Financial Institutions and Regulation of the Republic of China - Case Study Example

Memorandum Malkiat Singh, Investment Manager Jonathan Fredrick, Market Research Assistant July 22, Republic of China (Taiwan) - Financial Institutions and their Regulation Economically, a financial institution refers to institutions that provide financial services for its members or clients. Basically, there are three types of financial institutions that operate in any given country. These include deposit-taking institutions that that manages client’s deposits and provide loans such as banks, credit unions, building societies, mortgage loans, and trust companies; pension funds and insurance companies; and underwriters, brokers and investment funds. Financial institutions play a number of roles such as providing services as intermediaries of financial and money markets. They are also taking part in transferring investor’s funds to companies that are in need of those funds. These institutions also facilitate the flow of cash in the economy, as is the case in Taiwan. The purpose of this paper is to explore the Taiwan’s financial institutions and their regulation. Types of Financial Institutions in Taiwan Taiwan, just like any other country has a number of financial institutions that facilitate the flow of money within the country. Aberbach, Dollar and Sokoloff reveal that the financial institutions of Taiwan consist of the Central Bank of China, local branches of foreign banks, domestic commercial banks, medium and small business banks, investment and trust companies, credit cooperatives, insurance companies and the postal savings system (97). Taiwan’s Use and Sources of Credit Insurance Credit insurance plays a major role in Taiwan as noted by Aberbach, Dollar and Sokoloff (99). Taiwan uses its credit insurance to offer coverage to both individuals and businesses. The coverage is used for protecting the businesses and citizens in the event that the policyholder is rendered unable to settle outstanding debts because of any incidence that is covered in terms of the policy. Aberbach, Dollar and Sokoloff notes that the protection provided by Taiwan’s credit insurance is beneficial to both the lender and the debtor (100). They argue that the protection gives the debtor the peace of mind that any obligation that is accrued will be settled. On the other hand, it assures the lender that payment of the debt would be settled in full even if the debtor falls bankrupt or dies. The sources of credit insurance of Taiwan come from both government-managed institutions and private companies as well, formed specifically to offer credit insurance to businesses and individuals. These include Taipei Export-Import Bank of China, which is a government-owned bank providing export credit insurance and other financial facilities. Others are Chartis Taiwan Insurance Comprehensive Export Credit Insurance, The Coface, Allian-Taiwan Life Insurance, and International credit Brokers Alliance. Taiwan’s Primary Insurance Companies and Their Role in the Financial System The 2010 Statistics released by the Taiwan Insurance Institute show that there were 54 insurance companies in Taiwan. Out of this number, 31 were life insurance companies, while 23 were non-life insurance companies. The data also reveals that out of the 31 life insurance companies, 23 of them were local companies while 8 were foreign. The other 23 non-life insurance companies had 17 local based and 6 being foreign companies. The primary insurance companies include Taiwan Life Insurance Company Limited, the Federal Insurance Company, China Life Insurance Company, Taiping Insurance Company,Taiwan Travel Insurance from Atlas Direct, Fubon Life Assurance, Union Insurance Company Limited, Shin Kong Life Insurance Company, Aetns Life Insurance of Taiwan, and Manulife Taiwan among others. These insurance companies play a vital role in the financial system of Taiwan. These insurance companies offer a number of policies to secure different aspect of a company or individual’s life. This is to say that an insurance company secures the life of an insurance purchaser. The primary insurance companies in Taiwan help in stabilizing the financial position of its citizens and companies. It is argued that by allowing the people of Taiwan to purchase a suitable insurance policy, these individuals can transfer any personal risk to the insurance company. This would enable them purchase more goods and services. This implies that the insurance policies provided by the company’s increases the demand thereby encouraging the consumption of goods and services. The increased production and supply of goods and services to meet the demand promotes employment, which in turn foster economic development of Taiwan (International Association of Insurance Supervision 26). The insurance policies also enable businesses to face any risk with confidence. This is because the policy takes care of any sort of liability. In addition, the