Former Taiwan Finance Minister on consolidation

Taiwan''s former Minister of Finance, Ching-Chang Yen speaks about the consolidation of the financial sector.

In a long and illustrious career - in which he has helped shape the direction of Taiwan's financial system, and become the most seasoned expert on the WTO - it is perhaps surprising to learn that Ching-Chang Yen started out wanting to be a painter. His office in Taipei testifes to his continuing love of art: on his walls hang European impressionist works in oils next to classic Chinese calligraphy, all of which come from his own extensive art collection.

Now he has a new canvas.

Yen has just returned to Taipei from Geneva where he was Taiwan's Ambassador to the WTO, and he has just completed his fifth book in the field of GATT/WTO. He has returned to Taiwan to take on the role of Chairman and CEO of Fuhwa Financial Group, which is set to merge with Yuanta Core-Pacific later this year.

There is something strangely appropriate about his becoming the chairman of a financial holding company. That is because Yen is the man who is most credited with legislating Taiwan's Financial Holding Company Law, and has thus been described as the father of the financial holding companies. He did this during his pioneering time as Minister of Finance between 2000 and 2002 (he was also Deputy Minister of Finance between 1996 and 2000) and has spent the bulk of his career in the civil service. We talked to him about his new canvas.

Could you describe your decision to retire from the civil service and join Fuhwa as Chairman.

As I stated to my former civil service colleagues, every fabulous banquet under the sun must come to an end. I was very fortunate. I had a chance to serve as Finance Minister and in that role I conducted the major financial reforms in Taiwan. I still consider these financial reforms as the driving force that enhanced the competitiveness of the financial markets in Taiwan.

After stepping down as Finance Minister, I then had the good luck to serve as the first permanent representative of Taiwan to the WTO, and I considered that as another milestone. After serving three years and three months in Geneva, I feel happy that we demonstrated the importance of Taiwan's participation in this multilateral trading system. So I then decided to retire, and did so with much satisfaction.

You are known as the father of Taiwan's financial holding companies. Can you talk about what drove you to try and push this legislation through?

When I served as Finance Minister, there was talk about a possible financial crisis in Taiwan. Our neighbouring countries in Asia were going through their own financial crises and I had to clear up doubts about the asset quality of our financial markets. I was quite persuasive in this regard and helped bring some confidence. However, I realized I needed to convert these doubts into something positive, and therefore used it as the driving force to push financial reforms.

Taiwan was overbanked, and had a fragmented financial market, and so it became very important to enact the Merger Law and the Financial Holding Company Law. These gave our financial institutions greater opportunities to merge and increase their scale. I therefore could be regarded as the father of the financial holding companies. The law provided an optimum means for different kinds of financial institution to convert into a financial holding company.

Did Taiwan view Korea as a good benchmark for the financial reform process? Korea obviously consolidated its banks very quickly.

It's rather difficult to compare the two. After the financial crisis, most financial institutions in Korea saw their net assets go negative. In Taiwan, our financial institutions still enjoyed positive net assets. So, in this respect, it was much easier for the Korean government to clean up the system in one go.

Taiwan had the good fortune not to suffer from a financial crisis. On the other hand, that didn't allow our government to undertake the same radical restructuring measures that were seen in Korea. South Korea deserves to be congratulated for its quick recovery, but the example of Korea can't serve as a benchmark for financial consolidation in Taiwan.

What drove you to accept this new position at Fuhwa?

Around a year ago I took the decision that I would retire from the civil service. I then decided that I would write a book about my experience of working at the WTO, and provide my expertise and experience to my people. So I spent about eight months working on the book, and in the course of doing so, I tried to figure out what I would do after I retired from the government. I thought of entering academia and teaching at a university - continuing my expertise in GATT and WTO law.

I didn't think at all about joining the financial markets as chairman of a financial holding company. But after the news of my retirement appeared in Taiwan, Mr and Mrs Ma paid me a visit in Geneva. They showed kindness and eagerness and asked me to serve as Chairman of Fuhwa Financial Holdings. They spent two to three months to persuade me to accept the post.

As the father of the Financial Holding Company Law I felt that I could help Fuhwa. In early May I finally accepted.

After the merger with Yuanta Core-Pacific, will it still be called Fuhwa Financial Holdings or will the name be changed?

The name will change. The first step is for Yuanta to be merged with Fuhwa and for Yuanta to be delisted. The name of the financial holding company will be changed and Mrs Ma is thinking about a new name. Yuanta could be part of the name, or there might be a new name.

How is the merger progressing?

In Taiwan, when two publicly-listed companies merge they need to follow the procedures and for me, as the former Finance Minister, I am strongly emphasizing that we need to be a good example and have strong corporate governance. So the merger process between Yuanta and Fuhwa must follow transparent procedures.

The current stage is that two law firms and asset evaluation agencies have been engaged in due diligence and we are destined to complete the merger by the end of this year. I hope the consolidation will be complete by the first quarter of next year.

On the securities side, the new entity will be the biggest in Taiwan?

