Cleaning up non-performing loans (NPLs) has been a key goal of the nation's financial reforms. The NPL problem can be seen as a warning sign, alerting officials to the potential of a financial crisis. It's also an indicator of the long-term malaise affecting the nation's finance sector.

To reduce non-performing loans, the Ministry of Finance is planning to increase the size of Financial Restructuring Fund (金融重建基金) from NT$140 billion to NT$600 billion.

But some say it's not enough. Taiwan Ratings estimates that the government will need at least NT$950 billion to mop up the nation's bad loans. That raises questions as to what should be the appropriate size of the restructuring fund, and whether the problem can be solved simply by adding more cash to the pot.

The restructuring fund was established to clean up the bad loans of poorly run financial institutions. It gets its money through taxes. After writing off the losses of a sickly institution, the finance ministry and the Central Deposit Insurance Corp appoint a healthy state-owned bank to take it over.

Since the Financial Restructuring Fund Management Act was passed in June last year, the ministry has launched two large-scale takeovers of ailing financial institutions -- showing the government's determination to reform the banking industry.

But a look at overall NPL ratios shows that the government's actions have had little effect so far.

Most critics, when explaining the restructuring fund's poor performance, argue that its size is too small to handle all of the nation's bad loans.

The fund's initial size -- NT$140 billion -- accounts for less than 2 percent of GDP. This indeed is very low, given that the cost of handling NPLs in other countries is at least 10 percent of GDP.

But doubts about the inadequacy of the fund should have been raised as it was being planned, instead of blaming its shortcomings on the lack of funds a year after it began operations.

With money, everything is easy, it's easy to think. But if the government puts up the money to write off all of the nation's estimated NT$2 trillion in bad loans, would that be socially just or fix long-term problems and irregularities in Taiwan's finance sector?

Sacrificing future tax revenue from the financial sector in the hope of writing off bad loans will no doubt lead to a pointless reduction of the tax base, further distort the existing tax structure and put a strain on a government that is already strapped for cash.

On top of this, financial restructuring plans remain flawed, making reforms at grass-roots financial institutions fraught with moral risks which cannot be avoided by simply adding money to the restructuring fund.

The widespread misconception that banks cannot go bankrupt (and the belief that if they do, the government will take responsibility anyway), combined with flaws in the monitoring of banks, has led to a lack of crisis-awareness among bank managers as well as a lack of incentives for them to improve their business structures.

And while patching up existing holes, the government has been unable to prevent other crises from occurring. So the holes proliferate, turning financial reconstruction into a bottomless pit.

The Financial Restructuring Fund certainly should have the ammunition it needs, but it must also make the best use of every dollar it's given.

The authorities need to change their attitude of biding their time and waiting for change. Unrealistic expectations cannot achieve existing policy goals. In fact, they may needlessly lengthen the time it takes to clean up the problem and increase the cost of financial restructuring.

Information on grass-roots financial institutions should quickly be made public. An all-round takeover mechanism must be clearly defined; errant bank managers must be held accountable under the law; criminal penalties for violations should be raised. Only then can we lower moral risk and achieve substantive results through financial reform.

Concerns about a financial crisis are far from alarmist. It is only a matter of differences in how one understands the seriousness of the problem. The threat of a potential financial crisis cannot be removed until the chronic problems of the grass-roots financial institutions are resolved.

While everyone is arguing over how much money is needed for the Financial Restructuring Fund, all the more attention should be paid to the comprehensiveness and substantiveness of measures for grass-roots financial institutions. Otherwise, a great deal of the reform effort will be wasted.

（本評論代表作者個人之意見）

（本評論刊登於91.8.3Taipei Times）