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Taiwan: When merger isn’t consolidation

Taiwan’s grandiose plan to create a big national financial holding company by the end of 2007 has left analysts on the island cold.

The government-launched plan, which would merge three state-run lenders – Bank of Taiwan, Land Bank of Taiwan, and Export-Import Bank – would create a financial institution with an 18% share of the country’s banking market, assets of $160 billion and a combined market capitalization of more than $3 billion.

But so what? As critics point out, that would just create a much larger institution, with the same inefficiencies in place, and lacking any sort of impetus to reduce staffing levels.

What the country needs to do, as anyone outside Taiwan’s powerful unions recognizes, is to create a small clutch of powerful, privately run lenders capable of extending their reach beyond the tiny, overbanked island.

That hasn’t happened, and is unlikely to happen. Over the past several years, a few, relatively minor mergers have taken place. Yuanta Core Pacific Securities this year absorbed Fuhwa Financial Holdings, creating Yuanta Financial Holding – a substantial power in Taiwan’s equity capital markets, but with little clout in the banking sector. Some foreign banks have also joined the fray. Standard Chartered bought Hsinchu Bank for $1.2 billion in September 2006, and in April 2007 Citi announced that it would pay $426 million to buy Bank of Overseas Chinese, a lender with many years of restructuring ahead of it.

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