Another Taiwan Bank in Receivership

UNCLAS SECTION 01 OF 02 TAIPEI 000791

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: Another Taiwan Bank in Receivership

REF: (A) TAIPEI 0049, (B) 06 TAIPEI 4175

SUMMARY
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1. At the end of March, Taiwan added a fourth bank to those put
into receivership in the past four months. Another three banks
designated as insolvent in July 2005 are still undergoing
resolution. Taiwan's inadequate resolution mechanisms will likely
force state-owned banks to take over some of the problem banks. END
SUMMARY.

Receivership
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2. On March 30, Taiwan's Financial Supervisory Commission (FSC) put
China United Investment and Trust Corporation (CUIT) into
receivership after its net worth turned negative in March. Due to a
shortage of manpower and funds, the Central Deposit Insurance
Corporation (CDIC) contracted the 100% state-owned Bank of Taiwan
(BOT) to take over CUIT with an 11-member team.

Funding from BOT
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3. To prevent a run on CUIT, the CDIC guaranteed 100% protection
for deposits at CUIT, and BOT pumped NT$10 billion (US$300 million)
of cash into CUIT. At the CDIC's request, BOT, which already
provided CUIT NT$5 billion (US$150 million) in February, will supply
additional cash if withdrawals from CUIT increase. The CDIC will
repay BOT for the funds BOT advanced to CUIT during the entire
process of receivership.

Insolvency
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4. FSC Chairman Hu Sheng-cheng said that CUIT had exhausted its
liquidity by the time of BOT's assuming management control of CUIT
on March 30. CUIT's net worth was negative NT$2.98 billion (US$90
million). Its non-performing loan (NPL) ratio was 11.5%, much
higher than the limit of 5% tolerated by the FSC. Its NPL reserves
as a share of total NPLs was 30%, also below the minimum 40%
required by the FSC.

Open Bidding
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5. As previously announced for the three other banks recently
placed in receivership (reftels),FSC plans to sell CUIT through an
open bid process. A consultant will be contracted to assess CUIT
and recommend auction procedures. The three banks previously put
into receivership are Enterprise Bank of Hualiwn (EBH),Taitung
Business Bank (TBB),and Chinese Bank. The bidding and sale of
these three is expected be completed in Q3 of this year, according
to the FSC.

Three Banking Institutions Pending Resolution
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6. Three more banking institutions with poor financial quality are
still pending resolution. These three banks' NPL ratios all exceed
10% and their NPL reserve ratios are well below 40%. The FSC has
not put them into receivership because they still report positive
net worth. However, the FSC has instructed these three banks to
improve significantly prior to the end of this year. In response to
the FSC instruction, Bowa Bank is seeking funding support from
Safuan (Malaysia). Chinfon Bank is attempting to obtain additional

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capital from AIG (of the United States),ING (of the Netherlands),
or United Overseas Bank (of Singapore),and Asia Trust and
Investment is looking for new major shareholders.

Comment
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7. The FSC cannot resolve the seven problem banks with the NT$40.8
billion (US$1.2 billion) remaining in Taiwan's Financial
Reconstruction Fund (FRF),which is similar to the Resolution Trust
Corporation in the U.S. Lacking sufficient financial resources, the
FSC has tried to encourage bank consolidation through restricting
banks from establishing new branches. However, it now appears
likely that FSC will use state-owned banks to take over the problem
banks.

WANG