Taiwan Takes Over Problem Bank

UNCLAS SECTION 01 OF 02 TAIPEI 004175 SIPDIS SIPDIS STATE PLEASE PASS USTR STATE FOR EAP/RSP/TC, EAP/EP USTR FOR ALTBACH USDOC FOR 3132/USFCS/OIO/EAP/WZARIT TREASURY FOR OASIA/LMOGHTADER TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN E.O. 12958: N/A TAGS: EINV EFIN EIND ECON PINR TW SUBJECT: Taiwan Takes Over Problem Bank SUMMARY -------------- ¶1. (U) In mid-December 2006, Taiwan took over the insolvent Taitung Business Bank (TBB). TBB board directors may not leave Taiwan. The Central Deposit Insurance Corporation (CDIC) has sufficient funding to address TBB, but insufficient funds to resolve seven other problem banking institutions. Taiwan authorities had expected restricting bank branching would motivate sound banks to acquire the problem institutions, but this has not happened. END SUMMARY. Takeover -------------- ¶2. On December 15, the Financial Supervisory Commission (FSC) ordered CDIC to take over TBB and assured 100-percent protection for TBB depositors. With these assurances, the takeover has been orderly without any run on TBB. ¶3. Meanwhile, FSC restricted TBB board directors from leaving Taiwan and from transferring their properties. CDIC dispatched more than 20 officers, including a senior vice president, to execute the takeover order. TBB has 31 branch offices on the island, including 12 in Kaohsiung, ten in Taitung, and five in Pingtung. ¶4. TBB was the 50th banking institution taken over by the authorities since the banking crisis of 2001 when Taiwan's average NPL ratio shot up to 11.7%. The 49 problem banking institutions taken over earlier included 37 farmers association (FA) credit departments, nine credit cooperative associations, and two banks. Delinquency -------------- ¶5. TBB reported a pre-tax loss of NT$31.8 billion (US$978 million) in the first 11 months of 2006. TBB's net worth as of November 2006 was negative NT$1,089 million (-US$33.5 million at exchange rate of NT$32.5 per US$). Its capital adequacy ratio was negative 3.7%, a sharp contrast to the minimum 8% required by BASEL II. Its non-performing loan (NPL) ratio was 23%, far higher than the 5% limit acceptable to FSC. ¶6. Prior to the mid-December takeover, FSC had given TBB chances to improve its financial performance over the past two years. However, TBB failed to raise additional capital from its major shareholders or prospective new investors. It failed to stop losses or reduce its NPL ratio. Funding -------------- ¶7. FSC said that it has sufficient funding to resolve the TBB case. The Financial Reconstruction Fund (FRF),Taiwan's RTC, still has a balance of NT$40 billion (US$1.2 billion). In addition, CDIC has an outstanding deposit insurance fund of NT$13 billion (US$400 million). Funding from these two sources, totaling NT$53 billion (US$1.6 billion),will easily cover the estimated NT$3.7 billion required to reorganize TBB and subsequently sell it over the next six months, according to CDIC. COMMENT -------------- ¶7. CDIC funds are insufficient to deal with seven other problem banking institutions in Taiwan, including three banks (all larger than TBB),two trust companies (also larger than TBB),and two credit cooperatives. With lingering problem institutions and TAIPEI 00004175 002 OF 002 limited funding, Taiwan authorities may continue to restrict new bank branches in hopes this will motivate sound banks to acquire the problem institutions. However, this policy has not produced any results over the past three plus years. YOUNG