International loan is a very important business for Taiwan commercial banks, and China is the largest credit market for Taiwan banks. Even if China’s economic growth decelerates, China will still be an important market. However, when doing due diligence or credit risk research for Chinese companies, Taiwan commercial banks are facing difficulties and risks like difficulty to monitor the company, a decelerating Chinese economy growth and other factors.
And the common method used for international loan due diligence is not adequate to cope with the current credit risk situation.
There were two famous Chinese default cases in Taiwan during 2014, in which the thesis picks the Ultrasonic AG financial fraud case as an example. By using public information, Taishin found five red flags, and successfully detected and prevented this fraud. However, there are still seven banks and many investors suffered losses because of the default and bankruptcy of Ultrasonic AG. Ultrasonic AG defaulted and declared insolvency in a very rapid fashion, which shows this might be a fraud planned before the loan. This case is now very famous in Taiwan, and proves Chinese company loans should be carefully reviewed.
Although the Financial Supervisory Commission published additional rules related to Chinese company loans, which was nicknamed “Ultrasonic rules”, this kind of rules alone could not prevent Chinese financial fraud, instead the banks need to constantly improve and update their own due diligence or credit risk research method.
The Ultrasonic AG case shows that it is possible to use public information to detect and prevent financial frauds. Based on the case study, the thesis suggests Taiwan commercial banks could use a more comprehensive method of due diligence, to increase the accuracy of
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credit research. In the end, the thesis also suggests a KL credit scoring system, based on past financial frauds, to assist in credit risk research.
If the banks rely on only the common method and traditional models, fraud cases like the Ultrasonic AG case could not be prevented. But by utilizing a more comprehensive method of due diligence and KL score system with traditional models, Taiwan commercial banks could better detect and prevent international financial frauds, especially financial frauds in China. In the future as more cases developed, the method and model mentioned in this thesis could be further improved.
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