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Lee, "Carrots or sticks: The Taiwanese government's contrasting policy approaches to banking sector liberalization," 2004

USC Dissertation in Finance and Politics.
August 24, 2009

Leemen Lee, Ph.D.

Abstract (Summary)
This study analyzes banking sector liberalization in Taiwan from the late 1980s to 2002. It demonstrates that liberalization creates opportunities for politically powerful players to negotiate and seek financial sector rents. This study develops a simple game theory model to capture the rent-seeking dynamics in banking sector liberalization and to explain why liberalization is prone to debt accumulation and systemic crisis.

The contrasting results between reform achievements and drawbacks demonstrated the importance for the Taiwanese government of creating positive incentives and adopting a "carrot-and-stick" strategy for reforms. One important conclusion that emerged from this study is that the timing, sequencing, and measures of the major regulatory reforms in the banking system were to some extent attributable to major changes in the political system.

This study pointed out that the establishment of financial holding companies and the decentralized asset management company mechanisms resulted in widened gaps in profitability, capital adequacy, and asset quality between the group of banks affiliated with financial holding companies and the group of basic financial institutions and banks without such affiliations. The Taiwanese government needs to effectively cope with the dichotomizing trend in the banking sector.

Advisor: Cheng, Harrison