A general introduction to the banking regulatory regime in Taiwan

All the questions

Introduction

Taiwan is an island nation with a population of 23.57 million. According to the “Global Competitiveness Report 2019”, published by the World Economic Forum, among 141 economies, Taiwan ranks 12th in global competitiveness and first in macroeconomic stability.² ‘The Global Competitiveness Report Special Edition 2020′ halts rankings due to the impact of covid-19 on the global economy. However, when it comes to key competitiveness features that have improved countries’ responses to the pandemic, he recognizes Taiwan as one of the economies with strong financial systems that “could more easily find resources to provide credit to [small and medium-sized enterprises]which, in addition to public interventions, has helped keep businesses afloat in the current context”.³ According to the “IMD World Competitiveness Yearbook 2021”, published by the International Institute for Management Development, among 64 economies, Taiwan ranks eighth in overall performance based on indicators such as economic performance, efficiency of government, business efficiency and infrastructure.⁴ Moreover, with net financial assets per capita of €110,706, Taiwan ranks second in terms of net wealth in Asia, behind Singapore.⁵

The competent authority for Taiwan’s banking sector is the Financial Supervisory Commission (FSC), which is an independent regulatory authority governing the financial services industry in Taiwan. The FSC determines financial policy, drafts regulations and rules concerning the financial sector, carries out financial examinations and supervises financial institutions.

Based on the latest information released by the FSC Banking Office as of the end of September 2021, with the exception of the Central Bank of the Republic of China (Taiwan) (CBC), which regulates monetary and credit policies, there had 38 national banks. and 29 local branches of foreign banks (including Chinese banks) in Taiwan. Bank of Taiwan, CTBC Bank Co, Ltd, Mega International Commercial Bank, Taiwan Cooperative Bank and Cathay United Bank are the top five domestic banks measured by stock and assets.⁶

In order to align with the standards set by the Basel Committee on Banking Supervision, in 2019 the FSC amended the Regulations Governing the Capital Adequacy and Capital Tier of Banks.⁷ In addition, after estimating the size, interconnectedness, substitutability and complexity of each bank, the FSC also announced that CTBC Bank Co, Ltd, Cathay United Bank, Taipei Fubon Bank, Mega International Commercial Bank, Taiwan Cooperative Bank and First Commercial Bank are classified as national systemically important banks and are therefore subject to stricter capital standards.⁸

The most significant recent development in Taiwan’s banking industry was that the FSC granted approvals to LINE, Next Bank and Rakuten Bank to set up internet-only banks and also granted them digital banking licenses. Competition in Taiwan’s banking sector is expected to intensify in the coming years as these new players jostle the market.

The regulatory regime applicable to banks

i General introduction to related laws and regulations

The main laws and regulations governing the Taiwanese banking sector are as follows:

1. the Taiwan Banking Law, which provides rules on the conduct of banking business, including the establishment and dissolution of banks; general scope of business of various types of banks; compliance requirements; trade restrictions; etc The Banking Law regulates not only domestic commercial banks, but also special purpose commercial banks (such as industrial banks, agricultural banks, and export-import bank), investment and trust companies, and branches. foreign banks;
2. Taiwan’s Financial Holding Company Act (FHCA), which governs the establishment, operations and supervision of financial holding companies. A licensed financial holding company is the parent company of financial institutions which may include banks, insurance companies, securities companies or other companies engaged in financial activities. With the exception of standard corporate operations governed by the Taiwan Companies Act, a financial holding company is required to comply with the FHCA;⁹
3. the Central Bank of the Republic of China (Taiwan) Law, which sets out the general rules and the powers and functions of the CBC. The BCC regulates monetary and credit policies, manages official foreign exchange reserves and issues currency;
4. the Offshore Banking Act, which governs the establishment and operation of Taiwanese banks’ offshore banking units;^ten
5. the Deposit Insurance Law, which delegates the operation of Taiwan’s deposit insurance system to the Central Deposit Insurance Corporation of Taiwan (CDIC). CDIC handles matters related to deposit insurance and deals with troubled banks in accordance with FSC orders;
6. the Financial Consumer Protection Act, which governs the protection of the interests of consumers who deal with financial institutions; and
7. the Money Laundering Control Act, the Terrorist Financing Act and related regulations.¹¹

In addition to this, Taiwanese banks and financial institutions must comply with the Personal Data Protection Law; In addition, to prevent improper tax evasion, Taiwanese banks and financial institutions are required to comply with the Regulations Governing the Implementation of the Common Standard of Reporting and Due Diligence for Financial Institutions, which requires all banks and Taiwanese financial institutions to implement the common reporting standard.

ii Operation of a bank in Taiwan

According to banking law, an FSC approval and license is required to establish and operate a bank in Taiwan.¹² The minimum capital requirement for a commercial bank is NT$10 billion.¹³

The establishment, cancellation or relocation of any branch, representative office, subsidiary or joint venture by a bank also requires the approval of the FSC.¹⁴ If the relevant branch, representative office, subsidiary or joint venture is in another jurisdiction, the FSC will consult with the SRC before granting its approval.¹⁵ In addition, a separate approval from the BCC is required for a bank to engage in foreign exchange-related activities or to establish and operate an offshore banking unit.¹⁶

iii Foreign banks in Taiwan

A foreign bank is not allowed to do business in the territory of Taiwan until it has obtained FSC approval to establish and operate a branch in Taiwan.¹⁷

In addition, a foreign bank may establish a representative office in Taiwan after obtaining approval from the FSC.¹⁸ The permitted activities of the representative office of a foreign bank are limited to the collection of commercial and market information and commercial liaison.¹⁹

In addition, an FSC ruling issued on September 10, 2019 prohibits domestic banks or branches of foreign banks acting as agents of unlicensed foreign banks from providing financial services in Taiwan. Such behavior would be treated as circumvention of the banking law, which would be sanctioned.²⁰ It is generally understood that the policy of the FSC is to prohibit a foreign bank that does not have a Taiwan branch from carrying on business in Taiwan unless the transaction concerned is conducted on the basis of an offshore transaction. Although there is no crystal rule for such an offshore transaction, it is generally understood that a foreign bank without a Taiwan branch should avoid: (1) signing or receiving transactions or opening documents account in Taiwan; (2) use the services of any local agent, intermediary or personnel in connection with such transactions; (3) meet Taiwanese clients in Taiwan for specific transactions; and (4) engage in public marketing or promotional activities in Taiwan.