Taiwan Banks Implement Basel III Framework, Enhance Capital Adequacy and Liquidity
New Regulatory Framework Takes Effect in 2025
In line with the finalization of post-crisis reforms under the Basel III framework, the Financial Supervisory Commission (FSC) has amended the calculation method of Regulatory Capital to Risk-weighted Assets, effective January 1, 2025. This move aims to strengthen the capital adequacy and liquidity standards for Taiwanese banks, aligning them with international best practices.
Key Requirements Under Basel III
The new rules introduce the following key requirements:
- Capital Adequacy: Banks must maintain a minimum:
- Common Equity Tier 1 Ratio of 7%
- Tier 1 Capital Ratio of 8.5%
- Total Capital Adequacy Ratio of 10.5%
- Liquidity Coverage Ratio (LCR): Banks must maintain a minimum LCR of 100%. The LCR is calculated by dividing a bank’s high-quality liquid assets by its total net cash flows over a 30-day period.
- Leverage Ratio: Banks must maintain a leverage ratio of at least 3%, measuring capital adequacy against total risk exposure.
Enhancing Capital Quality and Risk-Taking Capacity
To further enhance capital quality and risk-taking capacity, the FSC has introduced:
- Total Loss-Absorbing Capacity (TLAC): Requirements for domestic banks investing in TLAC eligible debt instruments issued by Global Systemically Important Banks (G-SIBs).
- Domestic Systemically Important Banks (D-SIBs): Six D-SIBs have been designated, subject to stricter capital standards. These banks must allocate an additional 2% of statutory capital requirement and internal management capital requirement over a four-year period.
Customer Protection
To ensure customer protection, Taiwanese banks are required to:
- Know-Your-Customer (KYC) processes: Conduct thorough KYC processes and assess the suitability of financial products for different types of customers.
- Product Information: Provide comprehensive product information to customers, including risk disclosure statements.
The Financial Consumer Protection Act (FCPA) provides further protection by requiring fair and transparent business practices, as well as alternative dispute resolution mechanisms through the Financial Ombudsman Institution (FOI). FOI was established to handle disputes between financial consumers and financial institutions, providing a reliable mechanism for resolving customer complaints.
Strengthening Banking System Resilience
The amendments aim to strengthen the resilience of Taiwan’s banking system by enhancing capital adequacy, liquidity, and risk management practices. This move aligns with international best practices and demonstrates Taiwan’s commitment to maintaining a stable and robust financial sector.