Fed Fines Taiwan Bank, Says It Didn't Disclose Government's Big Stake

A Federal Reserve Board crackdown on a Taiwanese bank has underscored regulators' growing sensitivity to foreign government ownership of banks doing business in this country.

Last week the Fed levied a $22.3 million fine against International Commercial Bank of China, also known as ICBC. In its order, the Fed said that the bank had failed to disclose that the Taiwanese government held a 43% stake in ICBC when it acquired Chinese American Bank, a New York State- licensed retail bank.

The Fed ordered ICBC to sell off Chinese American within 300 days, but took no action against either Chinese American or ICBC's corporate banking operations in the U.S.

The Fed action comes amid a surge of fresh investment in the United States by Taiwanese banks. The island nation's fourth-largest bank, First Commercial Bank, expects next month to launch a community bank in Alhambra, Calif. And Bank Sinopac, with $5 billion in assets, is awaiting Fed approval of its planned purchase of Far East National Bank, Los Angeles.

Bank observers said they weren't surprised by the Fed's action against ICBC.

'There are long-standing problems with transparency in Taiwan, where the ruling Kuomintang Party has substantial holdings," remarked Gary Kleiman, an international banking consultant.

"It can be very difficult to draw the line between the public and private sector, not only in Taiwan but in other Asian countries as well."

Yet sources in the Chinese-American banking community appeared baffled by the Fed's decision, saying it was common knowledge for more than a decade that the Taiwanese government had close links to both ICBC and Chinese American Bank.

They added that both ICBC and the Taiwanese government had placed large deposits in Chinese American over the years, and that the Fed had known of the indirect stake several years ago.

"ICBC has always been viewed as a quasi-government bank," said one Chinese-American banker, who asked not to be named. "It's rather draconian, but it looks like the Fed doesn't want to be embarrassed again after BCCI and Daiwa."

Indeed, the Fed has reason to be concerned about issues of ownership and disclosure. Luxembourg-based Bank of Credit and Commerce International, better known as BCCI, secretly acquired ownership of First American Bank in the 1980s before going under. And Japan's Daiwa Bank Ltd. ran up over $1 billion in losses that were concealed from U.S. regulators.

Sources close to Chinese American Bank said Taiwanese investors are already being put together to take over the $300 million-asset bank.

Harry J. Tang, senior vice president and general manager at ICBC's Los Angeles branch, declined to comment on the ruling but noted that ICBC's credit ratings have remained unaffected. He added that the fine will have only minimal impact on first quarter earnings.

"This will not affect ICBC's operations," Mr. Tang said.

A Federal Reserve Bank spokesman in New York declined to comment on the order, which was issued last Thursday.

International Commercial Bank of China, formerly known as Bank of China, set up a New York branch in 1930 but as a result of Taiwanese restrictions did not get around to opening a Los Angeles branch until 1989. Since then the bank has focused heavily on trade-related operations.

As of midyear 1995, ICBC was the most active foreign bank in the United States in trade finance, with more than $1.3 billion in commercial letters of credit outstanding.

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