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Taiwan’s Banking Sector Adapts to Basel III Framework
In a move to strengthen the financial stability of its banking sector, Taiwan’s Financial Supervisory Commission (FSC) has amended the calculation method for regulatory capital to risk-weighted assets, effective January 1, 2025. This change aligns with the finalization of post-crisis reforms under the Basel III framework.
Minimum Capital Requirement
To establish a commercial bank in Taiwan, a minimum paid-in capital of NTD 10 billion is required, which must be paid in cash. The promoters of the bank are expected to subscribe up to 80% of the total paid-in capital, with the remaining shares publicly offered.
For foreign banks seeking to engage in retail deposit business in Taiwan, a minimum operating capital of NTD 250 million is required, subject to certain exceptions.
Capital Adequacy Requirements
Taiwan’s current capital adequacy requirements are in line with Basel III standards:
- 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 FSC and CBC implemented the LCR framework in 2015. Banks incorporated under Taiwan’s laws must maintain an LCR of at least 100% since January 1, 2019.
Leverage Ratio
Introduced in 2013, the leverage ratio measures a bank’s risk-taking capacity by dividing net Common Equity Tier 1 by total risk amount. A minimum leverage ratio of 3% is required for all banks.
Total Loss-Absorbing Capacity (TLAC)
In response to domestic banks investing in TLAC-eligible debt instruments issued by Global Systemically Important Banks, the FSC has amended capital accrual regulations to enhance capital quality and risk-taking capacity. The changes will take effect from 2024.
Domestic Systemically Important Banks (D-SIBs)
Six Taiwanese banks have been designated as D-SIBs:
- CTBC Bank
- Cathay United Bank
- Taipei Fubon Commercial Bank
- Mega International Commercial Bank
- Taiwan Cooperative Bank
- First Commercial Bank
These banks must allocate an additional 2% of statutory capital requirement over a four-year period.
Rules Governing Banks’ Relationships with Customers
Taiwan’s Banking Act classifies banks into three categories:
- Commercial Banks: The primary institutions in the banking industry, engaging in various financial activities.
- Banks for Special Business Purposes: Institutions that focus on specific areas of banking activity.
- Trust and Investment Companies: Companies that provide trust and investment services.
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 comprehensive product information to customers, including risk disclosure statements.
Financial Consumer Protection Act (FCPA)
The FCPA provides further protection to bank customers who are not professional investors or high-net-worth individuals. The FCPA requires more requirements on:
- Due Sale Process: Ensuring that customers receive fair treatment when buying financial products.
- Information Disclosure: Providing customers with clear and transparent information about the financial products they are considering.
- Alternative Dispute Resolution: Offering a mechanism for resolving disputes between banks and customers.
- Punitive Damages: Allowing courts to award punitive damages in cases where customers have been unfairly treated.
Financial Ombudsman Institution (FOI)
Established by the government under the FCPA, FOI is a reliable alternative dispute resolution mechanism for handling disputes between financial consumers and financial institutions. Before seeking a review, customers must first file a complaint with the involved financial institution. If unsatisfactory, they may then apply to FOI for further review.
The changes aim to strengthen Taiwan’s banking sector by enhancing capital adequacy, liquidity, and risk management practices.