China Times Editorial (Taipei, Taiwan, ROC)
February 9 2015
Executive Summary: The Ministry of Finance recently made a clear commitment. Publicly owned banks need not turn over all their future earnings to the Treasury. They should hold on to them, and issue them as dividends. This will increase bank capital and comply with the Basel III agreement. Publicly owned banks should definitely increase dividends. Only then will they have the ability to compete with other Asian banks. This of course is merely one approach to capital accumulation. The Treasury should seriously consider allowing foreign bank investment. It should allow foreign banks to become strategic partners, enabling them and the Central Bank to enter the international market together.
Full Text Below:
The Ministry of Finance recently made a clear commitment.Publicly owned banks need not turn over all their future earnings to the Treasury. They should hold on to them, and issue them as dividends. This will increase bank capital and comply with the Basel III agreement. Publicly owned banks should definitely increase dividends. Only then will they have the ability to compete with other Asian banks. This of course is merely one approach to capital accumulation. The Treasury should seriously consider allowing foreign bank investment. It should allow foreign banks to become strategic partners, enabling them and the Central Bank to enter the international market together.
The Basel III Capital Accord raised the fund requirement for banks. That is a step in the right direction. Following the financial crisis, the Basel Committee on Banking Supervision and Administration Commission resolved to toughen the statutory requirements for capital structure. It imposed strict requirements for capital inflows, and increased capital adequacy ratios. It promoted sound banking procedures to reduce the risk of another financial crisis. Under new regulations, Tier 1 Capital and common equity ratio requirements will be raised each year. In January 2016 the ratio will be increased to 0.625 percent from 0.5 percent. This is expected to result in a further influx of bank capital.
Under the new standards, publicly owned banks face more serious capital shortages than private banks. In the past publicly owned banks were required to turn their earnings over to the Treasury. This made it difficult for them to accumulate funds. According to reports, the Ministry of Finance will coordinate with the Comptroller General and ask the Treasury to return last year's earnings to the banks. Even if this is true, it is a drop in the bucket. For example, the Bank of Taiwan and the Land Bank turned over 20 billion NT to the Treasury last year. But the Bank of Taiwan's capital shortfall for 2016 alone was 66 billion NT. In order to meet the standards of the Basel agreement, to enable banks to accumulate more capital, and to improve their competitiveness in the international community, an issue of new shares and capital increases are necessary. If we want our banks to be able to compete with other Asian banks, we cannot limit ourselves to Taiwan. We must consider large international banks as strategic partners. In other words, capital increases need not be limited to domestic stock issues. We can use an open approach. We can attract capital from the outside, from banks with more advanced management. We can use the opportunity to transform out domestic banks, to make them more international, and make tehm more internationally competitive.
The experience of Mainland China, just across the Strait, may be instructive. The Mainland financial industry was once closed and backward. In 1994 it even issued its "Provisional Regulations on Investment in Shares of Financial Institutions", which forbade foreign investment in Chinese banks. Back then there was no distinction between politics and industry. Banks made huge numbers of non-performing loans. They hired too many employees. Their attitude was poor. Their efficiency was low. The international financial system concluded that the Mainland economy was about to collapse.
When Zhu Rongi took office, he introduced two reforms. The first was to "transform debt into shares". He eliminated non-performing loans, and established asset management companies. This immediately improved bank performance.The second was to use foreign capital to transform state-owned enterprises, and improve their capital adequacy ratios. Each bank introduced a foreign bank as a strategic partner. It made them important partners, but did not grant them controlling shares.
The Chinese mainland's closed financial markets were hit less hard than other Asian economies by the Asian financial crisis. This was at a time when the Mainland was joining the WTO and gradually opening its markets. In 2003, Zhu Rongji's determination and persistence led to the establishment of the China Banking Regulatory Commission and the publication of the "Overseas Financial Institutions Capital investment in Financial Institutions Management Approach". This encouraged foreign banks to acquire shares. The State Council also increased the allowable percentage of foreign shares. For a time this caused considerable controversy.
Between 2004 and 2006, huge sums of foreign capital flowed into Mainland state owned banks. HSBC invested $ 1.75 billion US for a 19.9% stake in the Bank of Communications. The China Construction Bank cooperated with Bank of America and Singapore's Temasek. These two foreign banks took a 9 percent $ 2.5 billion US share, and a 5.1% $ 1.4 billion US share. The Bank of China allowed a number of foreign bank investments. They include the Royal Bank of Scotland at 9.6 percent, Singapore's Temasek at 4.8%, Switzerland's UBS at 1.55%, and the Asian Development Bank at 0.23%. The Commercial Bank of China allowed Goldman Sachs, American Express, and Allianz to purchase shares. Together with Goldman Sachs they acquired a $ 3.8 billion US or 7.89% share.
Other regional commercial banks also invested over the same period. Foreign ownership in most of these exceeded 10%. The ING Group acquired 19.9% of the Bank of Beijing. Standard Chartered Bank acquired 19.99% of the Bohai Bank. Some even acquired ove r 20%. Citigroup and IBM Credit acquired 24.74% of the Guangdong Development Bank.
Foreign ownership will not of course achieve all the results desired. Incompatibilities and run-in costs remain. But basically Mainland banks greatly improved their degree of internationalization. This improved the competitiveness of Mainland financial institutions. This enabled them to expand their business. Internet banking on the Mainland is now well developed. Following their transformation, Mainland banks have now begun providing international financing. HSBC acquired Mainland Transportation Bank shares. It now has seats on the board. It has also introduced a large number of executives, who have improved bank management, staff training, risk management, internal controls, and electronic systems. The bank is now even listed in Hong Kong.
We must have open minds. We must take the long view. We urge the Treasury to use the opportunity to replenish its capital, accept international bids, select superior foreign banks, and them our strategic partners. That is the right way to compete in the Asian financial industry.