Financial Crime World

Banking Regulations: Credit Extensions to Related Parties

In an effort to ensure fair lending practices, the Taiwanese government has introduced new regulations governing credit extensions by banks to related parties.

Background

According to Article 32 of the Banking Act, no more than 5% of a bank’s total paid-in capital can be extended in credit to its responsible person, staff members, major shareholders, or any interested party. This regulation aims to prevent conflicts of interest and ensure that credit terms are not unfairly favorable to related parties.

Definition of Interested Parties

Article 33 defines “interested parties” as including:

  • Spouses
  • Relatives
  • Enterprises in which responsible persons or staff members hold shares
  • Other individuals with a significant financial interest in the bank

Pricing of Credit Extensions

The regulations prohibit banks from extending credit to related parties at unreasonable prices. Instead, they must set prices based on:

  • Market rates
  • Funding costs
  • Operating costs
  • Expected credit losses
  • Customer contributions

Conflict of Interest Prohibitions

Article 35 prohibits responsible persons or staff members of banks from accepting:

  • Commissions
  • Rebates
  • Other unwarranted benefits from depositors, borrowers, or customers.

Additionally, the article restricts concurrent holding of positions in other banks to only directors or supervisors of invested banks with the approval of the Central Competent Authority.

Purpose and Impact

The regulations are designed to promote transparency and fairness in banking practices, and to protect the interests of depositors and borrowers. Failure to comply with these regulations may result in penalties, including fines and restrictions on business operations.

In related news, the Central Bank of China has also announced plans to impose stricter regulations on lending rates and loan-to-value ratios to prevent excessive credit growth and maintain financial stability. The new regulations are expected to come into effect next quarter.