State Owned Bank Mergers Must be Privatized
China Times editorial (Taipei, Taiwan, Republic of China)
March 6, 2014
Summary: The FSC wants to create model regional banks. It wants to give Taiwan's financial industry the opportunity to emerge from the doldrums and to achieve prosperity. We support the Cabinet and the FSC in their effort to promote mergers and restructuring of state owned banks.
Full text below:
Over the next 30 years, the Asian economy will flourish. Our own state owned banks must seize these growth opportunities. They must move as quickly as possible. The government is determined to promote the merger of state owned banks. Recently three financial heavyweights, including the Minister of Finance, the Chairman of the FSC, and the President of the Central Bank, urged Premier Chiang to promote the consolidation of Asian regional banks and shares for state owned financial institutions. Premier Chiang gave his blessing. The responsible agencies will take action. Mergers of state owned banks will take a giant leap forward. This is an important development for our nation's fiscal policy. But the mergers of state owned banks must not merely increase the size of state owned banks. The state owned banks must also develop market-oriented management skills.
In recent years, domestic banking sector profits have reached record highs. In particular, the Bank of Taiwan and Megabank have enjoyed substantial increases in overseas profits. This means that deregulation of cross-strait financial transactions and the finance industry has enabled Taiwan banks to reach their full potential. But as everyone knows, the domestic banking sector has too much competition and market fragmentation. State owned banks are all rushing to gain market share. The result is cuthroat price competition. Promoting financial consolidation and overseas expansion is indeed a top priority.
Mergers of state owned banks, carried out for their own sake, will not result in favorable conditions and operating synergies. We must do more than advocate mergers. An even more importan consideration is how the banks will be operated following the mergers. We must create a new method of operations for state owned banking organizations.
The chairman said state owned bank mergers require separate management and ownership. We agree. We need a flexible pay system for individuals with talent, and other measures. Senior management salaries in state owned financial institutions are restricted. Their pay may not exceed ministerial level salaries in government agencies. This lack of flexibility in regional financial institutions makes it difficult to attract effective, high-quality senior managers. The defects in the system must be addressed. Take operations. Policies must be market-oriented and consider costs. The government must budget for this. Only then will the costs and benefits of state owned banks be apparent. Accounting must be clear. Rewards and punishments must relate to job performance. Only then will company performance improve.
A more fundamental problem is the assignment of chairmen. In the past state owned bank chairman appointments were based on seniority. If one was old enough and if one's resume included the Treasury or FSC. one could become a bank chairman. The appointment would be based on "can't go wrong" considerations. It would value a highly cooperative attitude in policy execution. Avoiding corruption would be a high priority. Seldom would a candidate be creative or make any substantive contribution to the industry. Future appointments should not be political rewards. They should be based on professionalism. Job evaluations for employees of state owned banks should also consider this. Let the concept of state owned private banks be fully implemented. When the government shackles are reduced, business management flexibility will increase. State owned banks will no longer seek only market share. They will no longer engage in price cutting. And they will no longer have excuses for inferior performance.
Banks should emulate the corporate governance policy of Singapore's state owned Temasek Holdings. Temasek is 100% owned by the Singaporean government. Its fiscal year ended on March 31, 2013. The group's investment portfolio was worth $169 billion. It full-year earnings were $8.3 billion. Shareholders received returns of up to 8.9%. How did it achieve this performance? Temasek is an independently operated investment company. The government assigns a treasury official as director. But he does not interfere with business operations. The board is not involved in the daily operations of the company. It merely expects management to evince good conduct. detailed monitoring, regulatory compliance, and risk management. Its manager are recruited from all ogver the globe, from world-class financial institutions such as HSBC, Citigroup, and American Express. It hires financial professionals and experts familiar with the different sectors of the investment environment. As a result their performance is outstanding.
Temasek's corporate governance ensures the separation of ownership and management. It ensures high profits. This enterprise management system is worth applying to our own newly merged, state owned banking organizations.
Finally, government financial regulation must advance with the times. The way financial institutions are assessed must be reasonable. The scale of the institution must not lead to unfair treatment. We should no longer demand that "The government support the banks, and the banks support business." Everything should revert to market mechanisms. We can encourage "corporate support for employees" however, as a matter of corporate social responsibility.
When state owned banks perform well, the surplus will increase. For 100% state-owned financial institutions, the surplus should go to the treasury, to reduce the government's fiscal deficit. For listed banks, as long as earnings increase, the stock price will rise. Government-owned shares of the assets will increase. The surplus will increase. The dividends will increase. These can all be injected into the treasury.
When the mergers of state owned financial institutions are privatized, their stock performance will improve. This will reduce the the threat of foreign intervention. This will enable them to expand abroad. This will give them the opportunity to increase their profits. These are the positive results that we can expect.
The FSC wants to create model regional banks. It wants to give Taiwan's financial industry the opportunity to emerge from the doldrums and to achieve prosperity. We support the Cabinet and the FSC in their effort to promote mergers and restructuring of state owned banks.