On Financial Management Policy, Be Complete and Pragmatic
A nation-wide unified and open market system had been developed. An improved macroeconomic regulatory system used indirect means and market forces to play a central role in economic management and the allocation of resources.A new tax and financial system was functioning effectively. Financial policy had been separated from commercial operations of the central bank, which now focussed on financial regulation and supervision. The exchange rate of the Chinese currency Renminbi (also "RMB") had been unified and remained stable. The Renminbi had been made convertible on current account. Further liberalization of pricing policy had resulted in the majority of consumer and producer products being subject to market prices. The market now played a much more significant role in boosting supply and meeting demand.
After being named minister of finance, Lee Yung-san, who has a background in finance, has issued statements on a number of important financial policies, including these: (1) In line with the policy of liberalization, the principle of "leniency in business and strictness in fiscal affairs" will be adopted; (2) To rectify financial disorder, poorly managed banks "should be allowed to collapse if they deserve to collapse"; and (3) In view of the continuous deterioration of numerous financial institutions, the amount in the Financial Rehabilitation Fund should be increased from the current NT$140 billion to NT$320 billion in order to meet the real need.
When viewed separately each of these policies is reasonable, but when observed as a whole they are lacking in policy consistency. What the Ministry of Finance must do is propose a concrete and practicable program for dealing with financial policy as a whole.
As everybody knows, "leniency in business" is a necessary trend in liberalization--there is no doubt at all about this. But how should leniency be exercised? Minister Lee said nothing about this. Observing the matter from the evolution of financial laws and regulations over the past 10 years, we see that there has been a relaxation to quite a large extent of the business operations of financial institutions. Commercial banks have moved in the direction of integrated operations, a fact that all who have eyes have seen, and the establishment of financial holding companies has boosted integrated operations to a higher peak. Since 1995 small and medium-sized business banks have been allowed, just like general commercial banks, to apply for the establishment of more domestic branches, and because of this long-established restrictions on trans-regional operations have been eliminated. Community-level financial institutions have undergone a similar development. In addition to allowing credit cooperatives to transform themselves into commercial banks in accordance with the regulations, the Law of Credit Cooperatives that was promulgated in 1993 also greatly expanded their operating space to include trans-regional operations (Article 7), permitted small and medium-sized enterprises to join credit cooperatives as associate members (Article 11), and added numerous new items of business (Article 15). Even the credit departments of farmers' and fishermen's associations have broken away from the limitation of clients to natural persons alone.
If we say that "leniency in business" refers to an extension of the fundamental thrust of liberalization and a continuation of the expansion of the business scope of financial institutions, therefore, there is really nothing new in it. But if it means the acceptance of the proposal of numerous financial businesspeople to adopt a negative list for banks so that they will be allowed to engage in any business that is not explicitly forbidden, then how can this policy be carried out? What kind of accompanying measures should be adopted to prevent the proliferation of wrongdoing? The Ministry of Finance should have a comprehensive program for this
In Taiwan and overseas, whenever financial institutions have run into trouble in their operations they have always appealed to the agencies in charge to relax controls and allow them to engage in new types of business. This is what happened with American savings and loan associations, and it is also what has happened in the development of the financial industry in Taiwan. The facts show, however, that a relaxation of business scope will not necessarily bring about an improvement in the operating systems of financial institutions; if there are no appropriate accompanying measures, when restrictions on business scope are relaxed it will be the same as planting the seeds of financial disaster and may even lead to the collapse of the financial industry. We can look to the experience of the United States in handling savings and loan associations in the 1980s as a recent lesson in this respect. In regard to Taiwan's domestic situation, in 1990--the year before the new banks began operating--the average non-performing loan rate in the banking industry was 0.93%; by the end of last year, it had exploded to 8.16%. Those in charge should study carefully what has caused this to happen. In fact, if leniency in business comes first and accompanying management measures only afterwards, then there will be huge losses that will inevitably affect fiscal health. Strictness in fiscal affairs, therefore, must also be based on the appropriate management of business, for otherwise it will be nothing but empty talk.
What should the government do about the banks that are operating poorly? Minister Lee said that those deserving to collapse should collapse. This pronouncement was forceful in the cause of justice, but what is difficult for us to understand is that at the same time the Ministry of Finance asked for a large increase in the size of the Financial Rehabilitation Fund. Because of this, some people are curious as to whether Minister Lee's policy will also fall into being nothing more than empty talk. There are two main advantages to the adoption of a "let those collapse that should collapse" policy: the first is that it costs nothing from the national treasury, so that taxpayers will not have to share the burden of the failed banks' losses; the second is that depositors will have to open their eyes and put their money into good banks, and for this reason the natural elimination of bad banks will exhibit the power of oversight by the market. But there is also a great risk in doing this. After the banks go bankrupt a lot of depositors will have no way to get their hard-earned money back, and the result will be a run by depositors on other banks that could lead to systemic financial turmoil. In the United States almost 10,000 banks went bust from 1929 through 1932; the country was filled with throngs of suffering depositors, and a deposit-insurance system was set up in 1934. After that various countries hastened to follow the American example, and this had the effect of pacifying the minds of the people. The deposit insurance system was introduced to Taiwan in 1985, and the implementation of the Financial Rehabilitation Fund and the management statute last year, which further allowed the deposit-insurance corporation to make compensation above the insured amount, was done with the objective of putting people's minds at ease. The facts prove that this measure was successful as a key factor in bringing order to the 36 community-level financial institutions.
What is the real content of the "let those collapse that should collapse" policy proclaimed by the Ministry of Finance? And how is it different from past policy? Outsiders have no way of knowing, and the ministry must clarify this. Simple slogans that excite the minds of the people are suitable for political discourse; but financial management, and especially the disposition of problem financial institutions, is like precise surgery: it can be fully effective only if it is carried out with rigid precision and caution. We hope that the Ministry of Finance will come up with a more pragmatic and comprehensive way to handle this issue. (March 2002)
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