VZCZCXRO2015
RR RUEHGH
DE RUEHIN #4175/01 3560435
ZNR UUUUU ZZH
R 220435Z DEC 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 3519
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3505
RUEHBJ/AMEMBASSY BEIJING 6123
RUEHUL/AMEMBASSY SEOUL 8346
RUEHGP/AMEMBASSY SINGAPORE 6720
RUEHKO/AMEMBASSY TOKYO 8318
RUEHML/AMEMBASSY MANILA 9870
RUEHJA/AMEMBASSY JAKARTA 3965
RUEHKL/AMEMBASSY KUALA LUMPUR 3614
RUEHHI/AMEMBASSY HANOI 3178
RUEHBY/AMEMBASSY CANBERRA 4393
RUEHWL/AMEMBASSY WELLINGTON 1662
RUEHHK/AMCONSUL HONG KONG 7353
RUEHGH/AMCONSUL SHANGHAI 0654
RUEHGZ/AMCONSUL GUANGZHOU 9838

UNCLAS SECTION 01 OF 02 TAIPEI 004175 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USTR 
STATE FOR EAP/RSP/TC, EAP/EP 
USTR FOR ALTBACH 
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN EIND ECON PINR TW
SUBJECT:  Taiwan Takes Over Problem Bank 
 
 
SUMMARY 
------- 
 
¶1.  (U)  In mid-December 2006, Taiwan took over the insolvent 
Taitung Business Bank (TBB).  TBB board directors may not leave 
Taiwan.  The Central Deposit Insurance Corporation (CDIC) has 
sufficient funding to address TBB, but insufficient funds to resolve 
seven other problem banking institutions.  Taiwan authorities had 
expected restricting bank branching would motivate sound banks to 
acquire the problem institutions, but this has not happened. END 
SUMMARY. 
 
Takeover 
-------- 
 
¶2.  On December 15, the Financial Supervisory Commission (FSC) 
ordered CDIC to take over TBB and assured 100-percent protection for 
TBB depositors.  With these assurances, the takeover has been 
orderly without any run on TBB. 
 
¶3.  Meanwhile, FSC restricted TBB board directors from leaving 
Taiwan and from transferring their properties.   CDIC dispatched 
more than 20 officers, including a senior vice president, to execute 
the takeover order.  TBB has 31 branch offices on the island, 
including 12 in Kaohsiung, ten in Taitung, and five in Pingtung. 
 
¶4.  TBB was the 50th banking institution taken over by the 
authorities since the banking crisis of 2001 when Taiwan's average 
NPL ratio shot up to 11.7%.  The 49 problem banking institutions 
taken over earlier included 37 farmers association (FA) credit 
departments, nine credit cooperative associations, and two banks. 
 
Delinquency 
----------- 
 
¶5.  TBB reported a pre-tax loss of NT$31.8 billion (US$978 million) 
in the first 11 months of 2006.  TBB's net worth as of November 2006 
was negative NT$1,089 million (-US$33.5 million at exchange rate of 
NT$32.5 per US$).  Its capital adequacy ratio was negative 3.7%, a 
sharp contrast to the minimum 8% required by BASEL II.  Its 
non-performing loan (NPL) ratio was 23%, far higher than the 5% 
limit acceptable to FSC. 
 
¶6.  Prior to the mid-December takeover, FSC had given TBB chances to 
improve its financial performance over the past two years.  However, 
TBB failed to raise additional capital from its major shareholders 
or prospective new investors.  It failed to stop losses or reduce 
its NPL ratio. 
 
Funding 
------- 
 
¶7.  FSC said that it has sufficient funding to resolve the TBB case. 
 The Financial Reconstruction Fund (FRF), Taiwan's RTC, still has a 
balance of NT$40 billion (US$1.2 billion).  In addition, CDIC has an 
outstanding deposit insurance fund of NT$13 billion (US$400 
million).  Funding from these two sources, totaling NT$53 billion 
(US$1.6 billion), will easily cover the estimated NT$3.7 billion 
required to reorganize TBB and subsequently sell it over the next 
six months, according to CDIC. 
 
COMMENT 
------- 
 
¶7.  CDIC funds are insufficient to deal with seven other problem 
banking institutions in Taiwan, including three banks (all larger 
than TBB), two trust companies (also larger than TBB), and two 
credit cooperatives.  With lingering problem institutions and 
 
TAIPEI 00004175  002 OF 002 
 
 
limited funding, Taiwan authorities may continue to restrict new 
bank branches in hopes this will motivate sound banks to acquire the 
problem institutions.  However, this policy has not produced any 
results over the past three plus years. 
 
YOUNG