Comment on “Receivership and

Resolution” & Taiwan Experience

Johnson ChenPresident

Central Deposit Insurance CorporationMarch 29, 2007

At ARC 5th Annual Meeting & ConferenceHanoi, Vietnam

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IADI’s Guidance for Resolution of Bank Failures

• International Association of Deposit Insurers (IADI)

issued “General Guidance for the Resolution of

Bank Failures” in early 2006.

– General issues

– Interrelationships and cross-border issues

– Statutory powers accorded to the deposit insurers

– Operational and administrative issues

– The resolution of failing or failed banks

For more information, please visit: www.iadi.org

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Major Comments on

“Receivership and

Resolution”

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Major Comments - 1

• How to transform and more actively help

stabilize financial markets is one of the major

challenges for DI in those countries whose

financial environment is in the normal stage

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Major Comments - 2

• NPLs of problem financial institutions co

uld be disposed via publicly-owned or pr

ivate AMCs

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Major Comments - 3

• Timely and effective resolution,

appropriate valuation and transparent

sales process are important.

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Major Comments - 4

• When setting up bridge bank mechanism,

particular considerations should be given to the

demands and financial environment of each

country.

One size doesn't fit all !

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Taiwan Experience

• Current developments in Taiwan’s banking

sector

• Main amendments to the Deposit Insurance

Act

• Card debt problem in Taiwan & Rebar Group

scandal

• The focus of the CDIC’s work in the future

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• Total assets have gradually increased

Current Developments in Taiwan’s Banking Sector

Source of data: Financial Supervisory Commission website: http://www.fscey.gov.tw/

8,0488,603

9,179 9,399 9,46910,153

10,80511,376 11,654

7,422

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Unit: US$100 million

Total Assets of All FIs

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Unit:%

Source of data: Banking Bureau, Financial Supervisory Commission- http://www.banking.gov

NPL Ratio of All FIs

Current Developments in Taiwan’s Banking Sector

11.7

10.3

6.9

1.13

17.9

19.318.6

17.6

14.5

10.9

8.13

6.84

55.47

7.48

6.12

4.33

2.782.13

2.24

12.5

2.1

3.2

8.16

6.2

2.12.193.28

0

2.5

5

7.5

10

12.5

15

17.5

20

2000 2001 2002 2003 2004 2005 2006

Credit Cooperatives

Credit Department of Fishermen’s and Farmers’ Associations

Total

Domestic Banks

• Asset quality has improved significantly

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Source of Data: Banking Bureau, Financial Supervisory Commission, website: http://www.banking.gov.tw

6.05

3.61

-7.35

3.52

10.30

4.81

-0.47 0.630.47

0.26

0.30

0.22

-10.00-8.00-6.00-4.00-2.000.002.004.006.008.00

10.0012.0014.0016.00

ROE 6.05 3.61 -7.35 3.52 10.30 4.81

ROA 0.47 0.26 -0.47 0.22 0.63 0.30

2000 2001 2002 2003 2004 2005

ROE

ROA

Unit:%

Current Developments in Taiwan’s Banking Sector

ROE and ROA of All FIs

• Profitability has gradually increased

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Source of Data: Central Bank of China

26.81%27.81%28.16%28.56%25.79%

24.14%22.93%21.32%20.00%

17.25%

73.19%72.19%71.84%71.44%

74.21%75.86%

77.07%78.68%

80.00%82.75%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Direct Finance 17.25% 20.00% 21.32% 22.93% 24.14% 25.79% 28.56% 28.16% 27.81% 26.81%

Indirect Finance 82.75% 80.00% 78.68% 77.07% 75.86% 74.21% 71.44% 71.84% 72.19% 73.19%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Indirect Finance

Direct Finance

Current Developments in Taiwan’s Banking Sector

• The proportion of direct finance is gradually increasing

Direct and Indirect Finance

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457

418406 402 397 391

382

340

360

380

400

420

440

460

480

2000 2001 2002 2003 2004 2005 2006

Source of Data: Banking Bureau, Financial Supervisory Commission, website: http://www.banking.gov.tw

Current Developments in Taiwan’s Banking Sector

• The process of mergers among financial institutions is speeding up

Numbers of Total FIs

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Main Amendments to the Deposit Insurance Act

• Replenishing and reforming the deposit

insurance fund

• Strengthening risk control

• Strengthening the mechanism for handling

problem financial institutions and systemic

crisis

Taiwan Experience

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Replenishing and Reforming the Deposit Insurance Fund

• Separate Deposit Insurance Funds

– Regular Banking Sector

– Agricultural Financial Sector

• Set the Target Ratio of the Deposit

Insurance Fund : 2% of Insured

Deposits

• Assessment Base:

Insured Deposit Insurable Deposit

Taiwan Experience

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• Way of participation in DIS– Mandatory application for newly established financial institutions,

but CDIC has the right of approval or disapproval.

• Mechanism for facilitating coordination among

financial safety net participants & clear division of

responsibilities of each financial safety net player

• Special inspection and investigation powers

Strengthening Risk Control

Taiwan Experience

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• Exempt from the cost restriction

• Special premiums

• Bridge bank

Strengthening the Mechanism for Handling Problem Financial Institutions and Systemic Crisis

Taiwan Experience

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• Card Debt Problem in Taiwan

Card Debt Problem in Taiwan and the Rebar Group Scandal

Severe competition

Banks lacking the ability to design &

innovate new products; rapidly expanding

their consumer banking business

Huge bad debts; seriously affect the economic and social

order

Result in

Issuance of huge number of cards w/o

appropriate RM & credit analysis

Taiwan Experience

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• The Rebar Group Scandal

Card Debt Problem in Taiwan and the Rebar Group Scandal

Conglomerate

Financial Holding Company Non-financial subsidiariesRisk Transfer

others

banks

securities

insurance

Investment trust construction others

telecommunication

Taiwan Experience

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Card Debt Problem in Taiwan and the Rebar Group Scandal

• Six reasons why the Rebar Group triggered the unfortunate event involving The Chinese Bank

– The group falsely established shell companies – Funds transferred by false transactions– Incorrect financial statements – Insider trading – Manipulating stock prices – Illegal bill discounted, loan fraud, or else loans

borrowed from banks based on untrue values attributed to collateral

Taiwan Experience

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The Focus of the CDIC’s

Work in the Future

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The Focus of the CDIC’s Work in the Future

• Strengthening the risk control function

– Immediately measure and detect, and control

risk

– Independent in powers, but not isolated in

cooperation

– Good fences make good neighbors

– Transparency is the key factor of fraud

prevention

Taiwan Experience

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The Focus of the CDIC’s Work in the Future

• Reducing the cost of dealing with problem

financial institutions and enhancing

efficiency

– Time is the key to handling problem financial

institutions

– Developing complete complementary measures

Taiwan Experience

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Thank You!

http://www.cdic.gov.tw