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Taiwan’s Banking Regulations: A Guide to Compliance
As Taiwan’s financial sector continues to evolve, the Financial Supervisory Commission (FSC) has implemented several regulations to ensure the stability and integrity of the banking system. This article delves into the key requirements for banks operating in Taiwan, including internal control systems, capital adequacy, liquidity coverage, leverage ratio, total loss-absorbing capacity, and rules governing relationships with customers and third parties.
Internal Control Systems
To maintain transparency and accountability, Taiwanese banks are required to establish an internal audit unit that reports directly to the board of directors. The unit must conduct regular audits and provide independent and impartial assessments of the bank’s internal control systems. Failure to comply may result in administrative fines ranging from NTD 2 million to NTD 50 million.
Capital Adequacy
Taiwanese banks are subject to capital adequacy requirements, which are aligned with the Basel III framework. The minimum common equity tier 1 ratio is 7%, while the tier 1 capital ratio and total capital adequacy ratio are set at 8.5% and 10.5%, respectively.
Liquidity Coverage Ratio (LCR)
To enhance short-term liquidity recovery, the FSC has implemented an LCR framework. Banks must maintain a minimum LCR of 100%, calculated by dividing high-quality liquid assets by total net cash flows over a 30-day period. The requirement does not apply to foreign bank branches in Taiwan.
Leverage Ratio
The FSC introduced a leverage ratio as a measure to address limitations in the Bank Capital Adequacy Ratio and prevent excessive leverage. Banks must maintain a minimum leverage ratio of 3% and disclose it accordingly.
Total Loss-Absorbing Capacity (TLAC)
In response to the increasing use of TLAC eligible debt instruments, the FSC has amended capital accrual regulations to enhance capital quality and risk-taking capacity. The amendments will take effect in 2024.
Domestic Systemically Important Banks (D-SIBs)
Six banks have been designated as D-SIBs in Taiwan, including CTBC Bank, Cathay United Bank, Taipei Fubon Commercial Bank, Mega International Commercial Bank, Taiwan Cooperative Bank, and First Commercial Bank. These banks must allocate an additional 2% of statutory capital requirement and internal management capital requirement over a four-year period.
Rules Governing Relationships with Customers and Third Parties
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 comprehensive product information, including structure, risks, and scenario analysis, in Chinese unless the customer is a professional investor.
The Financial Consumer Protection Act (FCPA) provides further protection to bank customers who are not professional investors or high-net-worth individuals. The act requires banks to conduct due diligence, disclose relevant information, and provide alternative dispute resolution mechanisms for addressing customer complaints.
Conclusion
Taiwan’s banking regulations aim to ensure the stability and integrity of the financial sector by setting clear guidelines for internal control systems, capital adequacy, liquidity coverage, leverage ratio, total loss-absorbing capacity, and relationships with customers and third parties. Banks operating in Taiwan must comply with these regulations to maintain a strong reputation and avoid potential fines or penalties.
Sources
- Financial Supervisory Commission (FSC)
- Financial Consumer Protection Act (FCPA)
- Basel III framework