Taiwan is characterized by a tightly regulated banking system, with state-owned banks still controlling half of the market assets, as stated in the 2008 U.S. Department of Commerce Country Commercial Guide report. Although Taiwan is not a member of the Bank for International Settlements, all domestic banks were required to implement Basel II from 2007, according to the 2006 Annual Report of the Financial Supervisory Commission (FSC). However, there is insufficient information publicly available clearly identifying Taiwan's compliance with the Basel Core Principles for Effective Banking Supervision. Effective July 1, 2004, the FSC was created as an integrated financial supervisor and regulator for the banking, securities and insurance sectors to resolve the problem of overlapping authorities. As reported on the FSC's website, as the financial services and activities become more sophisticated and diversified, both the regulatory and examination responsibilities will need to be further modified and consolidated to enhance the effectiveness and efficiency of financial supervision. The legal framework for banking supervision is mainly comprised of the 2005 Banking Act and the 2005 Financial Holding Company Act. The FSC, according to its 2006 Annual Report, was drafting a Financial Services Act and preparing draft amendments to the Banking Act and the Financial Holding Company Act. In September 2006, the Executive Yuan adopted the "Financial Market Package Project," prepared jointly by the FSC and the Ministry of Finance, in order to establish a diversified, internationalized, and stable financial system in Taiwan.

General Overview

Taiwan's Financial Supervisory Commission (FSC) was established on July 1, 2004 as an integrated financial supervisory and regulatory authority to resolve the problem of overlapping authorities, merging the three separate departments of the Ministry of Finance (MoF): the Bureau of Monetary Affairs, the Department of Insurance, and the Securities and Futures Commission. The FSC, according to its website, comprises four bureaus: the Banking Bureau (BB), the Securities and Futures Bureau (SFB), the Insurance Bureau (IB), and the Financial Examination Bureau (FEB). The BB, which was called the Bureau of Monetary Affairs until it was renamed effective September 1, 2005, is responsible for the supervision of the banking sector. The FEB is in charge of the examination of all financial institutions. Prior to the establishment of the FSC, on-site examinations of banks were carried out by three different agencies: the Central Bank of the Republic of China (Taiwan) (CBC), the MoF, and the Central Deposit Insurance Corporation (CDIC). Since July 1, 2004, the supervisory authority of the CDIC has shifted from the MoF to the FSC. As reported on the FSC's website, "as the financial services and activities become more sophisticated and diversified, both the regulatory and examination responsibilities need to be further modified and consolidated to enhance the effectiveness and efficiency of financial supervision."

The legal framework for banking supervision in Taiwan is mainly comprised of the 2005 Banking Act and the 2005 Financial Holding Company Act. Amendments to the 1997 Money Laundering Control Act (MLCA) in 2007 extended money laundering responsibilities to the FSC and the CBC, and enabled the exchange of information with law enforcement agencies in countries that have signed a mutual legal assistance agreement (MLAA) with Taiwan. The FSC, according to its 2006 Annual Report, was currently drafting a Financial Services Act to introduce functional supervision, improve the protection of consumers and investors, and integrate cross-industry participation in financial services. Per the same report, the FSC was also preparing draft amendments to the Banking Act and the Financial Holding Company Act. In September 2006, the Executive Yuan adopted the "Financial Market Package Project," prepared jointly by the FSC and the MoF. As noted on the Republic of China' s Government Information Office website, the Project seeks "to create an environment where consumers and investors can have access to safe, reliable, satisfactory banking services, and where industries will have sufficient capital to develop their businesses." In its 2006 Annual Report, the FSC noted that while Taiwan is not a member of the Bank for International Settlements (BIS), all domestic banks were required to implement Basel II from 2007, as called for by the BIS. However, there is insufficient information publicly available clearly identifying Taiwan's compliance with the Basel Core Principles for Effective Banking Supervision.

As noted in the 2008 U.S. Department of Commerce (DoC) Country Commercial Guide, Taiwan is characterized by a tightly regulated banking system. In 2007, per the same report, four foreign banks and three foreign private equity funds acquired Taiwanese banks, bringing the market share in terms of assets of all foreign banks in Taiwan to 15 percent, a 7 percentage point increase from the previous year. While 9 state-owned banks have been privatized over the past decade, state-controlled banks still hold a market share of 51 percent in terms of assets. The U.S. DoC report noted that this share has been falling in recent years due to privatization efforts from the Taiwanese government. As of the end of 2005, according to a 2007 Mutual Evaluation Report on Chinese Taipei by the Asia Pacific Group on Money Laundering (APG), the banking industry in Taiwan comprised 45 domestic banks, 36 foreign bank branches, and 29 credit cooperatives.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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The responsibilities of the FSC, as noted on its website, include supervision, examination, and inspection of the financial market. The FSC includes four bureaus: the BB, the SFB, the IB, and the FEB. The BB, previously called the Bureau of Monetary Affairs, is responsible for the supervision of the banking sector. The FEB is in charge of the examination of all financial institutions. According to the FSC's website, the FEB "is entrusted with the responsibilities of financial institution supervision and examination as well as the drafting, planning and executing of the policies and regulations." According to the FSC's 2006 Annual Report, the BB is responsible for the supervision and regulation of the banking industry and money markets. Despite the information provided above, the available sources do not directly address Taiwan's compliance with this principle.

