The banking market in Taiwan has been volatile over the past two years due to unexpected incidents such as Brexit-related uncertainties and the lingering U.S.-China trade tensions. Then came another “black swan”: the 2019 novel coronavirus, which spread into a global pandemic. These potentially damaging events could exacerbate conditions and shake financial markets at a time when the global economy was already slowing.
To reduce the impact of the uncertain global conditions, the government has taken steps to liberalize Taiwan’s financial sector. For example, it has encouraged the financing of windfarm projects as a new and very important business opportunity for the banking industry. The measure is enabling foreign banks with offshore-wind experience to bring their expertise to Taiwan, where they can work together with local financial institutions.
We look forward to continued liberalization to attract more foreign institutions to participate in the market and bring more business opportunities to Taiwan from neighboring financial hubs.
The government has also been carrying out deregulation in a timely and concrete manner to improve the business environment for Taiwan’s banking industry. The Financial Supervisory Commission (FSC) deserves credit for recent policies aimed at upgrading the competitiveness of Taiwan’s financial sector, such as its efforts in promoting financial technology (fintech), developing green finance, and expanding the scale of the capital market. Moreover, to expand the scale of Taiwan’s wealth management business, the FSC plans to promulgate a “New Wealth Management Scheme,” allowing a greater variety of financial products and services to be provided. As responsible members of the financial community in Taiwan, we aim to contribute to the sustainable development of the banking industry and help make Taiwan one of Asia’s financial hubs.
The Committee particularly wishes to thank the Taiwan financial authorities for paying extra attention to our recommendations in last year’s Taiwan White Paper and taking meaningful follow-up actions. For example, the definition of recognized Export Credit Agencies (ECAs) was expanded to help encourage green financing.
In this year’s paper, we have focused our attention on four main points whose objectives are in line with the FSC’s main policies. These are (i) removing affiliate trading restrictions on bank and securities firm sales and trading activities, (ii) relaxing loan loss and guarantee reserve requirements for foreign bank branches, (iii) promoting digital solutions for corporate banking and (iv) relaxing regulations governing bank eligibility to offer financial products and services to high-asset customers.
We believe that all these points could be resolved within the coming year. In view of the FSC’s desire to expand Taiwan’s financial market and increase employment opportunities, the first step in that effort should be to allow more products to be made available to additional types of customers in Taiwan. In this way, the Taiwan financial industry will become more competitive vis à vis neighboring financial markets such as Hong Kong and Singapore, and the ability to retain talent and develop the Taiwan industry will be enhanced.
Suggestion 1: Exempt the sales and trading activities of banks and securities firms from affiliate trading restrictions.
A bank engaged in trading of offshore securities is deemed to be concurrently engaging in the securities business, making the bank subject to Article 31-3 of the Regulations Governing Securities Firms (the “Regulations”). Under the restrictions set forth in that Article, securities firms (including such banks) are prohibited from trading offshore securities with their own offshore affiliates. The rationale for the restriction is to prevent securities firms from engaging in profit-and-loss manipulation through transactions with affiliates. However, this restriction has impeded banks and securities firms from engaging in a core business activity and from entering into arm’s-length transactions with related parties.
The banking and securities industries are highly regulated and subject to strict scrutiny by the FSC and regulators in other countries. In those countries, inter-affiliate transactions are governed by a well-established, stringent regulatory framework as well as internal controls. Thus, it is unnecessary to prohibit banks and securities firms from entering into arm’s-length transactions with their offshore affiliates. As a result, in last year’s White Paper the Committee suggested loosening the restrictions imposed under Article 31-3 of the Regulations.
The Committee was pleased to learn from a recent FSC announcement that a proposed amendment to Article 31-3 would allow securities broker-dealers to engage in transactions with their offshore affiliates upon a super-majority board resolution and within the product scope listed in Article 19-1, Paragraph 1 and Article 31-1 of the Regulations. The Amendment would also allow the board of directors of a broker-dealer to grant a generic authorization for transactions meeting certain criteria and trading limits.
Clarification is still needed as to how the Amendment may be applied. For example, what will be the method for determining “Public Market Price” and whether an offshore structured note can meet the “Public Market Price” criteria? And how to determine the transaction balance and net worth under Article 31-1, Paragraph 2, items 3 and 4?
Further, it needs to be clarified whether the repo/reverse repo position held by the securities broker-dealer with its offshore affiliates will be excluded from the transaction balance as long as the risk of such repo/reverse repo position has been transferred and mitigated.
