This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 TAIPEI 004873 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT:  Taiwan Legislature meddles with interest rates 
 
SUMMARY 
------- 
 
¶1.  On December 6 Taiwan's Legislative Yuan (LY) reached 
agreement to set a 10% cap on credit and cash card spreads, 
and increase monthly minimum payments to 20% of the balance 
from the current 3%.  According to the agreement, the 
proposed cap was to have a "second" reading December 9 
(without ever having had a first reading).  In response to 
the agreement, average stock prices of banking issues 
dropped sharply on December 8 as banks complained the 
measure would force them to stop issuing cards and ratings 
firms indicated it could lead to a downgrading of Taiwan's 
financial ratings.  In a rare triumph of reason over 
politics, the bill has been shelved for now.  End summary. 
 
Efforts to Halt Legislation 
--------------------------- 
 
¶2.  Opposition KMT and PFP legislators began promoting the 
interest cap legislation prior to the December 3 local 
elections as a way to reduce interest burdens on credit and 
cash cardholders.  Rising consumer debt has become a topic 
of media interest.  The December 6 agreement to schedule the 
bill for a "second" reading (of three required readings) 
took the financial community by surprise.  In the days 
before the scheduled "second" reading on December 9, bankers 
and foreign investors voiced loud opposition to the bill. 
As a result, ruling DPP Policy Committee Chairman Ke Chien- 
min asked LY President Wang Jing-pyng to postpone further 
consideration of the bill.  Banking Bureau Chief Secretary 
Nancy Yang told AIT that the Financial Supervisory 
Commission was also lobbying to stop the legislation. 
 
Immediate Impact 
---------------- 
 
¶3.  The draft legislation would require banks to reduce 
credit and cash card interest rates from the current 20% to 
12% (which banks claim is insufficient to cover card 
issuance costs.)  Passage of the bill would erode 
profitability of credit and cash card issuing banks.  The 
December 6 agreement drove the stock price index of the 
banking sector down 4.4% from 917.66 points on December 6 
and to 876.91 points on December 8.  The capitalization of 
listed banks and financial holding companies shrank 
NT$117.57 billion (US$3.5 billion) to NT$2,518.9 billion 
(US$75.2 billion).  Three large financial holdings 
corporations (China Trust, Taishin, and Cathay) experienced 
plunges of 10-12% in stock prices. 
 
Even Worse Long-Term Consequences 
--------------------------------- 
 
¶4. According a CLSA assessment (CLSA is the Asian investment 
banking arm of Crdit Agricole, the world's fifth largest 
bank), passage of the bill could prompt banks to stop all 
new card lending since the spreads would not cover the risk. 
As old balances were paid off, customers would not get new 
credit, causing a contraction of cash and credit card 
lending.  Without other non-card lending products to fill 
the gap, a significant contraction of overall consumer 
credit would result.  This would have a negative effect on 
consumer spending and Taiwan's domestic economy.  The bill 
would also increase the monthly minimum payment to 20% of 
the balance from the current 3%, which would force many 
credit and cash cardholders to default on payments.  Taishin 
Bank President Tsai Men-feng warned that passage of the bill 
would force people to go to underground banks which charge 
interest rates of over 40%, and which are associated with 
criminal elements. 
 
PAAL