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Taiwan’s Banks Face Direct Risk with Mainland China Exposure

The Financial Supervisory Commission (FSC) has taken steps to manage risks associated with Taiwanese banks’ direct exposure to mainland China, which accounts for the single largest overseas risk faced by Taiwan’s banking sector.

Background

According to figures released by the Central Bank of the Republic of China (Taiwan), Taiwanese banks had 131 branches and 38 representative offices overseas as of the end of 2015, with the largest concentration in mainland China. The rapid growth of exposure has led to concerns about the potential risks associated with this large-scale expansion.

Risk Mitigation Measures

To mitigate these risks, the FSC has implemented measures such as:

  • Limiting total exposure to mainland China to 100% of a bank’s equity
  • Encouraging banks to expand into other Asian economies to reduce high mainland concentration

Overseas Expansion Results

The results of Taiwan’s push for banks to expand overseas have been notable. Overseas banking assets have grown rapidly in recent years, with profits from overseas branches expanding by 53% in 2014.

Challenges Ahead

However, despite the impressive expansion, no Taiwanese bank has yet achieved the government’s goal of becoming a major regional player. As of year-end 2015, there were no Taiwanese banks among the top 25 Asian banks in terms of assets.

Domestic Banking Sector Challenges

The FSC is also working to address the overcrowded domestic banking sector, which has prevented banks from achieving economies of scale and leading to thin operating margins and low retained earnings. Regulatory authorities have taken steps to remove legal and regulatory barriers to consolidation, and encouraged banks’ overseas expansion.

Future Outlook

Going forward, banking sector consolidation and international expansion are expected to continue shaping Taiwan’s banking sector.

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Note: This article is based on a research paper by Nicholas Borst and Cindy Li of the Federal Reserve Bank of San Francisco.