Council for Economic Planning and DevelopmentExecutive Yuan, Taiwan, R.O.C.

June 10, 2005

TAIWAN’S FINANCIAL REFORMSTAIWAN’S FINANCIAL REFORMS

Thomas M. F. Yeh Vice Chairman

13th Conference on Pacific Basin Finance, Economics and Accounting PBFEA 032

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CONTENTSCONTENTS

I. INTRODUCTIONII. FIRST-STAGE FINANCIAL REFORMS

A. BACKGROUNDB. MAIN MEASURESC. ACHIEVEMENTS

III. SECOND-STAGE FINANCIAL REFORMSA. BACKGROUNDB. THE PLAN TO DEVELOPE TAIWAN

AS A REGIONAL FINANCIAL SERVICES CENTER

C. SUPPLEMENTARY MEASURESIV. CONCLUDING REMARKS

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A GLANCE at TAIWAN I. INTRODUCTION

CHINATaiwan

JAPAN

PHILIPPINES

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• Location: The island is located to the southeast of China.• Area: 36,000 square kilometers (roughly equal to the size of t

he Netherlands).• Population: 23 million.• Foreign Trade: 341.9 billion US dollars in 2004.• (Top-fifteen in the World.)• World top-three supplier of 28 items: Number One: 18 items Number Two: 6 items Number Three: 4 items• Global market share of major products: Recordable Optical Disks: 77 ％ Motherboards: 72% Notebook computers: 72 ％ LCD Monitors: 68％

A GLANCE at TAIWAN

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Source: Business Week,

May 16, 2005.

“The global economy couldn’t function without it.”

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Spike in NPLs

Contraction of banks’ Lending and Investment

Surge in troubled Financial Institutions

Increasing Moral Hazard

Challenge of Combating Financial

Crimes

A. BACKGROUND

The NPL ratio of depository institutions 3% in 1995 8.8% in march 2002

institutions had a negative adjusted net worth 10% by the end of 2001

II. FIRST-STAGE FINANCIAL REFORMS

Taking appropriate action to deal with asset stripping activities, such as illegal transfers of assets by top executives or senior managers of financial institutions, while striving to minimize moral hazard.

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B. MAIN MEASURES

1. Helping financial institutions accelerate the reduction of their NPLs

The slashing of the Gross Business-Revenue Tax (GBRT) from 5% to 2% in 1999.

The introduction of asset management corporations (AMCs) as a mechanism for speeding up the disposition of NPLs. The implementation of Measures for Accelerating the Reduction of Domestic Banks’ NPLs.The adoption of a new set of standards to make the calculation of Taiwan’s NPL ratio consistent with international practice.

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2. expediting the process of dealing with distressed financial institutions

The Financial Restructuring Fund was set up

in July 2001 to provide a mechanism and funding for the withdrawal of ailing institutions from the financial market.The provision of help to liquidate and consolidate troubled financial institutions, with 45 poorly performing community financial institutions and 2 banks taken over by 13 domestic banks.

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Financial Institutions

Negative Net Worth

Negative Net Worth

NPL Ratio Higher Than the

Regulatory Requirement

NPL Ratio Higher Than the

Regulatory Requirement

AMCs

Diposal of NPLsDiposal of NPLs

Received or Merged by Financial Institutions

FRF CompensatesLosses

FRF CompensatesLosses

Diposal of NPLsDiposal of NPLs

Diposal of NPLsDiposal of NPLs

Since the first AMCs were established in 2001, they have purchased bad debts from banks amounting to some 15 billion USD.

3.3 billion US dollars (113 billion NT dollars)

AMCs & The Financial Restructuring Fund (FRF)

45 poorly performing community financial institutions were taken over by 11 domestic banks.

Kaohsiung Medium Business Bank and Chung Shing Bank were taken over by E. Sun Commercial Bank and Union Bank of Taiwan respectively.

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The government launched financial reforms in July 2002.The setup of the Financial Reform Task Force (FRTF)：

Five Working Groups ─ Banking ─ Insurance ─ Capital Markets ─ Community Financial Institutions ─ Combat Financial Crimes

3. Government Task Force

The FRTF identified 23 financial reform issues and made 63 concrete recommendations, of which those already approved by the Legislative Yuan include: ─ The creation of a new financial supervisory body (FSC) ─ Increasing punishment for financial crime ─ Setting up a sound agricultural finance system

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increasing punishment for financial crimes 4. Re-regulation

Amendments to the Banking Law, Financial Holding Company Act, the Act Governing Bills Finance Business, the Trust Enterprise Act, the Credit Cooperatives Act, the Securities Exchange Law and the Insurance Law have been passed and enacted, providing for financial crime to be punished by:

─ Imprisonment for up to 10 years

─ Fine of up to NT$500 million (US$1.5 million) Enabling speedy invalidation of illegal asset transfers

Further amendments that (1) will enable the courts to invalidate

any transfer of assets by a CEO or senior manager where there are reasonable grounds for suspecting that such transfer is in violation of the law, and (2) will establish a procedure for a speedy hearing and decision by the judicial authorities in such cases, are currently under deliberation by the legislature.

