US embassy cable - 04TAIPEI3444

UNCLAS SECTION 01 OF 02 TAIPEI 003444 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
 
USTR FOR SCOTT KI 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/ZELIKOW AND WISNER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, TW 
SUBJECT: Problem Bank for Sale 
 
 
1.  Summary.  Taiwan authorities will auction off another 
problem bank currently in receivership at the beginning of 
December, part of their on-going effort to reduce the number 
of banks and thereby improve the health of Taiwan's 
financial sector.  However, creditor banks will not receive 
payment until the legislature provides additional funding 
for the financial reconstruction fund charged with 
addressing problem banking institutions.  Taiwan has 11 
other banks and dozens of small community financial 
institutions with relatively high non-performing loan ratios 
that have not yet been addressed.  End Summary. 
 
Bidding Schedule, Qualifications 
-------------------------------- 
 
2.  Taiwan's Central Deposit Insurance Corporation. (CDIC) 
will conduct open bidding on December 9 for the Chung Shing 
Bank (CSB), the last problem financial institution still 
under CDIC receivership (CDIC has not yet addressed the 11 
other problem banks).  A CDIC official told AIT that 
qualifications for bidding have been relaxed to permit both 
domestic and foreign securities firms, insurance companies, 
and investment institutions.  (In the past, only local and 
foreign financial holding companies and banks were permitted 
to bid for problem banking institutions.)  Interested 
companies are required to register before November 4.  CDIC 
also requires that the winning bidder must raise CSB's 
capital from the current NTD 5 billion to above NTD 10 
billion within three years.  If a bank wins the bid, the 
bank must still meet the 8 percent capital adequacy ratio 
after acquiring CSB. 
 
Good and Bad Parts of the Bank Separated 
---------------------------------------- 
 
3.  Although the CDIC sold most of CSB's non-performing 
loans in December 2003 and March 2004, the December sale 
will also exclude some of CSB's remaining liabilities.  The 
excluded liabilities are time deposits, deposits of other 
banks, negotiable certificates of deposit issued by CSB, and 
liabilities obtained from the inter-bank market.  CDIC has 
obtained the creditor banks' assent to delay repayment of 
the NT$64.9 billion owed to them until the Legislative Yuan 
passes a bill to increase the funding for the Financial 
Reconstruction Fund (FRF, similar to the U.S. RTC.) 
According to an official at CDIC's Banking Institution 
Disposal Department, if the additional funding bill fails to 
pass before the FRF expires on July 9, 2005, the Treasury 
will pay the CSB's outstanding liabilities.  CSB will not be 
required to pay this amount.  FRF funding has come from a 2- 
percent gross business receipt tax collected from financial 
institutions.  The CDIC sale in December will be the 
remaining, relatively healthy, parts of the bank with a 
positive net worth of NTD 6.4 billion.  There will be no 
need for any additional compensation to the winning bidder 
from FRF, as was needed in the two other sales of problem 
banks this year. 
 
4.  CDIC has received inquiries about the sale from several 
foreign firms and seven local financial institutions 
(including Cathay United Bank and ChinaTrust Commercial 
Bank).  Late last year, Taiwan's Bureau of Monetary Affairs 
stopped issuing permits for new bank branches in an effort 
to address the problem of too many banks for the size of the 
market.  (Taiwan has more than double the number of bank 
branches per capita of other Asian markets.)  This leaves 
merger or acquisition as the only way to expand bank 
networks.  The winner of the bid for CSB will take over its 
34 branches and will be allowed to open another 12 branches. 
The bid winner will also be authorized to transform the CSB 
trust department into a branch office and to relocate 
offices as desired. 
Two Earlier Sales of Problem Banks 
---------------------------------- 
 
5.  The use of the financial reconstruction fund to repair 
the banks books and the chance to acquire additional bank 
branches proved attractive to other domestic banks.  In late 
May the CDIC sale of the Kaohsiung Business Bank (KBB) 
attracted bids from eight local financial institutions.  The 
winner was the E. Sun Bank, which wanted to expand its 
presence in southern Taiwan.  In exchange for acquiring the 
KBB's 60 banking offices, E. Sun paid NTD 3.73 billion. 
This amount was the gap between the FRF's compensation of 
NTD 13.37 billion and the KBB's net worth of negative NTD 
17.1 billion.  In July, the sale of the problem Fifth Credit 
Cooperative Association of Fengshan (FCCAF) also attracted 
eight bids.  The winner was the ChinaTrust Commercial Bank, 
which, in exchange for the FCCAF's 10 banking offices, paid 
NTD 760 million, the gap between FRF's compensation of NTD 
1.1 billion and the FCCAF's net worth of negative NTD 1.86 
billion. 
 
Serious Problems Remain 
----------------------- 
 
6.  The resolution of CSB will totally exhaust the FRF 
funding of NTD 140 billion.  If Taiwan's legislature fails 
to increase the funding, there will be no ready solution for 
the other 11 problem banks and 93 problem credit departments 
of farmers' associations.  Financial officials estimate that 
NTD 270-280 billion will be required to address these 
problem institutions.  Taiwan officials have said they 
welcome foreign ownership of a local bank to heighten 
competition in the banking sector.  However, while foreign 
investors are allowed to bid for CSB, the restriction on 
opening new branches encourages local banks to consider 
acquiring CSB in order to expand their business.  This 
pressure may increase the amount that domestic banks are 
willing to pay for CSB. 
PAAL