International Pressures

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After a brief discussion of Taiwan’s changing financial system, it becomes clear that, from 1950 to late 2000s, the importance of local financial institutions rose at the expense of major domestic banks during 1980s and 1990s. During the period Taiwan had seen a chaotic financial system without an effective regulatory system to manage.

Although Taiwan escaped from Asian financial crisis in late 1990s, its banking system was coincidentally harmed by non-performing loans resulting from bankruptcies and financial crisis of large corporations (Yu and Wang 2005:284-85). Financial system was fragile that triggered a series of financial reforms to bail out illiquid banks, as well as, strengthen and unify the competent authority. A brief review above gives a general picture of Taiwan’s financial system when it started to implement the Basel Accords.

The following sections deal with possible international and domestic political factors that influence Taiwan’s choice of compliance with Basel Accords. They are followed by detailed investigation of legal amendments regarding the control of financial risks and implement the Basel Accords.

5.2 International Pressures

In the previous chapters, I discuss the relevance of international pressures to domestic bank regulations. I find a positive relationship between a country’s economic strength and exposure to global economy and the level of domestic bank regulations. The larger the country’s GDP volume and its exposure to global economy, the more likely does it comply deeper with the Basel Accord. The former relationship can be reasoned by recognizing that Basel Accords were devised and promoted by advanced industrialized economies; therefore those countries comply more with the global bank regulations.

Such relationship can be further sustained by the positive relationship between a

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country’s development level (GDP per capita) and its national bank regulations. The degree of exposure to global market is another important factor, which can be operationalized by looking at a country’s export to GDP ratio, outward foreign direct investment (OFDI), and its external debts. These indicators show how a country rely on global market.

A country with higher ratio implies its greater reliance on global markets, which in turn becomes more vulnerable to globally agreed regulations. In addition, more international trade leads to greater demands on banks’ foreign branches to facilitate cross-national businesses. This is especially for countries investing heavily abroad. If a country trades more with or invests more in a foreign country, their multinational corporations (MNCs) would need banking services provided by banks in their home country. As a consequence, banks’ foreign branches will confront host countries’

regulations on banks’ foreign branches. If the host country is a member of BCBS, host government would reject the application of foreign banks’ branches. Such rejection will bring pressure back home and push for changes of bank regulations. According to this, we should expect a positive correlation between the number of domestic banks’ offices, foreign branches, and subsidiaries and a country’s exposure to global markets. In order to open more foreign offices, the home country has to adjust its domestic bank regulations to the Basel Accord and then supervises its banks for higher Basel standards.

Also, if a country borrows much from the international society, it would become more vulnerable to creditors’ requests. This is especially true when a government receives conditional loans from international financial institutions, such as IMF. A case study of Indonesia done by Walter (2008:50-77) demonstrates exactly how IMF, led by the U.S.

and its Western European partners, forced Jakarta to adjust bank regulatory regime through conditional loans.

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In Taiwan’s case, the number of Taiwan’s overseas banks in 1995 amounted to 80.

Most banks were located in Asia, North America (mainly in the U.S.) and Europe.

Among those, 44 were branches, whose parent banks are subject to host countries’

financial regulation should it plan to open overseas branches. More overseas branches indicate home countries’ greater compliance to the standards set by Basel Accords. The number of domestic banks’ overseas presence climbed steadily to 293 in the end of 2013. 110 of those were branches. The distribution of overseas offices, however, becomes more uneven. While the number of overseas bank offices rise rapidly in Asia and fast in North America, more than half of foreign offices were closed in Europe from 1995 to 2013. The rise of overseas banks can be attributed to the surging demands from MNCs’ overseas businesses. As table 5.3 shows Taiwan’s OFDI around the world, including investments in Mainland China, increased about 8-fold from 1995 to 2013 with a peak of US$20.9 billion in 2012. Total exports also increased albeit in a more stable pace. Confronting with Taiwan’s climbing demands of banks internationalization for financially supporting global businesses. Banks and governments were facing greater pressures to adjust themselves for higher standards if domestic banks wished to pass host countries’ standards for the entry of overseas branches. As for the external debt position, Taiwan has been continuously purchased foreign assets due to its positions as a net creditor around the world. As a consequence, Taiwan does not receive international pressure coming from major western creditors like Indonesia.

