Q: The Xiamen City Commercial Bank equity participation proposal has finally been approved. Can you tell us a little about that whole process?

A: Things were looking very bad, but we were surprised by the happy ending. Externally, we had it all settled but hadn't anticipated that it would be in Taiwan where we'd encounter major resistance. It was really tough making progress in that political climate! Even the application from Fubon Bank Hong Kong to establish a Dongguan representative office was filed in the back of a drawer at the Mainland Affairs Council where it lay for two years! We eventually had to refile various documents because they had lost them – no one had a clue where they were.

Q: I understand it was Liu Mingkang, chairman of China's Banking Regulatory Commission, who pointed you in the direction of Xiamen Commercial Bank.

A: He guided us in the sense that he said this might be something to consider. I met with him three years ago and he hinted that Taiwanese banks might come and help out China's city banks. Three years ago a lot of China's city banks were teetering on the edge of collapse. The commission even amended Article 5 of the CEPA (Closer Economic Partnership Arrangement) regulations, lowering the shareholding threshold to US$6 billion, just for us.

Q: Do you feel that equity arrangements are the way to go?

A: China wants to rein in foreign institutions while allowing domestic ones to develop rapidly, so restrictions on branches are high. China's Big Four domestic banks each have more than 10,000 branches. If a Taiwanese bank wishes to open even 100 branches, each with a capitalization requirement of RMB100 million, that's a total of NT$50 billion. How much cash does Taiwan' financial sector have? With an equity stake, we get a minimum of 30 branches, so that saves RMB3 billion right there.

In an equity deal, it's best if you are granted management rights, so that you can appoint your own chief executive officer, chief financial officer and chief risk management officer. We aren't planning to send very many people over – other than those three positions, another two or three lower and middle managers will be sent. Our first step will be to boost automation right from the start of the introduction of the new operating system, so we can offer the services you would find in Taiwan.

Q: Were you granted management rights because your equity stake exceeds 50 percent?

A: Fubon Bank Hong Kong only holds 19.9 percent, while the rest is distributed among individual mainland shareholders. We're hoping that when China relaxes regulations, we'll have first options to purchase those shares from the mainland investors.

Q: You also formed a strategic alliance this year with Bank of Tokyo – Mitsubishi UFJ, Japan's largest bank. What are the future plans for that?

A: They're looking to develop a long-term relationship with us, starting with sales and marketing. Whether it be the quality of its assets, the quality of its workforce or the scale of its operations, Bank of Tokyo – Mitsubishi is tops in Japan, and they may even become a strategic partner some time in the future. In other words, it's not just about business development, but also may involve equity. That's a long way off, though, and I can't say too much about that.

Q: With the addition of Japan you now have four potential beachheads. What's your next move?

A: I'm hoping the [Executive Yuan] Financial Supervisory Commission will consider allowing secondary listings for financial holding companies so our banks can reorganize to comprise a single bank holding company that would be authorized to exercise the equity rights of the other banks. For example, Fubon Bank Hong Kong's equity rights could be controlled by Fubon Taipei. At any rate, Fubon Bank Hong Kong is quite small, while Xiamen City Commercial Bank soon will be opening at least 100 branches across Fujian Province. With such massive capital demands, we're hoping the supervising agencies will allow us relative flexibility.

Dismantling to Treat Imbalance

Q: This is your new thinking. Previously, you suggested dismantling the holding company. Why?

A: The current financial meltdown brought home that if a financial institution is to survive, the key remains access to capital; if you cannot obtain financing, there is no way to survive the financial crisis.

The biggest problem for financial holding companies right now is that there is an imbalance in the performance of various subsidiaries, and securities analysts don't even know where to start in appraising shares.

There's a strong possibility that a future problem for holding companies will be the diversity among subsidiaries in terms of demand for funds. What I propose for consideration now is allowing holding company subsidiaries to list independently. The benefit of an independent listing is that the subsidiary can raise capital independently without having to rely on the holding company to do it for them. This greater flexibility will result in a more favorable share appraisal.

Q: You mean allowing independent listings of subsidiaries without changing the 25-percent limit on holding company equity?

A: I think the 25 percent limit is too low. I think it should be over 50 percent.

Q: Has the current global financial crisis made you do a lot of thinking?

A: I think the current global crisis will prompt our society to re-examine the system of ownership of financial institutions. Just look at Citigroup, and the massive amounts of capital needed once problems arose there. Have these lessons been lost on institutions and regulators? Can they still not see the picture?

