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