Cablegate: Taiwan Takes Over Problem Bank

VZCZCXRO2015
RR RUEHGH
DE RUEHIN #4175/01 3560435
ZNR UUUUU ZZH
R 220435Z DEC 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 3519
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3505
RUEHBJ/AMEMBASSY BEIJING 6123
RUEHUL/AMEMBASSY SEOUL 8346
RUEHGP/AMEMBASSY SINGAPORE 6720
RUEHKO/AMEMBASSY TOKYO 8318
RUEHML/AMEMBASSY MANILA 9870
RUEHJA/AMEMBASSY JAKARTA 3965
RUEHKL/AMEMBASSY KUALA LUMPUR 3614
RUEHHI/AMEMBASSY HANOI 3178
RUEHBY/AMEMBASSY CANBERRA 4393
RUEHWL/AMEMBASSY WELLINGTON 1662
RUEHHK/AMCONSUL HONG KONG 7353
RUEHGH/AMCONSUL SHANGHAI 0654
RUEHGZ/AMCONSUL GUANGZHOU 9838

UNCLAS SECTION 01 OF 02 TAIPEI 004175

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR ALTBACH
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN EIND ECON PINR TW
SUBJECT: Taiwan Takes Over Problem Bank

SUMMARY
-------

1. (U) In mid-December 2006, Taiwan took over the insolvent
Taitung Business Bank (TBB). TBB board directors may not leave
Taiwan. The Central Deposit Insurance Corporation (CDIC) has
sufficient funding to address TBB, but insufficient funds to resolve
seven other problem banking institutions. Taiwan authorities had
expected restricting bank branching would motivate sound banks to
acquire the problem institutions, but this has not happened. END
SUMMARY.

Takeover
--------

2. On December 15, the Financial Supervisory Commission (FSC)
ordered CDIC to take over TBB and assured 100-percent protection for
TBB depositors. With these assurances, the takeover has been
orderly without any run on TBB.

3. Meanwhile, FSC restricted TBB board directors from leaving
Taiwan and from transferring their properties. CDIC dispatched
more than 20 officers, including a senior vice president, to execute
the takeover order. TBB has 31 branch offices on the island,
including 12 in Kaohsiung, ten in Taitung, and five in Pingtung.

4. TBB was the 50th banking institution taken over by the
authorities since the banking crisis of 2001 when Taiwan's average
NPL ratio shot up to 11.7%. The 49 problem banking institutions
taken over earlier included 37 farmers association (FA) credit
departments, nine credit cooperative associations, and two banks.

Delinquency
-----------

5. TBB reported a pre-tax loss of NT$31.8 billion (US$978 million)
in the first 11 months of 2006. TBB's net worth as of November 2006
was negative NT$1,089 million (-US$33.5 million at exchange rate of
NT$32.5 per US$). Its capital adequacy ratio was negative 3.7%, a
sharp contrast to the minimum 8% required by BASEL II. Its
non-performing loan (NPL) ratio was 23%, far higher than the 5%
limit acceptable to FSC.

6. Prior to the mid-December takeover, FSC had given TBB chances to
improve its financial performance over the past two years. However,
TBB failed to raise additional capital from its major shareholders
or prospective new investors. It failed to stop losses or reduce
its NPL ratio.

Funding
-------

7. FSC said that it has sufficient funding to resolve the TBB case.
The Financial Reconstruction Fund (FRF), Taiwan's RTC, still has a
balance of NT$40 billion (US$1.2 billion). In addition, CDIC has an
outstanding deposit insurance fund of NT$13 billion (US$400
million). Funding from these two sources, totaling NT$53 billion
(US$1.6 billion), will easily cover the estimated NT$3.7 billion
required to reorganize TBB and subsequently sell it over the next
six months, according to CDIC.

COMMENT
-------

7. CDIC funds are insufficient to deal with seven other problem
banking institutions in Taiwan, including three banks (all larger
than TBB), two trust companies (also larger than TBB), and two
credit cooperatives. With lingering problem institutions and

TAIPEI 00004175 002 OF 002

limited funding, Taiwan authorities may continue to restrict new
bank branches in hopes this will motivate sound banks to acquire the
problem institutions. However, this policy has not produced any
results over the past three plus years.

YOUNG

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