Taiwan Auctions 2nd Insolvent Bank in 2007

UNCLAS SECTION 01 OF 02 TAIPEI 001324 SIPDIS SIPDIS STATE PLEASE PASS USTR STATE FOR EAP/RSP/TC, EAP/EP USTR FOR ALTBACH and Stratford 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 AND NY FRB MARIA BOLIS E.O. 12958: N/A TAGS: EINV EFIN ECON PINR TW SUBJECT: Taiwan Auctions 2nd Insolvent Bank in 2007 REF: TAIPEI 1270 SUMMARY -------------- ¶1. In early June Taiwan financial regulators successfully auctioned off the Taitung Business Bank (TBB). ABN AMRO Bank became the first foreign bank to win bidding for a problem bank and will become third largest foreign bank in Taiwan after it takes over TBB. TBB was the second insolvent bank auctioned within ten days, largely depleting Taiwan's RTC funds. Another five problem banks still need resolution. END SUMMARY. Two Banks Auctioned in Ten Days -------------- ¶2. The Taiwan Central Deposit Insurance Corporation (CDIC) auctioned TBB to ABN AMRO on June 8. ChinaTrust Commercial Bank (CCB) won an auction for Enterprise Bank of Hualien (EBH) (reftel) at the end of May. EBH, TBB, and Chinese Bank were three insolvent banks placed in receivership in early January 2007. The CDIC will auction Chinese Bank in July or August. Cost and Compensation -------------- ¶3. The bidding for TBB (as with EBH) was for the compensation wanted to cover the insolvent bank's liability gap (i.e., the excess of debts over assets). ABN AMRO Bank wanted to take over TBB's 32 bank branches and assume TBB's liability gap of NT$10 billion (US$303 million) for CDIC compensation of NT$6.9 billion (US$209 million). Thus, ABN AMRO Bank will pay about NT$97 million for each branch, slightly less than the NT$116 million (US$3.5 million) paid by CCB for acquisition of EBH branches. Foreign Banks Increase Market Share -------------- ¶4. ABN AMRO Bank will take over TBB within 100 days. The takeover will increase the number of its branches from five to 36, behind only Standard Chartered Bank's 86 branches and Citibank's 65 branches. Standard Chartered Bank acquired Hsinchu International Bank late last year, and Citibank acquired Bank of Overseas Chinese in March 2007. The three mergers will increase the number of foreign banks' banking offices from 96 to 230, and their combined market share (in terms of banking offices) will increase from less than 3% to over 8%. Depleting RTC Funds -------------- ¶5. The CDIC will pay NT$11.4 billion (US$345 million) to compensate CCB and ABN AMRO Bank for taking over EBH and TBB. The reimbursement will reduce Taiwan's RTC funds to NT$28.6 billion (US$867 million),insufficient to address the five remaining problem banks, according to the Banking Bureau (BB). The five problem banks include a bank and a trust company placed in receivership in early 2007 and three banks under BB surveillance. COMMENT -------------- ¶6. Due to insufficient RTC funding, Taiwan will need to rely on other methods to resolve problem banks. It will likely continue to maintain strict branching restrictions to encourage good banks to acquire bad banks for expansion. TAIPEI 00001324 002 OF 002 YOUNG