All questions

Prudential regulation

i Relationship with the prudential regulator

As the competent authority of Taiwan's banking sector, the FSC issues regulations relating to financial services generally. There are two main bureaus subordinated to the FSC, which are in charge of supervising different areas of the banking sector. The Banking Bureau plans and implements the supervision and regulation of the banking market, the bills market, financial holding companies and banking enterprises; and the Examination Bureau is responsible for financial inspection and audit of financial institutions regulated by the FSC.21

The Examination Bureau may, at any time, appoint its staff, professionals (e.g., attorneys or accountants), authorised organisations or officials of the FSC to examine the business, financial and other affairs of a bank and request a bank to submit its financial reports, property inventories or other relevant documents for examination.22 In local practice, the Examination Bureau conducts financial examinations once every two years. Additionally, when the CBC thinks it necessary, it may also conduct the examination of a bank and request a bank to submit its financial reports, property inventories or other relevant documents for examination.

Each of the Taiwanese banks is required to prepare and submit its reports to the FSC and the CBC, respectively, for recordation. Such reports include an annual report, business report, financial statements and resolutions as to the distribution of profits or the form of losses, and other materials designated by the FSC. The submission shall be filed within 15 days of such reports being approved by the banks' annual shareholders' meeting or by the banks' board of directors (if there is no shareholders' meeting), as applicable.23 Taiwanese banks are also required to submit their internal audit reports, resolutions of board meetings and the relevant committees, and business-related information to the FSC or the CBC, or both, periodically, pursuant to various banking regulations.

All Taiwanese financial institutions, including banks, that are duly approved to accept deposits should participate in the CDIC's deposit insurance programme. If an insured financial institution is ordered to suspend its operations by the FSC, the CDIC will compensate each depositor up to NT$3 million. The types of deposits covered generally include deposits in current accounts (checking deposits), demand deposits, time deposits, deposits required by law to be deposited in certain financial institutions and any other deposits as approved by the FSC.

ii Management of banks

The corporate governance requirements for Taiwanese banks are generally similar to those applicable to other regular Taiwanese corporations under the Company Act. Banks are required to convene shareholders' meetings annually, conduct daily operations under the leadership of the board of directors and be supervised by the supervisors or the audit committee and remuneration committee composed of independent directors. Because all Taiwanese banks are public companies or are deemed public companies, they are also required to comply with the Securities and Exchange Act of Taiwan and the related regulations issued by the FSC in respect of the corporate governance of, and public disclosure by, a public company.

In addition, to ensure the sound business operation of Taiwanese banks, they are required to establish proper internal audit and internal control systems. The overall operation strategies, risk management policies and guidelines, operation plans, risk management procedure and execution guidelines are also required to be set up.24

There is no mandatory restriction on the bonus and remuneration paid by a bank to its directors, officers or employees. However, bonuses and remuneration are required to be reviewed and approved by the remuneration committee. Taiwanese banks are also required to set up a sales personnel remuneration system and have it approved by the board of directors.25 Also, according to the Guiding Principles for the Practice of Banks in Corporate Governance promulgated by the FSC, a bank shall take the following into consideration, inter alia, when reviewing the performance of its directors, officers and employees and determining payment of bonuses and remuneration:

  1. the risks associated with their performance (that may be realised in the future);
  2. the criteria and arrangement for determination and payment of bonus and remuneration should not have the effect of encouraging the bank's directors, officers and employees to proceed with risky transactions;
  3. a significant portion of the bonus and remuneration should be deferred or paid in the form of the bank's equity; and
  4. the amount payable under any golden parachute arrangement should be based on the performance that has been delivered by the relevant directors, officers or employees.26
iii Regulatory capital and liquidityCapital adequacy requirement

The principal legislation regarding the capital adequacy of a bank are the Regulations Governing the Capital Adequacy and Capital Category of Banks, which implemented much of the Basel III framework in 2013. The current capital adequacy requirements are generally in line with the standards under the Basel III framework:

  1. common equity Tier 1 ratio: 7 per cent;
  2. Tier 1 capital ratio: 8.5 per cent; and
  3. total capital adequacy ratio: 10.5 per cent.27

The ratios are generally defined as follows:

  1. common equity Tier 1 ratio: net common equity Tier 1 divided by total risk-weighted assets;
  2. Tier 1 capital ratio: net Tier 1 capital divided by total risk-weighted assets; and
  3. total capital adequacy ratio: aggregate amount of net Tier 1 capital and net Tier 2 capital divided by total risk-weighted assets.28

A bank shall periodically report relevant capital adequacy-related ratios to the FSC, and the FSC may, at any time, request a bank to do so.29 The FSC may assess a bank's capital based on the report made by the bank.30

