TAIWAN FSC CHAIRMAN SAYS BANKS STRONG, ASKS FOR

C O N F I D E N T I A L AIT TAIPEI 000189 STATE FOR EAP/TC STATE PASS USTR FOR STRATFORD AND ALTBACH, TREASURY FOR OASIA/CWINSHIP AND MPISA, NSC FOR LOI, COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN E.O. 12958: DECL: 01/21/2019 TAGS: CH ECON EFIN ETRD PGOV PREL TW SUBJECT: TAIWAN FSC CHAIRMAN SAYS BANKS STRONG, ASKS FOR ACTION ON FED MOU REF: 08 TAIPEI 1532 Classified By: AIT Director Stephen M. Young for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY. Chairman Sean Chen of the Financial Supervisory Commission (FSC) told AIT Director Young Taiwan banks are strong enough to weather the current financial downturn, although profitability remains an issue. Unwilling to forecast the length or depth of the current recession, he said Taiwan and the world's recovery depended on the U.S. Chen asked the Director's help in getting Washington to complete internal discussions so that Taiwan's FSC and the U.S. Federal Reserve Board could sign an MOU negotiated in substance some years ago. He also asked for U.S. support for the FSC's participation in the Financial Stability Forum and other multinational fora. End Summary. ¶2. (C) On Friday, February 13, AIT Director Young called on Sean Chen, Chairman of the Financial Supervisory Commission, Taiwan's chief financial regulator. Chen assumed the role in December 2008, after the resignation of his predecessor who held the position for only a few months. Chen has extensive experience as a financial service regulator and as a leader in the financial services industry. Most recently he served as Chairman of a large financial holding company. Chen noted to the director that he had met U.S. Treasury Secretary Geithner twice. According to his recollection, around the year 2000, Chen received Geithner in Taipei as Vice Minister of Finance when Geithner was with the U.S. Treasury They also met at another unspecified time in Singapore. "Wonderfully Unpredictable" - Recovery Depends on the U.S. -------------- -------------- ¶3. (C) With a smile, Chen said he was "confused" by all of the economic forecasts, and quoted one observer who called the world economy "wonderfully unpredictable." He noted, however, that unlike the earlier Asian financial crisis from which Taiwan emerged relatively unscathed, Taiwan would suffer this time because the problems were emanating from falling demand in its export markets. Reluctant to predict the duration of the current economic downturn, he did offer that the bursting of the dot com bubble saw the stock market's longest fall from peak to trough - a period of 25 months. If the current stock market drop were to play itself out the same way, he noted, the S&P 500, which peaked in October 2007, would hit bottom in November of this year. This was important, he said, because Taiwan's and the world's recovery depended on economic recovery in the U.S. ¶4. (C) Taiwan banks, Chen said, were in good shape to weather the current economic downturn. He pointed out as an industry, the various ratios that indicate the overall stability of a bank were much stronger than they were a few years ago. The capital adequacy ratio for the industry, for example, stands at 11.6%, which is well above the legal minimum of 8%. The non-performing loan ratio stands at only 1.5%, which compares to an official figure of just under 10% (which, according to Chen, was actually more like 12%) eight years ago. Profitability, was an issue, as margins were razor thin, and hardly cover loan risk. In the current environment, banks were less likely to lend and noted that as deleveraging occurred, loan demand had dried up. This made it more difficult for banks to inject cash into the economy. He had suggested that the Executive Yuan expand the credit guarantee fund for small-to-medium sized enterprises, which he believed would encourage banks to lend more. A Better Model for Cross-Strait Finance May Take Time -------------- -------------- ¶5. (C) Turning to cross-Straits banking and finance issues, Chen stated that the well-known case of Fubon Bank's recent acquisition of a 20% stake in a Chinese bank may not be the best model for the future. He pointed out that Fubon held only a minority stake in the bank. Even if Fubon had the right to appoint some key staff, "it was still not their bank." A better solution would allow for Taiwan banks to establish branches or subsidiaries on the mainland or have the controlling interest in joint ventures there. Taiwan banks were primarily interested in expanding in China in order to serve their Taiwan customers with operations in China, he said. ¶6. (C) Chen stated that an MOU on Financial Supervision and Regulation would be a necessary first step. Such an MOU is "a very simple thing" that would provide for exchange of information, confidentiality, on-site inspections, and continuity of contact. He characterized discussions on the issue as preliminary and said the FSC would not get involved in discussing technical details until it was asked to do so by the Mainland Affairs Council. (NOTE: Although AIT has been told before that the FSC and mainland counterparts have exchanged drafts in preliminary discussions, Chen comments imply that such discussions may take more time than initially expected. Dates for the next round of formal cross-Strait talks have not been scheduled, but are widely expected in May or June. END NOTE.) Seeking AIT/USG Assistance -------------- ¶7. (C) Chen asked the Director to convey his concern to Washington that the draft MOU between the Financial Supervisory Commission and the U.S. Federal Reserve Board, seemed to be stuck somewhere in Washington. It was his understanding that while the substance of this document had been negotiated years ago, Taiwan is still waiting for a reply from the U.S. on moving forward with the MOU. (NOTE: AIT has since learned that the draft MOU is currently with the Federal Reserve, pending their clearance. END NOTE.) He also asked the U.S. for broad support for Taiwan's participation and input into some of the multilateral meetings and fora discussing the global financial crisis. In particular, he asked for U.S. support for Taiwan's participation in the Financial Stability Forum, a group of monetary authorities and regulators with a secretariat based in Switzerland under the Bank for International Settlements. Taiwan is not a member of the BIS, nor of the FSF, but the G-20 meeting in Washington last year called for the FSF to reach out and seek participation of other emerging markets. He hoped that Taiwan could find a way to participate. Chen also hoped that even as a non-member, Taiwan would be able to provide input into the G-20 process. After the meeting, an FSC staffer told AIT that Taiwan was planning to seek the support of the U.S. and other friendly FSF members, and would then address the issue with China directly. They hoped that the improving cross-Strait relationship would help to facilitate these discussions. ¶8. (C) Comment: Although the current status of cross-Strait financial service discussions is not completely clear, Chen tried to lower expectations of any quick results. After the meeting, one FSC staffer told AIT that with strong industry pressure, the MOU was likely to be signed sooner rather than later. But it still remains to be seen how Taiwan and China will handle the more difficult issues of market access. Although the Federal Reserve Board is undoubtedly consumed with dealing with the financial crisis, the MOU has been stalled for years. It would be helpful for the Fed to respond to Chen's query. SYOUNG