Central Bank Surrenders Its Independence
The Storm Media Editorial, September 3, 2024
The Central Bank's succumbing to politicians has led to the sacrifice of its independence. Perhaps future generations will mark September 2 as the "anniversary of the death of the Central Bank's Independence." Under the behind-the-scenes guidance of President Lai Ching-te and Premier Cho Jung-tai, and with the vegetative Governor Yang Chin-long, the Central Bank fully accepted the intervention and directives of politicians regarding the Central Bank and its financial management. This has resulted in a complete collapse of the professionalism and independence of the financial supervision of the Central Bank.
Due to factors such as an overheated housing market and the near-maximum level of mortgage loans, the Central Bank recently held several coffee meetings with commercial banks, requesting control over mortgage applications, which the public referred to as the "loan restriction order." Subsequently, Premier Cho publicly declared that "the government will not issue a loan restriction order" and hinted that a meeting with the central bank would be held soon to strike out a decision to reassure the public. Last Friday, Premier Cho reiterated, in a meeting with the heads of publicly owned banks, that there was no loan restriction order, urging the banks to take more consideration of the rights and needs of the people.
Premier Cho repeatedly intervened in the Central Bank's financial supervision and management, and demanded the Bank publicly clarify that there would be no restrictions on housing loans, giving the Bank with immense pressure. Last Friday, the Executive Yuan even issued a "five-point statement" to clarify the government's position. Finally, in a broadcasted interview on Sunday, President Lai stated that there was no loan restriction order from the Central Bank and that the financial institutions had overreacted. He also mentioned that he had instructed the Central Bank to ensure that loans for first-time homebuyers and those with existing contracts should be processed. This was the "final straw" that broke the Central Bank's independence.
This Monday, as expected, the Central Bank urgently convened a meeting with general managers of the eight major public-owned banks and more than 10 private banks. Governor Yang chaired the meeting and directed that the need of loan for first-time homebuyers must be met and that any completed loan guarantee cases must continue to be processed. He also stressed that customer complaints and disputes must be handled with gentle persuasion.
Governor Yang's unquestioning obedience to the directives and demands from his superiors demonstrates that he is a highly compliant subordinate. However, as the institute of financial management and supervision, the Central Bank's disregard for professional standards and abandonment of its independence sets as a detonator for future financial crises. To say the Central Bank has bowed to political pressure is an understatement; more seriously, it could be considered "dereliction of duty" or even "breach of trust."
First, the Executive Yuan emphasized that the needs of first-time homebuyers must be met. This is utterly driven by political considerations, totally contradicting the professionalism of financial management and the basic principles of financial operations. No matter for individual or corporate loan applications, banks always evaluate the borrower's repayment capability as the primary factor, despite differences in credit standards and loan conditions. After receiving the directive to "ensure the needs of first-time homebuyers are met," are banks now expected to revise their credit standards and loan conditions? Should they be forced to approve loans even for first-time buyers with questionable repayment abilities?
One reason that the Central Bank introduced the loan restriction policy was that real estate financing had already reached historical highs, nearing full capacity. If the government's directives lead to a continuous increase in loan applications, should the government raise the allowable proportion of real estate loans? In the long run, politically driven mortgages carry higher risks than "normal loans," and tend to turn into bad debts. The U.S. savings and loan crisis in the 1980s and the 2007 subprime mortgage crisis serve as stark reminders. Politicians only harvest political gains without regard for financial risks. A potential financial crisis bound to surface after the 5-year grace period of the loans.
President Lai and Premier Cho set a terrible precedent as they disregard the independence and intervene financial management of the Central Bank. Premier Cho's direct instructions to the publicly owned banks, bypassing the central bank, make the situation even worse. As a result, the Central Bank, commissioned with financial management, is left in an untenable position, while the heads of the Public-owned banks are equally embarrassed and confused. Who exactly should they listen to?
Among more than 10 presidents and premiers in the last 36 years since the era of President Lee Teng-hui, have President Lai and Premier felt "proud" of their interference in the Central Bank's independence? Governor Yang's compliance to the politicians' intervention essentially burying the central bank's independence.
Upon further analysis, this is a quintessential example of prioritizing vote manipulation and pork-barrel politics over professional financial management. The issue originates from last year's presidential campaign, when candidate Lai introduced an upgraded version of the "Preferential Housing Loans for the Youth" to attract young voters, offering even more propitious terms than before. This hastily crafted policy, driven purely by electoral considerations and lacking professional evaluation, immediately generated multiple negative effects upon implementation. It led to an overheated housing market, property price surging, increased speculative investment, and issues such as dummy accounts.
Under the attractive conditions of the "five-year grace periods, interest subsidies, and 40-year mortgages," young first-time homebuyers are likely to misjudge their repayment capabilities. Once the grace period and subsidies expire, the issue of defaults arises-a reminiscent of the U.S. subprime mortgage crisis. While the Central Bank attempted to mitigate this risk through the "loan restriction order", the subsequent political interference only tramples on the Central Bank's independence in financial management and exacerbates the problem. Sadly, it is not a surprise for more interference from the Lai administration which could lead Taiwan into a similar financial crisis by this time next year.