Taoyuan Nights

While perusing the Taipei Times yesterday, I noticed that the Taiwanese government has announced they wish to push the Taiwan banking sector into a wave of consolidation. Consolidation just means “companies buying each other out” or “merging together to form bigger companies”. The aim is to produce some Taiwanese heavyweight banks - banks that are presumably more able to compete in global capital markets and have more ability to arrange finance for large business deals. At present, very large businesses looking to borrow money might prefer to look outside of Taiwan - that is, towards banks such as HSBC or Citigroup - for funding.

Further, given the wobblyness of the average Taiwanese small bank, adding some biggies to the banking scene might be seen as a very good way of bringing a bit more stability to the Taiwanese banking system.

However, for the ordinary person, this whole kerfuffle might not seem like a terribly big deal. Woohoo, banks merging. So what? In fact though, there could be some interesting consequences, depending on how things play out.

1. Share prices up? Assume the government is actively trying to create a favourable environment for companies to be bought (in their entirety) from the stockmarket, by other larger companies. This means that companies should want to buy the shares from existing shareholders. Increased demand, same supply: therefore share prices of small Taiwanese banks should go up. This is a short-term consequence. It is probably already priced into the market to some degree, but retail punters do seem to love piling into this kind of fun and mayhem.
2. Less price competition. Fewer banks = less competition = less favourable terms on loans/savings for people like you and me. This is a longer term consequence.
3. Debt kept cheap? A favourable environment for acquisitions might imply the government intends to ‘keep debt cheap’ to allow companies to easily borrow, for the purpose of buying other companies. In my view, this would suck for Taiwan. It could prolong and worsen the already-far-beyond-stupid housing bubble, as well as increase the tendency for people to drop borrowed money into expensive Japanese cars and crappy copycat hotpot businesses. This has both long and short-term consequences for Taiwan - if it happens.

   Yet for the typical man in the street, all of this pales into comparison when considering point 4 - the potential for chaos.

4. Chaos, disaster and loss of money. The government is targetting a situation of at least 3 banks having a market share of greater than 10%. Now, that could happen by consolidation. Or it could also happen via the government allowing the bigger banks to run promotions/saving schemes/lending schemes designed to push smaller banks completely out of business.

   Consider what would happen if your town mayor decided there should be 3 big restaurants in town. He might encourage McDonalds to buy out your little restaurant - or he might just turn a blind eye to McDonalds doing a 1-month ‘free burger’ promotion designed purely to drive your own small restaurant completely out of business.

   Either way, it doesn’t bode well for the customers of smaller banks in Taiwan. If a small bank is bought out, there can be confusion and disarray as it is merged into the larger corporate structure of the acquiring bank. If a small bank goes out of business through tough competition, you have even more chaos and the possibility of huge personal financial loss.
   

Conclusion and what it means for you.

Given the alarming number of smaller banks that went out of business in Taiwan already this year, I personally would not consider leaving my savings with a smaller Taiwanese bank. I know this might seem very unfair on the smaller banks, many of whom have a tough time competing as it is, but to put it simply, life is a bitch sometimes.

Equally, I would be unkeen to save with one of the medium-sized contenders that are likely to go on a debt-fueled acquisition binge. Over-borrowing is a very effective way for any medium-to-large company to commit suicide.

Instead, consider saving with a bank that is ‘big enough’ not to need acquisitions, and that has shown a history of being a survivor and going it alone. Particularly, one that has mechanisms to protect your assets in the event of lots of banks going under. Frankly, I would not be caring about 0.05% of a savings rate difference at this stage.

I suspect we will see small banks hurry to improve their capital ratios (the amount of cash they have lying around for a rainy day) so that they look ‘nice and safe’ to discourage customers from leaving; to increase the chance of surviving a rush for the doors by savings customers if a few smaller banks fold; and finally to make themselves more appealing as the target for an acquisition.

I wonder if they will try to find a way to sidestep price wars with larger banks, perhaps by offering ‘unusual’ services - 24 hour banking service? Unusual saving/lending facilities? Who knows. Regardless of the details of what eventually happens, I find myself left with the feeling that many of the smaller banks of Taiwan are about to get their bollocks soundly kicked - and that perhaps the TW government may achieve its goal of a big-bank-dominated finance sector through the simple tactic of making a self-fulfilling prophecy.