I don't know what the heads of other private institutions think. But for me, I think there isn't one group in Taiwan that can rely solely on its own financial resources over the long term and continue to perpetually grow, year after year acquiring capital and new holdings. The lesson financial institutions can take from the current global financial crisis is that we must transform. Even though privately funded, we must become real public instruments, indispensable public institutions of the highest repute. That is the kind of financial institution that can survive long-term.

Q: But during this crisis the markets have already punished highly leveraged financial holding companies with plummeting share prices and fleeing depositors.

A: That's true, but, you know, it took this once-in-a-century tsunami to expose those flaws. In a sense it's the crisis that saved them.

Q: What do you mean?

A: Because right now the government is even more worried about a systemic crisis. As soon as regulations guaranteeing the full value of deposits come out, everyone will start to relax, and no one will be able to tell the good from the bad again. And regulators won't step forward to seize this opportunity to aggressively direct acquisitions in the private sector.

Deep Pockets of Your Own

Q: How do you think that can be done?

A: Bankers should harbor a determination to merge. Secondly, government regulators are so fierce about every little thing – why is it when they run into a merger they get so weak and timid? Regulators abroad actively promote mergers; in Taiwan the government rescues the afflicted so they don't need to approach anyone else about a merger. For example, the government needs to enforce legislation already on the books, so that if poorly performing institutions need to be divested of stock, they won't be able to avoid divestiture by using personal connections. If this were done, our system of ownership would undergo some major changes.

The government should also pass regulations that the shareholdings of responsible parties of financial institutions may not be collateralized. I'm not trying to engage in financial clout contest with anyone, but if you want to play this game, you have to have deep pockets of your own, or you'll be coming to the table empty-handed. Think about it – if these guys don't move money out of their companies, how are they going to pay the bank interest? It's a vicious cycle, when people act selfishly – even if you have good results in the short term, problems will arise in the long term. If you use inappropriate government connections, those tracks will be revealed in the long run.

Q: The past several years have not been the best as regards interactions between government and business.

A: Sure. The Tsai family has learned its lessons the hard way. Just look how Tsai Chen-chou [Daniel Tsai's cousin] ended up as a result of improper government connections. [Tsai Chen-chou was arrested on charges of embezzlement related to the Tenth Credit Cooperative.] My father [Tsai Wan-tsai, the uncle of Tsai Chen-chou] served 11 years as a legislator at-large representing commercial groups. Then the KMT chose to nominate Tsai Chen-chou [as legislator at-large] instead. Why? Because my father failed to manage his government connections well. I often say I learned my biggest lesson from my father.

Government Connections Unreliable

Q: What lesson was that?

A: The lesson was that government connections are unreliable, and it's crucial to rely on your own abilities. If you don't believe it, just look at what happened to Tsai Chen-chou – he not only lost his livelihood but also his life, and nearly dragged the whole family business down with him.

Q: So you think the government should step forward and direct mergers between private financial institutions?

A: The government need not be concerned with system-wide risk. There is no possibility of a system-wide crisis in Taiwan! Why? With half the banks controlled by the government, once a problem arises, the Bank of Taiwan will step forward to resolve it. Taiwan's financial markets have never been fully free. If they put a few institutions in order, how could that cause any financial crisis?

Taiwanese regulators are just swatting flies, they're not hunting tigers. For instance, when some insurance companies were really in peril, the government failed to act. With that kind of financial oversight, how could we expect a booming financial sector? If we want to raise Taiwan's competitiveness, we must start with raising the efficacy of Taiwan's financial regulators.

In the final analysis I have to say I have higher expectations for Taiwan's regulatory agencies. I believe they should not underestimate themselves. They should observe how others have acted boldly and gotten on track with international standards.

I think the leadership of China definitely has a leg up in this regard, and they are, after all, a major power. When I went to meet Liu Mingkang, I noticed he could discuss any aspect of the overall financial market as well as any economist. Of course, he needn't report to the Legislative Yuan and has the time to do the research. Liu Mingkang gives me the impression that he understands the big picture better than any banker in China, but I'm afraid I can't say the same for Taiwanese regulators with regard to local bankers. This is why he can react and issue directives, because he has a real grasp of the overall course of events.

He has even proposed a creative solution to the impasse in concluding a banking supervisory agreement, what I believe to be the biggest current headache. He hopes the two sides can conclude a memorandum of understanding stating that China will simply use the words "Banking Regulatory Commission," omitting the word China, while Taiwan uses the title "Financial Supervisory Commission," each side using a simplified three-word moniker. I hadn't imagined Mr. Liu would be so broadminded, so willing to proceed on a handshake without assuming any mantle of authority, so pragmatic. 

Translated from the Chinese by Brian Kennedy

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Chinese Version: 政商關係不可靠，自己實力最重要