Taiwan report: Sean Chen takes the FSC hotseat

Institutional Investor, September 2009

Sean Chen took on the chairman role at Taiwan’s Financial Supervisory Commission in December, becoming the agency’s sixth head since its creation in 2005. It has been a difficult period to preside over for the former chairman of Sino-Pac Financial Holding, but he can at least take comfort in the fact that Taiwan, and particularly its banking sector, has weathered the global storm well so far.

“In Chinese we say you can find fortune in misfortune,” says Chen, speaking to Institutional Investor in Taipei. “Our major export market, the US, is the country which suffered most from the financial turmoil, But we are also blessed because for the past 10 years we have been shifting our export markets to mainland China – now the largest export market for Taiwanese manufacturers.”

Since Taiwanese banks have been major providers of credit and services to the manufacturers who are exposed to China’s continuing boom, Taiwan’s banking sector continues to look very healthy. Non-performing loans are just 1.6% – much lower than the US, where the level is around 2.5% – and provisions stand at 69.8%. The capital adequacy ratio for Taiwan’s banking sector as a whole is between 11 and 12%, well above the statutory minimum of 8% and again higher than the norm in the US. “Our banking industry, even after the financial turmoil, remains relatively healthy compared to other areas,” Chen says.

But will it stay that way? Apart from that fact that NPL levels look bafflingly low, there are clear headwinds to come (see main story for NPLs and the D-RAM sector). “Personally I’m not so optimistic: I would not say the worst time is behind our back, because this world is too small for us to prosper or suffer alone,” says Chen.

Bankers are also alarmed by the prospects of a law capping interest rates on credit cards. Chen is quick to point out that the US has a similar law that has already passed the House of Representatives, and argues that the mooted Taiwanese law – which would have a floating cap moving with changes in the central bank base rate – is more flexible than the US approach which proposes an outright cap. (“That’s incredible. The US is a free economy!”) He also points out that although the Taiwanese law has passed a first reading of its legislature, in Taiwan any such amendment must go through three readings, and that major discussion will take place first, including the banking industry and consumer protection associations. Nevertheless, he says: “After the financial turmoil in Taiwan as other countries, the administrative and legislative branches are paying more attention to the interests of the consumer,” and he puts the credit card amendments within that context.

Chen is part of the team negotiating the eagerly awaited memorandum of understanding with China (see main story). “There is a French word, rapprochement, building a bridge; it’s a very good word to describe the present situation,” he says. “We have to mend the relationship between Taiwan and China. Any financial institutions which intend to conduct cross-border activities need a blessing from the home and host regulators. But how can they do that? Those regulators have to sit down and talk to each other.” Taiwan has previously signed MOUs with 35 counterparties in other countries; mainland China has more than 50, so there’s no lack of experience in negotiation. “The problem is, for the last eight years, not only the regulators but the governments on both sides of the strait don’t want to sit down and talk.”

Now that they are, things have improved. “We all agree it will be very healthy for the financial institutions on both sides of the strait to set up a financial presence in each other’s territory,” he says. The MOU provides for an agreement for the two regulators to jointly supervise institutions which intend to conduct cross-border activities, and three are under negotiation: for banking, insurance, and securities businesses. “There will be obstacles, but those obstacles will be removed and the MOU can be signed,” he says. “The most difficult question to answer is when.”

Pressed for detail, he says: “Well, frankly speaking, there’s nothing new in the MOU. A very basic MOU should include, first, the intention of cooperation; second, the intention to exchange necessary information; third, how to protect those information exchanges between the regulators; and fourth, the intention for further cooperation. It’s very simple.”

Interestingly, Chen says one reason progress is slow is that for both sides, despite the common language, this is the first time to structure an MOU in Chinese. “There’s a problem,” he says. “After separation, from 1949, the Chinese language changed a bit on both sides of the Chinese strait. So sometimes it takes a lot of time to find a terminology which is acceptable by both sides.”

When the MOU is signed, “it doesn’t mean Taiwanese institutions will be granted a license in China automatically, because they have to prove their institutions have been managed under prudential principles,” he says. But it paves the way.

It is strongly noticeable how Chen’s attitude towards banking consolidation differs markedly from that of his predecessors, who sought actively to encourage consolidation, even to precipitate it. “You should come back to basics and let market forces operate,” he says. “If a financial institution can operate by its own, it can be a niche player and we should allow it to operate in that way.

“We should not give it any guidance that it should be acquired by another institution. That’s not fair.”  That said, “I would expect to see further consolidation – but not in the instant future.”