Newsletter
BANKS UNDER FHC WILL BE ALLOWED TO MAKE LONG-TERM INVESTMENTS
An official of the Financial Supervisory Com-mission (FSC) recently stated that the FSC in-tends to put forward amendments to the Finan-cial Holding Company Act (FHCA) to restore the ability of banks that are subsidiaries of fi-nancial holding companies to make long-term investments. This will allow financial holding companies with banking subsidiaries greater flexibility in their application of funds, and en-hance their ability to conduct mergers and ac-quisitions.
Under Article 74 of the Banking Act, banks are permitted to apply to the competent authority to invest their funds in financial-services-related enterprises, including banks, bills finance enter-prises, securities enterprises, credit card enter-prises, financial leasing enterprises, insurance enterprises, trust enterprises, and other finan-cial-services-related enterprises designated by the competent authority; provided, that the amount of such investments may not exceed 40% of the bank's paid-in capital (less any accumu-lated losses). In coordination with a government economic development program, and with the prior approval of the competent authority, a bank may also invest in enterprises not related to fi-nancial services; but such investments may not exceed 10% of the bank's paid-in capital (less accumulated losses), and a bank's investment in any individual non-financial-services enterprise may not exceed 5% of that enterprise's issued shares.
However, Article 36 of the FHCA, which took effect three years ago, provides that after a bank is converted into a financial holding company, "bank investments shall be made by the financial holding company." That is to say, following the enactment of the FHCA, although a bank owned by a financial holding company may still invest in securities on the basis of financial investments in accordance with Article 74-1 of the Banking Act, investments involving mergers, acquisitions and long-term investments must be made by the parent financial holding company. Thus a bank owned by a financial holding company is barred from making long-term reinvestments, whereas an insurance company or securities company owned by a financial holding company is subject to no such restriction. As a result, financial holding companies whose core subsidiaries are banks are at a disadvantage compared to other financial holding companies, and this unfair situation has led to much controversy.
After the above provision of the FHCA is amended, investments by banks, insurance companies, and securities companies that are subsidiaries of financial holding companies will each be governed by the legislation relevant to their individual sectors, and will no longer be subject to different rules under the FHCA.