FSC Chairman Hu Sheng-Cheng:
Extending the Value Chain of Taiwanese Banks
In this exclusive interview, the new chairman of Taiwan's Financial Supervisory Commission shares his insights on foreign investment in Taiwan's banks.
Extending the Value Chain of Taiwanese BanksBy Maxine S. C. Yang
From CommonWealth Magazine (vol. 369 )
Since Taiwan’s government restricts domestic banks from establishing subsidiaries or branches across the Taiwan Strait, they cannot service Taiwanese businesspeople in China and expand their market. Over many years the successive heads of the Financial Supervisory Commission (FSC) – the government watchdog for the banking industry – have been trying to find a solution that accommodates the financial industry’s demands for access to the Chinese market and the government’s desire to keep close tabs on banks’ potentially risky exposure to China.
Hu Sheng-cheng, the new FSC chairman, has masterminded and promoted financial reform during past stints as minister of state and head of the Council for Economic Planning and Development (CEPD). In his new job the veteran economist and former board director of Taiwan’s central bank can now reap the fruit that he has sown. In his first interview with a Taiwanese media organization since taking office in January this year, Hu told CommonWealth magazine how he intends to use foreign banks to upgrade the competitiveness of domestic Taiwanese banks. Following are excerpts from the interview.
Nowadays many foreign banks want to buy Taiwanese banks. Actually, this constitutes an extension of the second stage of financial reforms.
Since the reforms stipulate that the number of domestic banks should be cut in half, banks are forced to figure out how to position themselves, how to strengthen their constitution, to prevent being among the half that is eliminated.
While we did not set a deadline for halving the number of banks, we are still making efforts to carry out reforms, which is why foreign banks are very interested in our banks. It’s not out of the blue that foreign banks want to buy our banks – a lot of arrangements were made in the background behind these actions.
Considering Global Reach
We are very open-minded toward foreign investors. We are letting matters run their own course as long as they are able to improve our banks’ operating capacity, boost innovation, and introduce new products.
Foreign investment is very helpful for injecting new ideas. Although we have opened the market to new (domestic) banks, their talent is all coming from the old banks. Everyone thinks and does things the same way. On top of that, our market is very small, so competition is fierce. As a result, profits are razor-thin. Moreover, our banks have not been strict enough when approving loans, so their asset quality is not that good. As soon as there is a slight commotion or there are economic fluctuations, banks that lack a robust capital basis for buffering such adverse influences are in trouble.
Besides, foreign capital can also extend the value chains of our banks. Hsinchu International Bank (HIB) was originally only a mid-size bank. Internationally, its scope was too small, so internationalization would have been difficult. But now HIB has turned into an international bank. By integrating the resources of Standard Chartered Bank, HIB has improved its competitiveness.
Our enterprises need the services of internationalized banks. In Asia we are the largest foreign investor in Vietnam, the third largest in Thailand and Malaysia, and the second largest in China. Banks must follow the manufacturers in establishing a global reach. Today large international banks help manufacturers establish a presence around the globe and also force other large Taiwanese banks to reconsider their global strategies.
Mergers with foreign companies are the first step toward internationalization. We can open banks abroad and can also bring international banks to Taiwan.
We need to give more thought to how we can use foreign resources, and what our own opportunities are. For instance, we are now planning to open up investment in the Labor Pension Fund, which is a business opportunity that all foreign investors hope to grab. We can give them a piece of this big pie, while also requesting them to establish regional operation centers in Taiwan in return. China is doing that, so the Council of Labor Affairs can demand the same.
If we are afraid of foreign banks becoming a huge force in the market, we could also merge several of our large domestic banks to compete with them. The only problem is that the Taiwanese people are a bit scared of one large bank emerging. They worry it could become a colossus that no one could keep under control.
Hands-off Approach to State-owned Bank Mergers
Nowadays, state-owned banks can merge, and they can also split again after mergers. But we won’t get involved in any struggles between the Ministry of Finance (as the representative of the government’s shares in state-owned banks) and private shareholders. As far as the FSC is concerned, they represent two key market players, and both sides need to respect the rules.
In the future, the government’s financial reforms must be directed toward strengthening corporate governance and establishing the rules, while everything else will be left to the market.
Translated from the Chinese by Susanne Ganz