108.10台灣銀行家雜誌第118期 / By Hank Huang (黃崇哲)
Differentiated Regulation for Better Financial StabilityEditor’s note
In the aftermath of the Jiji earthquake 20 years ago, Taiwan started modernizing its disaster recovery system in preparation for the next major catastrophe. This disaster preparation and response played a role in recovery from Typhoon Morakot, ten years later. Similarly, in financial markets, the 2008 financial crisis caused slow-moving turmoil in financial institutions around the world. Global taxpayers across generations were forced to share the costs of gross financial misallocation. In response, the Basel Committee on Banking Supervision (BCBS) of the Bank for International Settlements, and the Financial Stability Board (FSB), required global systemically important banks (G-SIBs) to produce advance resolution plans, or ‘living wills.’ Higher regulatory requirements are applied to these domestic systemically important banks (D-SIBs). By combining overall advance prudential policies with effective bailout response, these plans aim to mitigate financial risks.Given these trends, Taiwan’s Financial Securities Commission (FSC) has selected five financial institutions, based on characteristics like scale and systemic importance, for its first round of screening: Taiwan Cooperative Bank, CTBC, Mega International Commercial Bank, Taipei Fubon Bank, and Cathay United Bank. It hopes that strengthening their capital adequacy and resilience will reduce the possibility of domestic financial crisis and maintain the soundness of Taiwan’s overall financial system. While pleased to have been selected for this initial screening, these banks worry about possible cost increases and growth pressure after being subjected to differentiated regulation. The FSC and all of the institutions however agree that financial system stability is a crucial common objective. Thus, after joint discussions, the FSC agreed to adjust their plan, not only relaxing rules related to working capital, but also creating ‘green business channels’ for these early subjects. For instance, it is also assessing more rapid construction of domestic and foreign branches, as well as new business applications, so that excellent institutions can improve their business development vision while strengthening risk management. In particular, as Taiwan’s financial industry has incorporated international practices in recent years, firms have gone global. These differentiated regulations will allow the selected banks to become a national team with international competitiveness. But this is not simply a process of internationalization for its own sake. Policymakers are grappling with how Taiwan can best use this situation to its advantage. Fortunately, following policy discussions, regulators and financial institutions reached a mutual understanding, and the new systemic risk system is off to a promising start. Going forward, the sustainability of Taiwan’s financial architecture will depend on continued communication between market players and the government throughout the implementation process.Twenty years after Taiwan’s second-deadliest earthquake, Taiwan’s construction, disaster preparedness, and rescue services have all improved. But is Taiwan truly ready for the next big one? Perhaps people always take chances in the face of an unknowable future, and will therefore end up being caught off guard by the inevitable storm. For Taiwan’s economy, which is deeply vulnerable to global volatility, it is impossible to know for sure whether systemic risk will occur. We can only hope that under reasonable policy guidance, these systemically important banks continue to thrive and become an important pillar in Taiwan’s defense against domestic and international risks, protecting the sustainability of Taiwan’s financial industry and the hard work of its people. With the great power of these five banks comes great responsibility.