The Committee supports the Amendment and will be happy to continue providing input on its implementation and relevant rulings in line with the goal of providing clarity and enhancing the operational flexibility of banks and securities broker-dealer, while facilitating affiliated transactions between securities firms and their interested parties.
Suggestion 2: Relax the loan loss reserve and guarantee reserve requirements for foreign bank branches in Taiwan.
The main clients of foreign bank branches in Taiwan are large corporations or clients with high net worth, the assets of which are of good credit quality and create low risk exposure. As per the impairment allowance treatment based on financial asset quality and the expected credit loss (ECL) model defined in IFRS (International Financial Reporting Standard) 9, the expected amount of reserves for such types of clients is relatively low. However, according to “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing/Non-accrual loans” (“the Regulations”), a bank is required to provide a 1% loan- loss reserve and guarantee reserve for normal credit assets, regardless of changes in the underlying credit risk.
In addition, an FSC ruling requires that banks post reserves based either on the Regulations or IFRS 9, whichever requires the higher reserve. This requirement has caused foreign bank branches to provide considerably higher amounts of reserves than required under the expected credit loss framework in IFRS 9. Thus, without regard to credit asset quality, a foreign bank branch is required to provide excessive minimum loan-loss reserves in line with the Regulations.
This considerably higher loan-loss reserve ratio not only reduces a bank’s financial flexibility and profitability, but also constrains the bank’s lending capacity, all of which has a detrimental impact on its loan business and affects corporate clients’ operational financing and M&A-related short-term funding needs.
The foreign bank’s head office has already provided loan-loss reserves for its global credit assets based on the financial accounting standard or regulatory requirements in its home jurisdiction. Those reserves cover the expected asset impairment losses of its branches globally. In addition, the loan-loss reserve difference between IFRS 9 criteria and the Regulations is one of timing only, and thus will be fully reversed upon return of the loan. Hence, permitting use of IFRS 9 rather than the Regulations will not have any impact on the operations of the foreign banks.
The Committee notes that foreign bank branches are exempted from capital adequacy ratio requirements and that a local bank’s excess loan-loss reserve in excess of the expected loan-loss level can be counted as part of the bank’s Tier II capital. We were pleased to learn that the FSC is considering a proposal to amend relevant regulations and rulings to allow – after taking into account the overall loan-loss reserve provision and asset quality – the base for calculating the lending capacity of a foreign bank branch to be increased by the amount of excess loan-loss reserves beyond its total loan-loss level. The Committee supports this proposal and is willing to continue to contribute its input. We hope that implementation of the proposal will maintain foreign bank branches’ capacity to absorb loan loss, while helping to continue development of foreign banks’ lending business in Taiwan.
Suggestion 3: Promote digital solutions for corporate banking.
3.1 Relax regulations on digital corporate banking services to enhance banks’ digital competitiveness. The current online application processes for deposits and credit extensions are mainly open to consumer banking businesses only. As per the “Model Guideline for Processing an Online Deposit Account Opening Application,” the online account application for corporate banking is limited to “Sole Proprietorship” companies, registered under the Business Registration Act, which are owned by natural persons of ROC nationality over the age of 20.
Further with regard to credit-extension business, the “Guidelines for Security Measures of Financial Institutions for Electronic Banking Services” state that new and existing customers may use online services to 1) apply for personal loans, 2) increase housing or car loans within the amount secured by an existing mortgage, and 3) consent to the financial institution’s checking credit information online with the Joint Credit Information Center. However, new corporate customers are unable to apply for corporate loans online and must go through a time-consuming, in-person application process.
The COVID-19 outbreak looks to be a disruptive factor that will drive a shift to digital behavior and increase demand for online banking platforms. To reduce the risk of coronavirus infection, both individuals and corporations can increasingly be expected to prefer obtaining service online – including account opening, financing, and insurance – rather than in person. The demand for digital channels, products, and operational procedures is happening right now.
We recommend that the FSC take into account the differences in corporate and retail banking by relaxing regulations on online corporate account opening and corporate loan applications. If corporations can avail themselves of such online services outside the rigid constraints applicable to retail banking, it will help Taiwan stay abreast of the demand for digital financial services.
3.2 Establish a national data repository to connect financial services and facilitate customers’ access to financial services. Based on current business and AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) regulations, banks are required to collect various paper documents when implementing KYC/CDD (Know Your Customer/Client Due Diligence). Certain paper documents are needed for such tasks as validating identities using reliable, independent source materials; witnessing signature; opening corporate accounts; providing credit-extension services; and other transactions.
