THE TAIWAN BANKING SECTOR - THE IMPACT OF LIBERALIZATION AND MACRO ECONOMIC FACTORS. AN EMPIRICAL STUDY OF TAIWAN

Abstract

ABSTRACT National culture is a well-researched and significantly impactful factor as nations transition from developing to emerging to fully developed status. Adam Smith set forth the idea that certain “norms” were required for capitalism to grow, and subsequent research has indicated that cultural factors are significant in both bilateral trade and the participation in stock markets. While many factors significantly influence the efficiency of emerging market banking and the internationalization of currency, perhaps none is more important than the financial liberalization of a nations' banking system. This paper investigates the process of liberalization of Taiwan's banking sector since the Asian financial crisis in 1997 and into present day. The steps undertaken by the country are reviewed and what foreign banks may offer in terms of increasing competitiveness amidst the domestic banks, is examined. The effects of liberalization are analyzed by developing a model and tested by an empirical framework using linear regression. Results indicate significant direct effects of liberalization on emerging market banking efficiency, and a significant negative moderation effect of NPAs. Lessons are drawn for other markets currently engaged in efforts of liberalization of their financial services industry. Keywords Liberalization, Emerging Markets, Banking System Efficiency, Capital Adequacy, Non-performing assets