The Role of the Financial Early-warning System

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The Role of the Financial Early-warning System

• Dr. Professsr Wei-Yi Lin

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Abstract

• Ever since financial liberalization became a
  popular world trend in the 1980s
• the global financial markets becoming
  increasingly integrated and efficient
• financial technology being upgraded and new
  financial products on financial supervision
• financial institutions need to consolidate their
  risk management
• add emphasis on financial discipline and
  financial supervision

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Abstract

• the impact of financial liberalization and
  globalization has greatly increased the
  operational risk borne by financial institutions
• I would now like to discuss with you all the
  following four topics

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The Importance of Establishing a Financial
Early-warning System

• The supervisory authorities need to strengthen
  financial supervision in the following aspects
• (1) Placing added emphasis on financial
  discipline(Table2).
• (2) Maintaining financial stability(Table3).
• (3) Safeguarding the rights and interests of
  depositors.
• (4) Handling the problem financial institutions
  promptly.

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Table 2 Financial Risk Management Model- for
good corporate governance
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Table 3
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The Importance of Establishing a Financial
Early-warning System

• Practices of Early-Warning system in the U.S.
  system set up bank appraisal system financial
  institutions were evaluated on Capital adequacy,
  Asset quality, Management, Earnings , Liquidity
  and Sensitivity to market risks CAMELS.
• FDICs Risk-Related Premium System (RRPS)

Supervisory Subgroup Supervisory Subgroup Supervisory Subgroup
Capital Group A B C
1.Well Capitalized 23 26 29
2. Adequately Capitalized 26 29 30
3. Undercapitalized 29 30 31
Rates are in cents per 100 of insured
deposits.
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The Current Operating Conditions of the Financial
Early-warning System in Taiwan

• The Examination Data Rating System referred to
  the Federal Financial Institutions Examinations
  Council of the U.S., that is , the so called
  CAMELS rating system.
• CDICs Risk-Based Premium System (RBPS)

Examination Data Rating Score Examination Data Rating Score Examination Data Rating Score
Capital Adequacy A B C
1.Well Capitalized 5.0 5.0 5.5
2. Adequately Capitalized 5.0 5.5 6.0
3. Undercapitalized 5.5 6.0 6.0
Rates are in cents per 100 of insured
deposits.
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The Contribution of the Taiwans Financial
Early-warning System

• Effectively Utilizing Financial Supervisory
  Resources and Strengthening the Handling of
  Problem Financial Institutions
• To Immediately Implement Effective Response
  Policies
• Determining the Risk-base Assessment Rate
  Criteria for each Financial Institution.

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The Operational Performance of Deposit-taking
Financial Institutions in Taiwan
Pastdue Loans Ratio
Unit, multiples
Banks in General Credit Cooperative Associations Credit Dep. of Farms and Fishermens Associations
1996 3.74 6.13 8.5
1997 3.71 6.19 10.8
1998 4.14 7.55 13.2
1999 4.96 10.54 16.18
2000 5.47 12.45 17.9
2001 7.48 11.66 19.3
2002 6.12 10.34 18.62
2003 4.33 6.91 17.57
2004 2.78 3.17 14.46
2005 2.24 2.09 10.92
2006 2.13 1.55 8.13
2007 1.84 1.29 6.25
2008 1.54 1.24 5.16
Category Of Institution
Year-end
Note set up RTC fund to resolve of financial
institutions operational crises in the 2001.7
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Conclusion and Recommendations

• The government in regard to the financial
  early-warning system and both financial
  supervision and the deposit insurance mechanism
  will in the future need to give careful
  consideration to the following
• 1.The financial early-warning system will need to
  expand and to integrate relating to banking,
  insurance, securities business and futures
  trading on the financial services groups to
  effectively unify the work of financial
  supervision.

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Conclusion and Recommendations

• 2.Financial early-warning system in order to be
  able to detect abnormal capital ratios and
  quickly take corrective measures.
• 3.A basis for implementing the deposit insurance
  risk-based premium system, in order to reflect
  the operational risk of financial institutions
  and avoid moral hazard.
• 4.To avoid the occurrence of delays in handling
  problem financial institutions.

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The end