1.(2) Operational independence and adequate resources.

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The FSC, as noted on its website, functions as an independent agency that directly reports to the Executive Yuan. The Chairperson and commissioners of the FSC are appointed by the President of the Republic of China (Taiwan). However, the available sources do not directly address Taiwan's compliance with this principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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According to its website, the FSC has adequate resources to carry out vigorous law enforcement and comprehensive supervision due to its quasi-judicial power. However, the available sources do not directly address Taiwan's compliance with this principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

1.(5) Legal protection for supervisors.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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Pursuant to the 2003 Organic Act Governing the Establishment of the Financial Supervisory Commission of the Executive Yuan, as noted on the CBC's website, Taiwan has established a coordination mechanism among financial supervisory authorities. Furthermore, a coordination group, including senior officers of the FSC, the CBC and other related financial authorities, meets on a regular basis to coordinate and cooperate on issues of financial supervision, management and examination. However, the available sources do not directly address Taiwan's compliance with this principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

4. Authority to review and reject transfer of ownership.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

5. Authority to review major acquisitions and investments.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

9. Prudential limits and management information system on concentration of exposure.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

10. Arm's length rule and monitoring for connected lending.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

11. Policies and procedures for country risk and transfer risk.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

13. Comprehensive risk management processes.

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The CBC, as stated on its website, developed and implemented the "Financial Institutions CARSEL Analyzing System" in 1990, which uses financial analysis and management accounting as tools to screen periodic report data. The CBC noted that the CARSE evaluation system was an important tool for supervision policies. However, the available sources do not directly address Taiwan's compliance with this principle.

14. Adequate internal controls.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

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Taiwan is a founding member of the APG, and was elected to the steering committee of the APG in 2005. Following the establishment of the FSC, according to the APG's 2007 Mutual Evaluation Report on Chinese Taipei, the CBC was no longer responsible for the supervision or regulation of individual financial institutions regarding anti-money laundering (AML) and combating the financing of terrorism (CFT) requirements. Per the same report, the FSC provides guidance to banks in order to comply with the 1997 Money Laundering Control Act (MLCA). The FSC also conducts regular on-site examinations, and has the authority to impose administrative fines in accordance with the provisions of the MLCA. In practice however, as stated in the 2007 APG report, sanctions imposed by the FSC are inadequate in view of the many AML/CFT non-compliance findings for the banking sector. Moreover, underground banking activities (e.g. black market currency exchanges) remain a major issue and need to be addressed.

According to the 2008 U.S. Department of State International Narcotics Control Strategy Report, amendments to the MLCA in 2007 extended money laundering responsibilities to the FSC, and enabled the exchange of information with law enforcement agencies in countries that have signed an MLAA with Taiwan. Although Taiwan is not a member of the United Nations (UN), it has adopted and implemented laws in compliance with the goals and objectives of the different UN Conventions. However, the available sources do not directly address Taiwan's compliance with this principle.

16. Effective supervisory system consisting of on-site and off-site supervision.

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The FSC website discloses that prior to the establishment of the FSC in 2004, on-site examinations of banks were conducted by three different agencies: the CBC, the MoF, and the CDIC. Since July 1, 2004, the supervisory authority of the CDIC has shifted from the MoF to the FSC. The CBC, as noted on its website, conducts regular on-site examinations as well as off-site monitoring, which enables it to monitor changes in banks' operating conditions, and to require appropriate corrective actions in a timely manner. The CBC also conducts joint examinations with other supervisory agencies. According to the FSC website, the FEB conducts examinations of financial holding companies and their subsidiaries, including banks, as well as off-site monitoring. During 2006, the FEB carried out 857 on-site examinations, as noted in the FSC's 2006 Annual Report. However, the available sources do not directly address Taiwan's compliance with this principle.

17. Regular contact with bank management and understanding of bank's operations.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

20. Ability to supervise on a consolidated basis.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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As noted in the 2008 U.S. DoC report, "legal accounting systems are largely transparent and consistent with international standards." According to the January 2008 Deloitte IAS Plus update, the Financial Accounting Standards Committee of the Accounting Research and Development Foundation in Taiwan "has made much effort to converge with International Financial Reporting Standards (IFRSs) since 1999." Furthermore, while most of IFRSs have been incorporated into Taiwanese standards, efforts are still needed to fully converge with the IFRSs. However, the available sources do not directly address Taiwan's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

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The CBC, according to its 2006 Annual Report, "closely monitored mismanaged financial institutions and collected the information for the Bank's policy decisions" (p. 90). Moreover, collected information was submitted to the relevant authorities to ensure timely corrective action. The FSC, as noted in its 2006 Annual Report, was preparing a draft amendment to the Banking Act to establish prompt corrective measures. However, the available sources do not directly address Taiwan's compliance with this principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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There is insufficient information publicly available clearly identifying Taiwan's compliance with this principle.

24. International exchange of information with other supervisors.

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As noted in its 2006 Annual Report, "the FSC aims to establish more communication channels with the financial regulators of other countries and bring about the signing of bilateral cooperation agreements, such as Memoranda of Understanding or exchanges of notes" (p. 48). However, the available sources do not directly address Taiwan's compliance with this principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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According to the FSC website, the FEB conducts examinations of local branches of foreign banks. However, the available sources do not directly address Taiwan's compliance with this principle.