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Historical background to the National Conference on Banking

In the early 1970s, the financial environment underwent very important changes both globally and in Taiwan. This made the National Conference on Banking of May 1973 a very meaningful event.

In July 1944, the Allied nations held a Monetary and Financial Conference at Bretton Woods in the United States to draw up an economic framework for the post-war world. This framework established the US dollar as the world’s currency and relied on a gold-exchange standard administered by the International Monetary Fund. Countries throughout the world held US dollar reserves, which they could exchange in unlimited amounts for gold. The US dollar became the primary currency used for international trade and lending.

After the end of World War II, the US emerged as the world’s greatest superpower. At one point it held 70% of the world’s gold reserves, and it was often said that “the dollar is as good as gold,” but the stationing of US military forces around the globe, and the gradual expansion of other countries’ trade surpluses versus the US, caused a huge outflow of US dollars. In the mid-1960s, France began exchanging US dollars for massive quantities of gold, eventually causing the US dollar to depreciate. In December 1971, the US dollar depreciated for the first time in the post-war period. Japan and many European countries switched to a floating exchange rate versus the US dollar, and the international financial order suddenly changed. Beginning in 1972, global inflation and the energy crisis led to soaring goods prices and serious unemployment that had a big impact on Taiwan.

In the early 1970s, many banks re-opened for business in Taiwan and the government took preliminary steps to deregulate the financial industry. In the early years after the government relocated from mainland China to Taiwan, the Central Trust of China was the only financial institution that continued operating normally in Taiwan, while others did not reopen here. Many big-name banks in China had seen their staff, documents, and properties decimated by warfare. The main financial institutions in Taiwan in those early post-war years were the following seven banks: Bank of Taiwan; First Commercial Bank; Chang Hwa Bank; Hua Nan Bank; Land Bank of Taiwan; Taiwan Cooperative Bank; and Taiwan Business Bank. After Taiwan was recovered from Japan, all of these banks were taken over and restructured by the Taiwan Provincial Governor’s Office, and came to be known colloquially as “the seven provincial government banks.”

In 1959, Nippon Kangyo Bank opened a branch in Taiwan, and in the following year the Bank of China and Chiao Tung Bank resumed business in Taiwan, followed by the Central Bank in 1961, the Directorate General of Postal Remittances and Savings Banks in 1962, the Farmers Bank of China and the privately-owned Shanghai Commercial & Savings Bank in 1965. In the 1960s Taiwan saw the establishment of Taipei Bank, and the government granted approval for Citibank, American Express Bank, Bangkok Bank, and the Metrobank (of the Philippines) to set up business operations in Taiwan.

As for other types of financial institutions, the government established a Securities and Exchange Commission (SEC) under the Ministry of Economic Affairs in 1960, and the Taiwan Stock Exchange officially commenced operations in 1962, thus bringing an early form of Taiwan’s securities market into existence. During the 1960s the government approved the establishment of seven life insurance companies and six non-life insurance companies, and by 1970 Taiwan had 15 domestic banks with a total of 379 branches, while Taiwan’s credit cooperatives, foreign banks, farmers’ and fishermen’s association credit departments, and insurance companies had a total of 3,926 business locations.

In order to formulate more forward-looking financial policies, Minister of Finance K.T. Li and Central Bank Governor Yu Kuo-hwa convened a three-day National Conference on Banking that began on May 28, 1973. Over 300 banking executives attended the conference, where they engaged in comprehensive discussions regarding the financial environment and related policies. The event yielded a consensus on many reforms.

Premier Chiang Ching-kuo personally appeared at the conference and delivered an address in which he traced the basic outlines of a plan for reforming the government’s fiscal and financial policies. Premier Chiang stated that international economic conditions were very unstable, so the government considered it a matter of utmost importance to ensure that banking services keep pace with the 6th economic development plan for Taiwan, Republic of China (1980-1989).

Premier Chiang said that the key purposes of the government’s fiscal and financial policies include: maintaining stability; ensuring growth, fairness, and reasonableness; effectively handling inflation; and assisting economic development by guiding banks to engage in important types of lending. The premier said he especially wanted banks to increase lending and provide better services to small and medium enterprises (which have strong development potential) and to farmers (who are the nation’s foundation), and to avoid an over-concentration of loans to large borrowers. He further stated that the government hoped, by amending The Banking Act, to build a medium- to long-term credit system and improve bank lending procedures.

Minister of Finance K.T. Li and Central Bank Governor Yu Kuo-hwa each responded to different aspects of Premier Chiang’s policy comments. Finance Minister Li called on banks — especially strong banks like the Bank of Taiwan, Taipei Bank, First Commercial Bank, Chang Hwa Bank, and Hua Nan Bank — to pay close attention to SME financing issues. Central Bank Governor Yu urged banks not to place excessive emphasis on collateral and said they should also consider the quality of an enterprise’s financial structure, the state of its product-market fit, the quality of its credit, the competence of its top management, and whether the enterprise has a promising future.

The great majority of financial institutions at that time were state-owned, so they often received criticism regarding service procedures and attitudes. The National Conference on Banking included five breakout sessions to discuss the following subjects:

1. How to effectively promote agricultural lending in order to accelerate development of the agricultural sector.
2. How to strengthen SME lending and assist SME development.
3. How to improve bank deposit and lending operations to accommodate the needs of industrial and commercial enterprises.
4. How to improve the foreign exchange business to respond to changing international financial conditions, and to develop international trade.
5. How to spur corporatization of bank management.

Participants in the breakout session on bank deposit and lending operations discussed improvement of deposit operations, improvement of the bills exchange system, improvement of banks’ counter service systems, simplification of deposit operations and deposit slip signature procedures, simplification and improvement of lending procedures, easing of collateral requirements, use of variable interest rates to reflect risk levels and loan periods, making it easier for banks to share credit check information, establishment of a correspondent banking system, improvement of trust receipt operations, and prevention of double financing or multiple financing. They also arrived at conclusions that would do much to improve financial services.

After the conclusion of the National Conference on Banking, the Ministry of Finance worked steadily to incorporate conference conclusions into legislation and policies. In order to effectively promote agricultural lending, the Ministry of Finance formulated the Regulations Governing Farmers Association Credit Department Operations in May 1975, amended the Personal Property Secured Transactions Act for the second time in January 1976, and amended the Act Governing the Farmers Bank of China in December 1980 to ensure a sufficient supply of agricultural credit for development of the rural economy.

With respect to guidance for the development of SMEs, the Ministry of Finance amended The Banking Act in July 1975 and reorganized Taiwan’s eight former mutual savings and loan companies into small and medium business banks to help SMEs obtain financing. In December 1975, the Ministry of Finance issued the Regulations Governing Short-term Bills Trading Firms and approved the establishment of three bills finance firms (Chung Hsing Bills Finance Corporation, International Bills Finance Corporation, and China Bills Finance Corporation) to make it easier for SMEs to obtain financing.

As for routine banking operations, in 1973 the Ministry of Finance issued the Regulations Governing Bills Acceptances, Guarantees, and Discounts by Banks; granted the Bank of Taiwan approval to handle usance credits and development bank acceptances in March; issued the Enforcement Rules of the Negotiable Instruments Act in May; and granted banks approval to issue negotiable certificates of deposit in August. In 1977 the Ministry amended the Regulations Governing the Handling of Checking Accounts in July, then issued the Directions for the Improvement of Banking Business Operations in August. This series of financial reforms very effectively improved Taiwan’s business climate, and it clearly demonstrated the government's serious intent to provide SMEs with guidance and ensure that they could remain stable amidst a non-stop cascade of external shocks.