WEF Ranks Taiwan 100th in Banking Soundness

UNCLAS AIT TAIPEI 003990

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E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: WEF Ranks Taiwan 100th in Banking Soundness


SUMMARY
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1. The World Economic Forum (WEF) recently gave Taiwan's banking
system a ranking of 100th out of 125 rated economies. Taiwan's
banking regulators have expressed dismay, disagreement, and have
pointed out flaws in evaluation method. End summary.

Poor Ranking
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2. In its 2006 banking soundness rating for 125 economies, the WEF
lowered Taiwan's ranking to 100th from 74th in 2005. Banking
soundness was one of 89 factors on the WEF global competitiveness
rating. Taiwan's 2006 overall ranking dropped from 8th to 13th, and
the United States' ranking from first to fifth.

Taiwan Regulator Disagrees
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3. In response to the poor rating, the Financial Supervisory
Commission Banking Bureau (BB) held a press conference on September
27 to rebut the WEF findings. The BB noted that the WEF did not
base its bank rating on financial indicators as capital adequacy
ratio, non-performing loan (NPL) ratio, return on asset (RA) ratio,
and return on net worth (RE) ratio. Instead, the WEF based its
rating on a simple questionnaire which asks ordinary businessmen
(without financial backgrounds) to judge the soundness of the
banking system. BB claims that the questionnaire's sole question on
banks reads: "Banks in your country are: 1=insolvent and may require
a government bailout, 7=generally healthy with sound balance sheet."
The BB also noted that the WEF never interviewed any of Taiwan's
banking regulators.

Good Shape but Poor Profitability
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4. According to the BB, Taiwan banks are in relatively good shape
with good quality assets. Their average capital adequacy ratio is
10.33%, higher than the 8% required by Basil II. Their average NPL
ratio is 2.39%. Their profitability in term of RA or RE ratio is
relatively poor but is expected to improve as delinquent debt
problems seem to be under control.

Poor Ranking for the United States and Japan
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5. According to the BB, while the rating for Taiwan was unfair, the
WEF also gave the United States a ranking of 27th, worse than 18th
for Chile, 19th for South Africa, and 22nd for Barbados. The
ranking for banks in Japan was 76th.

WANG