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5. De-regulationFacilitating Financial Market Consolidation 14 financial holding companies (FHCs) have been established since the end of 2001, with 89 financial institutions (including 15 banks, 14 securities firms, 8 insurance companies , and 6 bills finance companies) incorporated into these FHCs.

Broadening market access and attracting foreign investment

The abolishment of the 12-year-old QFII system in September 2003 meant that Taiwan’s stock market was fully opened to foreign investment.

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Main Finance-related Laws Enacted from 2000 through 2004 Date of

Promulgation Name of Law (Act)

Nov. 2000 Financial Institutions Merger Act

July, 2001

Six Financial Reform Bills, including:Statute for the Establishment and Management of the Executive Yuan's Financial Restructuring Fund;Financial Holding Company Act ; Act Governing Bills Finance Business; Value-added and Non-value-added Business Tax Act; partial revision of the Insurance Act; and partial revision of the Deposit Insurance Act.

July, 2002 Financial Asset Securitization Act ； Statue for the Protection of Securities Investors and Futures Dealers

July, 2003Organizational Act for the Executive Yuan’s Financial Supervisory CommissionReal Estate Securitization Act Agricultural Finance Act

June, 2004 Securities Investment Trust and Consultants Act

6. The Most Important Items of Legislation

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％

1.52 0.98-0.07

-0.96-2.09

-2.79-2.83-2.70-1.37

1.262.03

2.72

7.338.61

2.742.78

3.45

3.544.14

4.335.625.686.116.12

7.127.488.047.487.79

6.475.89

7.90

5.444.94

-4

-2

0

2

4

6

8

10

3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3

2001 2002 2003 2004 2005

banks’ Lending and Investment Growth

Past-Due Loan Ratio

End of Year Past-Due Loans Loans NPL Ratio2001 1,087 14,527 7.482002 864 14,131 6.122003 631 14,563 4.332004 433 15,558 2.78

March 2005 432 15,766 2.74

Unit: billion NTD

C. MAIN ACHIEVEMENTS

1. Decreasing Domestic Banks’ Past-Due Loans & Increasing lending and investment

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2. Improving Asset Quality

A substantial improvement in the profitability of Taiwan’s banks is likely to be further strengthened by the industry’s improving asset quality and the continued robust performance of Taiwan’s financial markets that most forecasters expect.

Basic Financial Data on Taiwan’s Banking System (%)

End of Year

1998 1999 2000 2001 2002 2003 2004 2005(1~3

)

ROA 0.60 0.50 0.48 0.27 -0.48 0.22 0.63 0.18

ROE 8.00 5.90 6.19 3.60 -6.93 3.52 10.30 2.88

CAR 10.58 11.17 10.75 10.40 10.63 10.07 10.69 ─

ROA = Return on total Assets.ROE = Return on stockholders’ Equity.CAR = Capital Adequate Ratio.Source: The Financial Supervisory Commission

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Item of Scale March 2002(Billion US$)

March 2004(Million US$)

Growth Rate(%

)The Market Value of Listed & OTC’s Companies

383 470 22.7

Average Daily Bond Trading Value

15.5 22.2 43.2

Total Assets of Mutual Funds

57 79 38.6

Domestic Banks’ Deposits 619 795 28.4Domestic Banks’ Loans 374 472 26.2Total Assets of Insurance Industry

90 180 100.0

3.Enlarging the Scale of Financial Markets

Sources: CEPD & FSC

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Total Accumulated Net Inward Remittance Unit: US$ billion

4. Enhancing the Confidence of Foreigners

86.880.1

66.343.041.431.422.9

11.19.39.06.34.32.6

0.020.040.060.080.0

100.0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Mar-05

Abolished the screening system for qualified

foreign institutional investors (QFII)

29.1

22.520.916.815.613.9

11.810.29.310.78.16.55.9

0

10

20

30

40

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

The Proportion of Institutional Investors’ Trading Value on TSEC Market (%)

Source: FSCJan. ~ May

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III. SECOND-STAGE FINANCIAL REFORMS

1. Developing the Financial Services Industry

through Deregulations and the Launch services and New Products

A. BACKGROUND

1st-stage Financial Reforms

2nd-stage Financial Reforms

Following up on the major efforts that have been made to overhaul the financial sector in recent years, the government will be placing particular emphasis on the developments of Taiwan’s capital market： 1. fund-raising functions2. asset management business

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2. SWOT Analysis of Taiwan’s Financial Markets

Weakness

Threat

Strength

New pension fund system helps develop asset management business

Vigorous capital market paves the way for developing Taiwan as a Regional Financial Services Center

Facing competition from international conglomerates Need for strengthening and integration of regulatory environment in step with financial sector development.