A bank is also required to self-assess its capital adequacy and establish a strategy to maintain its capital adequacy.31 The FSC may, based on a bank's self-assessment, request the bank to improve its risk management. If the bank fails to do so, the FSC may require it to adjust its regulatory capital and risk-weighted assets or submit a capital restructuring plan within a certain period.32

Consolidated (group) supervision

The FSC has the authority to impose prudential standards on a consolidated basis for a banking group. The quarterly average balance of the total net asset amount (i.e., the amount of assets minus the amount of liability for each transaction) of the subsidiary bank, combined with the number of the foreign financial institution's branches within Taiwan, shall not exceed 50 per cent of the local subsidiary bank's net worth of the preceding fiscal year. However, a foreign financial institution meeting certain requirements (e.g., the common equity Tier 1 ratio is above 9.5 per cent; Tier 1 capital ratio is above 11 per cent; and total capital adequacy ratio is above 13 per cent) is allowed to set a different ratio.33

Reporting obligations are also imposed on banking groups: the balance sheet, income statement and statement of cash flow of a foreign bank's Taiwan branch; the consolidated balance sheet, income statement and statement of cash flow of such branch and its offshore banking units; and the head office's annual report must be submitted to the FSC for its records within four months of the end of the fiscal year, and must be publicly announced in a local newspaper or in another manner designated by the FSC.34

The FSC also has the authority to limit the range of activities the consolidated banking group may conduct and the overseas locations in which activities can be conducted. A bank's investment in any financial business or non-financial business must obtain prior approval from the FSC.35

Minimum capital requirement

The minimum paid-in capital for establishing a commercial bank in Taiwan is NT$10 billion; the promoters of the bank shall subscribe to up to 80 per cent of the total paid-in capital of the bank and the remaining shares shall be publicly offered; the capital contribution shall be made in cash.36

Subject to certain exceptions, a branch of a foreign bank in Taiwan shall allocate the minimum operating capital of NT$250 million if the Taiwan branch plans to conduct retail deposit business.37

Liquidity coverage ratio

To enhance the short-term liquidity recovery ability of banks, the FSC and the CBC implemented the liquidity coverage ratio (LCR) framework in 2015. The LCR is calculated by dividing a bank's high-quality liquid assets by its total net cash flows over a 30-day period.38 Since 1 January 2019, banks incorporated under the laws of Taiwan have been required to maintain an LCR of at least 100 per cent.39 The LCR requirement is not applicable to a branch office of a foreign bank in Taiwan.40 However, a foreign bank applying to establish a branch office in Taiwan must specify the liquidity risk management framework adopted by the head office and the liquidity risk management measures applicable to the Taiwan branch.41

iv Recovery and resolution

The FSC may place a bank in receivership if any of the following occur:

  1. there is a concern that a bank might be unable to pay its debts when due or there might be a detriment to the depositors' interests due to obvious deterioration in the bank's business or financial condition;42
  2. a bank's capital is graded as being seriously inadequate and 90 days have lapsed since the bank was listed as having seriously inadequate capital. However, if a bank is ordered by the FSC to undertake capital restructuring or a merger within a prescribed period and fails to comply, the 90 days should be calculated from the day subsequent to the prescribed period;43 or
  3. the losses of a bank exceed one-third of the bank's capital and the bank fails to make up such deficit within three months.44

If the FSC places a bank in receivership, the bank's operations and management power and the powers to administer and dispose of the bank's properties shall be exercised by the receiver appointed by the FSC.45 The duties and powers of the bank's shareholders' meeting, board of directors, directors, supervisors or audit committee should be suspended.46

The receiver may formulate a concrete plan for taking the following actions towards a bank under receivership, which should be subject to the FSC's approval:

  1. mandating other banks, financial institutions or the CDIC to operate all or part of the business;
  2. increasing capital, reducing capital or increasing capital after reducing capital;
  3. selling all or part of the business, assets or liabilities;
  4. arranging a merger with another bank or financial institution; and
  5. other important actions as determined by the FSC.47

In local practice, if a bank is placed under receivership and has been included in the coverage of the Financial Restructuring Fund set up by Taiwan's Executive Yuan (the cabinet of the Taiwan government), the rights of the shareholders of the bank should be forfeited except for entitlement to distribution of remaining assets (if any).48 Seven banks were placed under receivership between 2006 and 2008, but none have been since.49 For the seven banks in crisis, the FSC divided their assets into 'bad banks' (non-performing assets) and 'good banks' (the other assets) and sold them separately. The bad banks were sold to asset management companies; the businesses of the good banks were sold to and assumed by banks on the condition that the FSC agreed to pay a certain amount of compensation to these banks. The depositors, employees and non-deposit creditors suffered little hurt, but the shareholders generally received nothing back after the disposal.