insurance policies provided by the insurance companies promote assist entrepreneurs gain better return on their investments as well as bring technological development to speed up production. Indeed, the insurance companies have helped in creating financial stability in Taiwan over the years (International Association of Insurance Supervision 28). Taiwan’s Primary Pension Funds and Their Role in the Financial System Taiwan’s primary pension funds include the labor insurance scheme established d in 1958 that provides protection for laborers. The benefits include payment for disability, injury, childbirth, old age, and death. Other funds pension funds include emergency aids and services to poor citizens of Taiwan established under the Social Assistance Act of 1990. In addition, Taiwan government also established national pension insurance (NPI) in 2008 which provides annuity for the citizens of Taiwan. The fund is meant to shield those in unemployed related insurance schemes such as the labor insurance coverage. Thos protected under the scheme include housewives, students and the jobless who have no stable or any suitable income at all (Meng 14). The pension funds just like the insurance companies play a major role in the financial system of Taiwan. Firstly, the fund plays a major role in the development of Taiwan’s capital market. It also helps in building financial stability of the country. This is because the pension funds have a strong link with the Taiwan financial institutions such as banks. Since the funds are mainly meant to alleviate people from poverty, this help the government concentrate in other areas of development as the funds take care of the poor, disables and the unemployed (Meng 18). Taiwan’s Security Firms and Their Role in the Financial System Security is an area that concerns many countries, Taiwan, not an exception. This is because a country cannot realize any meaningful development if the state of security is poor. For instance, the development of the financial institution requires enough security in order to function well. These are some of the reasons why Taiwan has several securities firms. The firms include Arecont Vision, Canon Europe Ltd, EverFocus Electronics AG, Honeywell, MOBOTIX AG, Proxim Wireless Corporation, AirLive, AXTON, and CEM Systems. Others are FUJIFILM Europe GmbH, Fastlane Turnstiles, Dedicated Micros, and Ballmeir electronic GmbH & Co.KG, just to name a few (Security.com 1). These security firms play a great role in Taiwan’s financial system. One of the roles played by the security firms is to provide security to the financial institutions such as banks, credit unions, building societies, insurance companies among others. This is important because it helps in building confidence on the financial market that the money is safe. The security firms also assist in escorting money from one institution to another ensuring that no hijacking takes place, which may interfere with the operation of a given financial institution thereby creating financial shortage in the country. The security firms also help in providing protection to individuals and businesses from burglary. This ensures that businesses are well protected thereby creating stability and enhancing economic development of the country (Security.com 1). Taiwan’s Government Assistance to the Financial Industry as Lender and/or Insurer The government of Taiwan has taken a bold step over the years by providing financial assistance to the financial institution experiencing financial crisis. It does this with the help of Central Bank of China. The government of Taiwan has created an atmosphere that allows commercial banks in the country to borrow money from China’s Central Bank in case these banks are under a crisis. This was evident in response to the 2007-2008 global financial crises where the government of Taiwan acted as the lender of last resort by allowing its central bank to intervene by lending other financial institutions money to survive the meltdown (Aberbach, Dollar and Sokoloff 103). Taiwan Government Regulation and Supervision of Financial Institutions The government of Taiwan plays an active role in regulating and supervising its financial institutions. The supervisions and regulations are meant to ensure that the financial institution operates within the established guidelines and principles. For instance, Taiwan through the ministry of Finance (MOF) established the Bureau of Finance that supervises and regulated the banking industry. The MOF also established the Department of Insurance charged with the responsibility of regulating the insurance industry. It is worth noting that, initially, the security industry was being supervised by the Ministry of Economics. However, since 1981, the supervisory and regulatory authority of banking, insurance industry and the security markets have been vested in the MOF (Hwang, Lin, and Lin 4). Under the financial regulatory system of Taiwan, all the administrative