We recommend that the National Development Council establish a corporate version of the MyData service scheduled to go live this year, in order to provide corporate customers with a smoother customer experience, optimize banks’ client-identity management, and lower operating risk. This national data repository would allow corporate customers to download such company information as certified copies of certificates of registration/incorporation; articles of incorporation; lists of responsible persons, directors, supervisors, shareholders, or ultimate beneficial owners; lists of affiliates/groups; tax registration; income tax payment certificates; financial statements; proof of payment of utility bills, and other relevant information. Through online authorization, in addition, corporate customers could also allow government agencies or non-profit organizations to access their company information and allow for customized digital services as required by the company.
In conclusion, banks could use such a version of MyData as a reliable source of information for identity verification when corporate customers open corporate accounts or apply for loans. It further provides corporate customers with a seamless interface and enables digital identity verification. The replacement of paper documents for corporate account opening and loan applications through such a version of MyData would be a major step forward in enhancing banking efficiency in Taiwan.
Suggestion 4: Revise regulations governing financial products and services for high-asset customers.
In order to develop the wealth management business, the government is adopting regulations allowing eligible banks to provide a variety of wealth management products and services to “high-asset customers.” The Committee welcomes this relaxation. However, the proposed rules as to the eligibility of banks to engage in this business are too restrictive to meet the intended purpose of expanding the business scope of financial institutions.
For example, according to Article 3 of the draft “Regulations Governing Banks Conducting Financial Products and Services for High-Asset Customers,” the criteria for defining a high-asset customer includes holding both “investable assets and insurance products.” In turn, the definition of investable assets includes bank deposits, mutual funds, equity securities, securities such as bonds and bills (inclusive of repo), structured notes, gold passbooks, etc. All these assets are counted as the customer’s Assets Under Management (AuM) to determine whether the customer is qualified to be considered a “high-asset customer.” The drafting notes to Article 3 indicate that the above criteria were based on references to such similar concepts as the “Private Banking Customer” defined by the Hong Kong Monetary Authority. A circular issued by HKMA stipulates that “investable assets” also include securities, deposits, and certificates of deposits. If customers hold only deposits, the deposits are not excluded when calculating the assets threshold.
We also note that in the newly released draft for the “high-asset customer” wealth management program for security firms, there is no AuM qualification requirement.
The Committee firmly believes that a fair competitive environment for domestic and foreign banks is required to maintain a growing and healthy wealth-management market. Since AuM are accumulated over time, the AuM criterion has become a steep barrier to entry for most global banks interested in participating in Taiwan’s financial market. For existing foreign banks who have already made significant investments in Taiwan as part of a long-term investment plan, the AuM criterion in the current draft precludes them from participating in Taiwan’s wealth-management market on equal terms.
To enable qualified banks applying for businesses stipu-lated under Article 7, item 2, to align with Article 3 for the sake of consistency, the Committee recommends:
Align with the regulation for security firms by removing the AuM requirement for banks when applying for business licenses under the “Regulations Governing Banks Conducting Financial Products and Services for High-Asset Customers.”
Alternatively, confirm that the scale and scope of a bank’s financial management service shall include insurance products as well as customers who hold only deposits – rather than excluding these customers as stated in the current drafting notes. In global markets, deposits are deemed to be one type of investable asset, and customers can easily and freely transfer funds from deposit accounts to any other investment product at their discretion. Including customers who hold only deposit accounts will not only encourage banks in Taiwan to engage in such “high-asset customer” business, but will also increase Taiwan’s chances of becoming a regional financial hub in the Asia Pacific, further enhancing Taiwan’s competitiveness in the world.
Grant exceptions to the AuM qualification rule under Article 7, item 2 based on the nature of the business, implementation level of corporate social responsibility (CSR), and contribution to Taiwan’s market development. This discretion would help Taiwan’s overall wealth management market to eventually reach international standard by attracting elite foreign banks with global best practices to participate in the market. The evaluation criteria could be a combination of following:
(1) Total wealth management AuM greater than NT$10 billion;
(2) Strengthened education by the applicant bank in the past year for its core asset-management function staff in research, products, risk management, or local investment;
(3) A proven record of the applicant bank over the past three years in the areas of implementing CSR as a core value, fostering a sustainable environment, preserving public welfare, and exercising corporate governance; and
(4) Preparation of a Taiwan wealth management business development plan.