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Taiwan’s Banking Industry Reinforces Internal Controls and Capital Requirements
As part of its ongoing efforts to strengthen the country’s banking sector, Taiwan has introduced new regulations governing internal controls and capital requirements. The measures aim to enhance banks’ resilience and better protect customers.
Internal Control System
Under the revised regulations, all banks are required to establish an internal audit unit, which will report directly to the board of directors and the audit committee at least every six months. The internal audit unit will be responsible for conducting independent and impartial audits of a bank’s internal control systems.
- Failure to implement or maintain these systems can result in administrative fines ranging from NT$2 million to NT$50 million.
Capital Requirements
Minimum Paid-in Capital
The Banking Act requires commercial banks to have a minimum paid-in capital of NT$10 billion, which must be paid in cash. The promoters of the bank must subscribe up to 80% of the total paid-in capital, with the remaining shares available for public offering.
Operating Capital for Foreign Banks
Foreign banks operating in Taiwan must allocate a minimum operating capital of NT$250 million if they intend to engage in retail deposit business.
Capital Adequacy Requirements
Taiwan’s capital adequacy requirements are aligned with international standards under the Basel III framework. The current requirements include:
- Common Equity Tier 1 Ratio: 7%
- Tier 1 Capital Ratio: 8.5%
- Total Capital Adequacy Ratio: 10.5%
Liquidity Coverage Ratio (LCR)
To enhance banks’ short-term liquidity recovery ability, the Financial Supervisory Commission (FSC) and Central Bank of China (CBC) introduced the LCR framework in 2015. Banks are required to maintain an LCR of at least 100% since January 1, 2019.
Leverage Ratio
The FSC introduced the leverage ratio as a measure to address the limitations of the Bank Capital Adequacy Ratio and prevent banks from engaging in excessive leverage. The leverage ratio is calculated by dividing the net Common Equity Tier 1 by the total risk amount, and it must be maintained at a level of at least 3%.
Total Loss-Absorbing Capacity (TLAC)
In response to domestic banks investing in TLAC-eligible debt instruments issued by Global Systemically Important Banks (G-SIBs), the FSC has made amendments to the capital accrual regulations. The new rules will come into effect in 2024 and aim to enhance the capital quality and risk-taking capacity of banks.
Customer Protection
Taiwanese banks are required to conduct thorough know-your-customer processes and assess the suitability of financial products for different types of customers. Banks must also provide customers with comprehensive product information, including risks and scenario analysis.
Additionally, the Financial Consumer Protection Act (FCPA) provides additional protection to bank customers who are not professional investors or high-net-worth individuals. The act requires banks to follow more stringent due sale process and information disclosure requirements, as well as alternative dispute resolution mechanisms and punitive damages.
Financial Ombudsman Institution (FOI)
The FOI was established by the government in accordance with the FCPA to provide a reliable alternative dispute resolution mechanism for handling disputes between financial consumers and financial institutions. Customers must first file a complaint with the financial institution involved, and then apply to FOI if the response is unsatisfactory.
These new regulations aim to strengthen Taiwan’s banking industry by enhancing internal controls, capital requirements, and customer protection measures. The measures are expected to improve banks’ resilience and better protect customers in the long run.