Opportunity

Relatively small scale of individual financial institutions Limited liberalization of financial market Too many state-owned banks Lack of experience of cross-selling and internationalization Synergy needs to be improved Insufficient financial professionals

Transnational enterprises will need more financial services

Higher foreign exchange reserves, and less external debt

Abundant capital of overseas Taiwanese

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Ratio of Financial services

sector output to GDP (%)

Ratio of Financial Services

Sector Employment to total

Employment (%)1999Hong Kong 11.3 5.5Taiwan 10.3 3.8Singapore 12.5 4.6

2003Hong Kong 11.8 (2002) 5.2Taiwan 11.4 3.9Singapore 11.5 5.2 (2002)Sources： CEIC

3. Current Development of Financial Services Industry in Taiwan

Main Financial Centers in Southeast Asia

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Asia’s Largest 300 Banks by Assets

Number

Share of Total

Assets (%)

The Average Asset Scale Relative to Taiwan’s

Taiwan 42 5.4 1.00Hong Kong 18 4.9 2.12Singapore 3 1.8 4.67South Korea 14 5.0 2.78

The fragile financial market and the relatively small scale of financial institutions hamper the pace of product innovation and efforts to take advantage of economy of scale.

Sources： International Chinese Newsweekly, June 13, 2004. Compiled by the Council for Economic Planning and Development

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1. Guidelines and Strategies

B. The Plan to Develop Taiwan as a Regional Financial Services Center

New Guidelines: 1. Maintain openness 2. Foster innovation 3. Strengthen efficiency Approaches: 1. Strengthen financial supervision 2. Improve corporate governance

Five Strategies Developing sound macro- economic environment Forming a regional fundraising center Promoting asset management business Developing diversified financial services Strengthening financial market competence.

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2. Main Plans

(1) Integrating finance related laws and regulations, and drafting Financial Services Act.(2) Promoting consolidation in financial sector.(3) Encouraging financial innovation and adopting negative listing for the review of new financial services and products.(4) Strengthening the cultivation of financial talent and elevating the professional level of the financial industry as a whole.(5) Building a competitive financial taxation environment in line with international practices.(6) Stepping up the pace of financial liberalization through speedier de-regulations.(7) Strengthening risk management and promoting financial discipline and information transparency.

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3. Specific Targets for Promoting Consolidation

(1) For our three biggest banks to each have a

market share of 10% or more by the end of 2005.

(2) The number of government-owned banks should

be reduced from twelve to six by the end of 2005 .

(3) The number of financial holding companies should

be halved from fourteen to seven by the end of

2006.

(4) At least one domestic financial institution should

be run by a foreign-owned entity or be listed on

an overseas stock exchange by the end of 2006 .

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(1) For the financial services sector to raise its share of GDP

from 11.3% in 2003 to 13.0% by the end of 2008 .

(2) For one to three financial institutions to become established

as representative regional operators by the end of 2008.

(3) For stocks held by foreign entities to rise as a percentage of

total market capitalization from 18.8% to 25.0% in 2008.

(4) For the amount of funds raised in Taiwan by multinational

corporations and international institutions to double by the

end of 2008

(5) For the issuance of asset-backed securities to grow four-fold.

(6) For the assets of financial institutions as a whole to grow

more than 30% over the same period

4. Anticipated Results

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Supplementing and amending related

laws and regulations

Privatization of state-owned banks

Enhancement of corporate governance

C. SUPPLEMENTARY MEASURES

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1.Supplementing and amending related laws and regulations

Law Major Content

Financial Services Act

Use of the same criteria by different financial industries undertaking asset management.

Limited Partnership Act

Heightening the flexibility of corporate operations; helping to attract long-term domestic and foreign capital into the venture capital industry.

Reorganization and Bankruptcy Act

Establishment of a single set of rules for corporate reorganization and bankruptcy, to speed up the review of corporate reorganization application and bankruptcy cases.

Amendment of Income Tax Act

Adoption of person/place policy for tax levies.

Financial Services Industry Bills Slated for Enactment or Amendment

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Timetable for Privatization of State-Owned Timetable for Privatization of State-Owned Financial InstitutionsFinancial Institutions

2.Privatization of state-owned banks

Governing Authority

Name of Institution Date Set for Privatization

MOF

(Ministry of Finance)

Bank of Taiwan December 2006

Land Bank of Taiwan December 2006

Central Trust of China

December 2006

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the Policy Agenda and Action Plan to Strengthen Corporate Governance

3.Enhancement of corporate governance

The key points of focus of the action plan :1. The strengthening of companies’ internal controls. 2. The orderly establishment of a system of independent directors. 3. The protection of investor interests. 4. The reinforcement of public disclosure requirements.

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1. The goal of Taiwan’s second phase of financial reforms is to develop Taiwan as a free, open and efficient regional financial hub through the efforts of deregulations and initiatives.

2. Promoting financial consolidation has been the top priority work for the government to improve the over-banking situation in Taiwan.

3. Financial reform and corporate governance should be carried out at the same time. The earlier this can be achieved, the higher its benefits will be and the lower its costs for the society as a whole.

IV. CONCLUDING REMARKS

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We welcome foreign investors to establish new financial

institutions and invest in domestic banks in Taiwan.

THANK YOU！