Taiwan Ratings Issues Warning Over Banking Sector

by Mary Swire, for LawAndTax-News.com, Hong Kong

15 February 2008

The Taiwan Ratings Corporation (TRC) on Thursday issued a warning with regard to the territory's banking sector, suggesting that an ongoing "flight to quality" could sound the death knell for certain ailing banks.

Analyst, Susan Chu explained that:

"The government takeover and sell-off of several failing Taiwanese banking institutions over the past 14 months has depositors on edge. Savers are fleeing lower-rated banks in droves and flocking to more reputable lenders, despite a government-backed credit guarantee that protects deposits. The fund-starved banks face significant challenges to overcome the negative sentiment and secure new business. As credit profiles deteriorate, further culling is possible this year."

However, she added that:

"Despite the ongoing upheaval, Taiwan's banking system remains largely stable, as the failed and creaking institutions account for only a small proportion of total system assets. With two now-defunct banks selectively defaulting on bond issues in 2007, holders of subordinated bank debt and similar instruments have more reasons to worry."

Ms Chu went on to explain that the Central Deposit Insurance Corp (CDIC), which is permitted under Taiwanese banking legislation to assume operation of banks if they appear unlikely to be able to fulfil their financial obligations, took control of six such banks between December 2006 and January 2008, following an "industrywide deterioration in consumer credit quality".

She suggested that:

"Consumers' flight to quality made it more difficult for the banks to attract new capital and retain liquidity. Various regulatory measures included an initiative from 2001 to 2006 that allowed banks to delay the recognition of credit costs related to the disposal of NPLs to asset management companies, but these only postponed the inevitable."

In conclusion, the TRC analyst predicted that:

"The flight to quality, which will further widen the risk profile gap between stronger and weaker banks, could catapult more banks into trouble in 2008. To ensure a stable financial system, the regulator is likely to protect most of the obligations (mainly deposits) of banks that stumble upon hard times. But investors in the riskier end of the bank bond market could still be in for some sleepless nights."

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