Oh yes. Yuanta was already ranked top and with Fuhwa its market share of daily securities trading will be about 12%. The number two player has slightly less than 7%, so there is a big margin, and so the new financial holding company will easily be the number one player in brokerage. It will be the first financial holding company to achieve the number one position in brokerage.

The strategy for the new financial holding company is to expand in investment banking.

Do you foresee Fuhwa Financial Holdings (or whatever it may be renamed) participating in the next round of bank consolidation?

In my former capacity as Finance Minister, I considered Taiwan's financial market was overbanked and fragmented. I need to admit that this situation remains unchanged. There have been some small changes, but in order to become a more modernized financial market, Taiwan still has a long way to go. So when I returned to Taipei, I was happy to see there was merger activity looming. I really welcome this.

But talking about Fuhwa/Yuanta, I have discussed this with the key members of the new management team and we have come to the same conclusion. Of course, we will look at suitable targets to enlarge our scale, but we need to be practical. We must first digest the consolidation between Fuhwa and Yuanta before we look at doing anything else. I hope that in the near future we will enlarge the scale of this financial holding company.

In October 2004, the government said it wanted to see the number of financial holding companies reduced from 14 to seven within a couple of years - and also see a major foreign bank owning one of them. Clearly, that now looks a little optimistic. Have you been disappointed by the pace of the consolidation?

The goal was established be President Chen, and I considered the direction correct. It is a must that the current 14 financial holding companies go through a second round of mergers. That was also emphasized by myself when I gave out the original 14 licenses. Of course, I have been rather disappointed in the last couple of years. But I endorse the idea and moving towards seven financial holding companies is correct.

So you think that seven is an optimal number?

The reason for President Chen to say that 14 had to merged into seven was probably to express his political idea that there needed to be economies of scale in financial services. But I don't consider seven is the optimal number.

Korea has four big financial groups, plus three powerful foreign banks. Does that represent an optimal situation in your view?

Yes, but Korea is another story, as I already stressed. Taiwan didn't have a financial crisis, so we need to gradually increase the size of our financial institutions. We probably need to be more aggressive in this regard. Seven financial holding companies would be welcome; but under seven would be better.

The UK, Australia and Korea all have four big banking groups? Does that suggest that four is the optimal number?

Possibly. But I have to stress that the consolidation process in Taiwan has to be conducted through the market mechanism. In the course of globalization, Taiwan's financial holding companies will face more and more competition from outside - just like other sectors of the economy - and they will increase their scale in order to enhance their competitiveness.

If there isn't going to be a financial crisis that drives this process of consolidation, what can the government do to encourage it?

First, I would like to address the issue of a financial crisis. We did have some bank failures in Taiwan, and when I served as Finance Minister, I undertook measures to clean-up 36 underperforming financial institutions. Those 36 were all small-scale community banks, and they suffered negative assets and I utilized public capital to takeover the management of all 36 at once. Within a month we cleaned them up and arranged for these to be consolidated by other financial institutions. So this provides a model.

But that requires there to be a problem in the first place?

Yes. But we cannot ignore these community banks. Healthy financial institutions want to increase their branch numbers and one way to do this is to acquire these small community banks. Indeed, after our merger completes, we will probably approach some community banks to consolidate. We want to have 100 branches across Taiwan, and this is one way to do it - currently there are only 48 bank branches in Fuhwa Financial Holdings. We could get to this target by merging with a big bank or by integrating with a few different small community banks. We consider the latter to be easier for us.

Could the government encourage consolidation by mandating that each financial holding company must have a minimum number of branches? Presumably, that would trigger mergers?

It's possible, but that would need to be approved by parliament - which would have to revise the articles of the Financial Holding Company Law and make it mandatory to have a certain number of branches. It is possible, but I would rather prefer mergers taking place based on the operation of market mechanisms instead of the visible hand of government.

But isn't the problem in Taiwan - somewhat like in Hong Kong - that lots of the banks are family-owned and these families will only merge on their own terms. But obviously, not everyone can merge on their own terms and this slows things down, or in fact means nothing happens at all?

I need to confess that many very large financial institutions are operated by families and probably this kind of attitude is an obstacle to mergers - since every family wants to retain management control. But our people need to learn that intense competition from abroad is coming and large-sized family-controlled financial institutions need to consider this. They need to really become competitive, not just in Taiwan but regionally.

How long do you forecast it will take for there to be a consolidation to an 'optimal' number of players?

In order to answer this question, I need a crystal ball. But I am quite confident in this regard. The consolidation process is occurring worldwide, and I don't want to say it will take a certain number of years. It will be a dynamic process and will evolve. But by the end of this decade I do believe we will see quite radical changes in the financial landscape in Taiwan. Mergers will occur more frequently. There will be seven financial holding companies within 10 years.

If a major global bank such as Citigroup or HSBC bought a major bank in Taiwan, would that act as a strong catalyst to consolidation?

Yes, certainly. I notice that some huge foreign financial institutions are becoming key shareholders in Chinese commercial banks and based on our healthy economy and our other advantages, I believe Taiwan should be an attractive place for foreign banks - and that they may consider buying a large financial insitution in Taiwan.

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