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Table 5.3 Taiwan’s domestic banks’ statistics

Year NUM BR ASIA NA EU OFDI EX RES

1. NUM, BR, ASIA, NA, EU, OFDI, EX, and RES respectively represent the number of Taiwan’s overseas banks (including offices and subsidiaries) of domestic banks, the number of overseas branches the number of overseas branches in Asia, the number of overseas branches in North America, the number of overseas branches in Europe, Taiwan’s outward foreign direct investment in billion US$, Taiwan’s export volume in billion US$, and Taiwan’s purchases of foreign reserve assets in its balance of payments.

2. Data comes from the Ministry of Finance’s and Financial Supervisory Commission’s Basic Financial Data (1995-2013) and data from Ministry of Economic Affairs and Central Bank.

Figure 5.1 demonstrate the correlations between the number of overseas banks and branches and the degree of exposure to global market. As is shown, the number of overseas banks and branches were strongly correlated both with the volume of Taiwan’s OFDI around the world and total export volumes. The Pearson product-moment correlation coefficient (Pearson’s r) for OFDI and the number of overseas banks equals

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0.889 (R²=0.7912); Pearson’s r for OFDI and the number of overseas branches equals 0.872 (R²=0.7603); Pearson’s r for exports and the number of overseas banks equals 0.914 (R²=0.8355); Pearson’s r for exports and the number of overseas branches equals 0.870 (R²=0.7568). If one would like to make a causal relationship out of these four strong correlations, it would be more plausible to attribute the surge of overseas banks to OFDI and exports. If Taiwan hardly invest overseas or trade with foreign countries, there is no need for the foreign presence of domestic banks.

Figure 5.1 Number of Taiwan’s overseas banks and exposure to global market

Source: Data comes from the Ministry of Finance’s and Financial Supervisory Commission’s Basic Financial Data (1995-2013) and Statistics from Ministry of Economic Affairs and Taiwan’s Central Bank.

The U.S. hosted the largest number of Taiwanese overseas bank branches. They amounted to 22 in 1995 and 63 in 2013. The first foreign branch was opened in New

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York in June 1946 by The International Commercial Bank of China in Taiwan, which was later merged together with Chiao Tung Bank into the new Mega International Commercial Bank in 2006. After 53 years Chang Hwa Bank was the second Taiwanese bank opening a branch in New York. In 1992 The International Commercial Bank of China had the largest number of foreign branches in the U.S. Los Angeles is another city that hosts many Taiwanese overseas banks (Li et al. 1992). Both cities maintained close economic ties with Taiwan through overseas Taiwanese who businesses abroad needed financial services operated by overseas branches to connect themselves back home. Most foreign branches had limited connection to local native people and businesses. That’s one of the main reasons why most overseas banks choose foreign locations that have large volume of trades and foreign investments by Taiwanese.

Due to the ever-increasing international trades between Taiwan and the U.S. and the large number of overseas Chinese residing there, it is no coincidence that the U.S.

hosts the largest number of Taiwanese overseas representative offices, branches, or subsidiaries. Since U.S. was the most influential creator for the Basel Accords, it set up more stringent regulations for the entry of foreign banks’ offices. U.S.’s The Foreign Bank Supervision Enhancement Act of 1991 clearly prescribed that countries failing to implement the Basel Accord, it banks will confront additional funds requirement while applying for branch licenses (Misback 1993). For countries that are more interdependent than the U.S. in a specific dyadic relationship, the U.S. has the upper hand for exerting international pressures for the harmonization of domestic bank regulations into the Basel Accords in the more interdependent country. Like that Tokyo was threatened by Washington by the ban on the entry of Japanese banks to expand its offices in the U.S. (Kapstein 1989), Taiwanese banks would confront the same challenges in their applications for entering financial markets in the U.S. As Taiwan

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trades more, invests more overseas and becomes a highly dependent on global economic markets, it requires the internationalization of domestic banks to catch up with its global businesses expansion. Such urgent requirement inevitably would put pressures on domestic bank regulatory regime. If Taiwan’s bank regulations and banks’

performance cannot meet global standards, the opening of foreign branches are likely to be blocked by the host country, which I will discuss in greater detail below. Therefore Taiwanese government, together with domestic banks, had to deal with such pressure in order to be financially and structurally competent to sustain Taiwan’s overseas economic adventure. International pressures for greater compliance of Basel Accords can be great for those who rely highly on the global market, especially those controlled by BCBS members.