Private Banks: Taiwan's Practice and Mainland China's Exploration

Author: Xiong Jizhou
Publisher:
Publish Date: 2003-11-01
Features: In December 2002, funded by the Himalayan Foundation, Fudan University held an academic symposium titled "Lessons from the Development of Private Banks in Taiwan and Their Implications for Mainland China." Now, the outstanding papers presented by the experts and scholars at the symposium have been formally compiled and published. This is a welcome development in academic exchange across the Taiwan Strait, and I extend my congratulations on this occasion. The concept of private banks originated in July 2000 with the establishment of the Great Wall Financial Research Institute. Scholars such as Xu Dianqing and Fan Gang (2001) argued that while China was actively developing the private economy and introducing competitive mechanisms, it had overlooked the development of private financial institutions in the financial market, leaving state-owned banks in a monopoly position to this day. This has resulted in severe competition deficiencies in the financial sector. China should develop a multi-tiered financial system, which not only requires large, national state-owned commercial banks but also cannot be without local small and medium-sized private banks. For a time, calls for the establishment of private banks grew strong, but to this day, academia has not reached a unified consensus on what constitutes a private bank. Broadly speaking, there are three representative viewpoints:
1. The "Private Capital Control Theory," which emphasizes ownership structure, defining a private bank as one controlled by private capital.
2. The "Private Enterprise Service Theory," which emphasizes the asset structure, defining a private bank as one that primarily serves private enterprises.
3. The "Corporate Governance Structure Theory," which emphasizes corporate governance, defining a private bank as one where senior management is appointed by shareholders or the board of directors and operates with market-oriented mechanisms.
In my view, regardless of how a private bank is established, it should be a modern commercial bank with clear property rights, standardized corporate governance, and engaged in banking business. Over the past two decades of reform, we have one successful experience: where competition is more (sufficient) in an industry, its efficiency is higher. In this sense, financial openness to the domestic market is an inevitable trend in reform. The experience of Taiwan (fully) demonstrates that the establishment of private banks can promote competition in the banking sector and improve service efficiency and quality. However, unfortunately, Taiwan also faced the problem of overbanking (overbanking) due to the establishment of too many new banks, which serves as a warning for mainland China. For mainland China, strengthening the credit risk management of small and medium-sized private banks is particularly important. Banks are a very special type of enterprise, and their operational risks can affect the stability of the entire financial system. For the government, it is not only necessary to establish and improve relevant credit laws and regulations but also to strengthen supervision and management of private banks. Innovation always carries risks, but the key is to control these risks to the greatest extent possible through in-depth research and discussion, as well as through laws and policies, and to resolve them promptly. I hope the publication of this book will promote a deeper understanding and appreciation of private banks and contribute, in a small way, to the reform and development of China's banking sector.
Introducing the system of private finance, breaking the monopoly of state-owned banks, and promoting financial development and deepening have become important components of China's financial system reform. Before 1990, Taiwan's banking system shared many similarities with mainland China, with public banks also holding a monopoly position in the banking system. Afterward, with the allowance for the establishment of private banks and the privatization of public banks, Taiwan's banking system underwent rapid institutional change and innovation, including both successful experiences and lessons learned. This book is a collection of papers that focuses on topics such as the "institutional foundations of private bank development, strategic construction and path selection, risk prevention, corporate governance, and lessons from Taiwan's experience." It is suitable for students and faculty in universities and colleges majoring in finance and economics, as well as financial workers.