Financial Resources and Funding Accommodation
The Fund's resources include government financial business tax revenue and deposit insurance premium income received from the financial sector. The former one includes financial business tax revenue covering the years 2002-2005. The latter one comprises the CDIC's incremental insurance premium income covering a ten-year period from January 2002 onwards that arises as a result of the increase in the insurance assessment rate which took effect on January 1, 2000. In the event that the revenues from the above financial sources are not realized, CDIC may apply to the Central Bank of China for accommodation, borrow from other financial institutions, or else issue bank debentures, in order to meet the needs of the Fund's operations, and shall repay any such amounts from the above financial resources.
Applicable Financial Institutions
- The financial institution's adjusted net worth is negative.
- The financial institution is unable to pay its debts
- The financial institution's financial situation is deteriorating, and the competent authority maintains that it cannot continue to operate.
Since of all the financial institutions at present it is the community financial institutions that, because of structurally-derived problems, are in a relatively serious situation, the Fund stipulates that priority shall be given to the handling of community financial institutions.
Handling Problem Financial Institutions
In order to both swiftly and effectively resolve the problem financial institutions, and avoid a crisis of confidence among depositors and a chain risk reaction, the Financial Restructuring Fund Statute has removed the restrictions in the Deposit Insurance Act that state that the cost of handling problem financial institutions shall be less than the loss arising from the cash pay-offs. The Statute also stipulates that the Fund shall provides a transitional blanket guarantee to all depositors and other creditors of the problem financial institutions handled by the Fund. As to the way in which the financial institutions are handled, this will be in line with relevant regulations at the present time such as the Banking Law, the Financial Institutions' Merger Law and the Deposit Insurance Act, including:
- Settling the liabilities and taking over the assets, and selling such assets by tender.
- The difference by which the liabilities to be settled exceed the assets.
- Becoming a shareholder in the financial institutions by means of preferred shares.
Custody of the Fund
The Fund's funds, apart from being used to handle problem financial institutions with unsound operations, shall be deposited in the form of cash in creditworthy financial institutions, used to purchase government bonds, bank debentures, and negotiable certificates of deposit issued by banks, or else maintained by other means in accordance with regulations prescribed by the competent authority.
The Handling of Acquired Assets
Pursuant to the Financial Restructuring Fund Statute, the Restructuring Fund shall entrust the CDIC with the full amount required to settle the deposit-related and non-deposit-related claims on problem financial institutions with unsound operations. The Restructuring Fund shall, in its own name, take over the assets of the aforementioned financial institutions, and shall dispose of them by offering them for sale by tender, auction or other method. Any proceeds from the disposal shall be included in the Restructuring Fund.
Accounting Treatment
When handling accounting and auditing matters, the Fund shall conform to generally accepted accounting principles and auditing standards, and shall establish an accounting system which conforms to such principles and standards.
The Fund's Period of Operation and its Termination
The Fund shall be operative for a period of three years from the date on which the Financial Restructuring Fund Statute is promulgated. However, the period may be extended for a further year with the approval of the Legislative Yuan. After the Fund is no longer operational, its assets and liabilities shall be taken over by the National Treasury. However, if the assets which have been taken over by the Fund still have not been fully disposed of by the set time, the National Treasury may value them as property, and reinvest such assets in CDIC, in order to handle them more efficiently and increase CDIC's capital.
Penalties for Losses Incurred by the Fund
In order to guard against the making of illegal profits by the responsible officials or employees of institutions participating in deposit insurance, leading to the occurrence of moral hazard, the Financial Restructuring Fund Statute stipulates that any person who with intent illegally benefits from the Fund whether for himself or a third party, or damages property or other benefits of institutions participating in deposit insurance, or CDIC or the Restructuring Fund, such person shall receive a sentence of between three and ten years, together with a fine of up to NT$100 million. In addition, in order to prevent the insured institution's responsible official or two or more employees from collaborating together in committing the above-mentioned crimes, the Statute stipulates that the aforesaid penalties shall be increased by half, and that the violators shall jointly or severally be required to pay compensation, in order to serve as an effective threat. CDIC shall also, in its own name, file civil proceedings against the person(s) who should pay compensation on behalf of the institution participating in deposit insurance or the Fund, to thereby put a stop to moral hazard.