Cablegate: Taiwan Legislature Meddles with Interest Rates

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 TAIPEI 004873

SIPDIS

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP

USTR FOR WINTER AND WINELAND

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/LMOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan Legislature meddles with interest rates

SUMMARY
-------

1. On December 6 Taiwan's Legislative Yuan (LY) reached
agreement to set a 10% cap on credit and cash card spreads,
and increase monthly minimum payments to 20% of the balance
from the current 3%. According to the agreement, the
proposed cap was to have a "second" reading December 9
(without ever having had a first reading). In response to
the agreement, average stock prices of banking issues
dropped sharply on December 8 as banks complained the
measure would force them to stop issuing cards and ratings
firms indicated it could lead to a downgrading of Taiwan's
financial ratings. In a rare triumph of reason over
politics, the bill has been shelved for now. End summary.

Efforts to Halt Legislation
---------------------------

2. Opposition KMT and PFP legislators began promoting the
interest cap legislation prior to the December 3 local
elections as a way to reduce interest burdens on credit and
cash cardholders. Rising consumer debt has become a topic
of media interest. The December 6 agreement to schedule the
bill for a "second" reading (of three required readings)
took the financial community by surprise. In the days
before the scheduled "second" reading on December 9, bankers
and foreign investors voiced loud opposition to the bill.
As a result, ruling DPP Policy Committee Chairman Ke Chien-
min asked LY President Wang Jing-pyng to postpone further
consideration of the bill. Banking Bureau Chief Secretary
Nancy Yang told AIT that the Financial Supervisory
Commission was also lobbying to stop the legislation.

Immediate Impact
----------------

3. The draft legislation would require banks to reduce
credit and cash card interest rates from the current 20% to
12% (which banks claim is insufficient to cover card
issuance costs.) Passage of the bill would erode
profitability of credit and cash card issuing banks. The
December 6 agreement drove the stock price index of the
banking sector down 4.4% from 917.66 points on December 6
and to 876.91 points on December 8. The capitalization of
listed banks and financial holding companies shrank
NT$117.57 billion (US$3.5 billion) to NT$2,518.9 billion
(US$75.2 billion). Three large financial holdings
corporations (China Trust, Taishin, and Cathay) experienced
plunges of 10-12% in stock prices.

Even Worse Long-Term Consequences
---------------------------------

4. According a CLSA assessment (CLSA is the Asian investment
banking arm of Crdit Agricole, the world's fifth largest
bank), passage of the bill could prompt banks to stop all
new card lending since the spreads would not cover the risk.
As old balances were paid off, customers would not get new
credit, causing a contraction of cash and credit card
lending. Without other non-card lending products to fill
the gap, a significant contraction of overall consumer
credit would result. This would have a negative effect on
consumer spending and Taiwan's domestic economy. The bill
would also increase the monthly minimum payment to 20% of
the balance from the current 3%, which would force many
credit and cash cardholders to default on payments. Taishin
Bank President Tsai Men-feng warned that passage of the bill
would force people to go to underground banks which charge
interest rates of over 40%, and which are associated with
criminal elements.

PAAL

© Scoop Media