powers are centralized in the MOF, but the examination powers are decentralized. Here, the Central bank, Central Depository Insurance (CDIC) and the MOF through Bureau of Monetary Affairs are the institutions charged with the responsibilities of supervising and regulating banks. On the other hand, the supervision of security markets is delegated by SFS to the Taiwan Stock Exchange. Moreover, the Department of Insurance is responsible for regulating and supervising insurance businesses (Hwang, Lin, and Lin 5). The Effects of Taiwan’s Most Recent Regulations Directed at Financial Institutions The mot-recent financial regulation directed at the financial institutions in Taiwan is that which is aimed at enforcing corporate governance by making it mandatory for all listed financial institutions and firms to appoint independent directors and establish a remuneration committee. Failure to comply with the regulation is expected to attract a penalty according to Lee (Parag. 1). The regulation has indeed had far reaching effects in the financial institutions as it has improved the corporate governance of financial institutions and listed companies. This is mainly due to the fear that any breach may attract a penalty. The regulation has also compelled the managers of the financial institutions to ensure that a sound remuneration package is established for company’s board members, executive officers and supervisors (Lee par. 3). The effect of Taiwan’s Most Recent Capital Requirements Directed at Financial Institutions The current capital requirement directed at the financial institutions in Taiwan require banking industries to maintain a minimum of 10 billion NT dollars, securities 1 billion NT dollars, 2 billion NT dollars for non-life insurance industries and 2billion NT dollars for life insurance industries according to Lai (14). Maintaining such a minimum capital based has seen Taiwan FHC achieve a diversification effect. It has also ensured that stakeholders are protected in case these financial institutions fall bankrupt or face liquidation. This is because the minimum capital requirement would be able to cover at least a big segment of their investment. The Effect of Basel Accords on Taiwan The Basel accord refers to a regulation that requires banks’ capital-adequacy ratios to be maintained at a figure not less than 8%. This accord was established in 1988 by the Basel Committee on Banking Supervision under the Bank of International Settlement (BIS). The implementation of the Basel Accord has benefited the Taiwan a great deal. This is because it has helped improve banks’ risk-management practices. This has also helped build financial stability among banks in Taiwan. This has in turn helped banks maintain trust with its customers as they have sufficient capital. The accord has also helped cushion banks in Taiwan against insolvency. This has seen Taiwan become one of the countries with good financial and economic stability (Hou 160). Contrasting Taiwan’s Financial Institutions and Regulations with Those of the U.S. Both the US and Taiwan share a lot in common with regard to financial institutions and regulations. The financial institutions for both countries, for instance, consist of banks, credit unions, building societies, mortgage loans, and trust companies; pension funds and insurance companies, brokers among others. However, unlike in Taiwan where the supervisory authority is vested in the hands of FCH, in US, the Federal Financial Institutions Examination Council is the one mandated to carry out supervisory work. It is also evident that unlike in Taiwan where supervisory work is centralized under the ministry of finance (MOF), in the US, the supervisory worth is decentralized to different departments. Nevertheless, in both countries, the institutions supervised are also the same. That is banks, saving societies, insurance companies and mutual saving banks among others (Hwang, Lin, andLin 8). Work Cited Aberbach, Joel D., Dollar, David & Sokoloff, Kenneth L. The role of state in Taiwan’s development. New York, NY: M.E. Sharpe. 1994 prints. Hwang, Dar-Yeh, Lin, Jung-Chu and Lin, Ching-Ching. A study on designing a financial supervisory institution in Taiwan. 2002, Jan 1, p. Hou, Johnny T. C. Pro-Cyclicality impact of Basel II in ROC (Taiwan), (Chapter 9). 2001, Pp. 157-178. International association of Insurance Supervisors (IAIS). Insurance and financial stability. Nov. 2011, pp.1-49. Lee, Patricia. Financial Regulatory Forum. Retrieved from: http://blogs.reuters.com/financial-regulatory-forum/tag/taiwan/ Lai, Tsai-Ching & Yu, Min-The. Capital Requirements for Financial Holding Companies in Taiwan. 2002. Pp.1-20. Meng, Channarrith & Pfau, Wade D. The role of pension funds in capital market development. GRIPS Policy Research Center. 2010, pp. 1-20. Security.com. Security Companies in Taiwan. Retrieved from: http://www.sourcesecurity.com/companies/search-results/company-search/c.taiwan.html Read More