.
Translated by Tim Smith
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