Review of Quantitative Finance and Accounting, 20: 81–106, 2003
2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
A Study on Designing a Financial Supervisory
Institution in Taiwan
Department of Finance, National Taiwan University, Taipei, Taiwan
Department of Finance, Tamkang University, Taipei, Taiwan
Department of Business Administration, Kao-Yuan Institute of Technology, Kaohsiung, Taiwan
Abstract. This paper investigates world trends in ﬁnancial supervision, including the separation of treasury and
ﬁnance and the shift from departmental regulation to functional regulation. Based on the trend toward integration
in ﬁnancial supervision and examination, this paper proposes the adoption of a functional approach to ﬁnancial
supervision and the problems that may occur when we restructure the ﬁnancial supervisory framework in Taiwan.
This paper also discusses various ﬁnancial supervisory institution models and weighs their advantages and disad-
vantages. Finally, it advances other issues concerned with the restructuring of the ﬁnancial supervisory system,
including the repositioning of the Central Deposit Insurance Corporation (CDIC), and adjustments in the powers
conferred upon the Central Bank to conduct examinations.
Keywords: functional regulation, ﬁnancial supervisory institution, ﬁnancial affairs foundation
Vincent Hsiao, a former Premier of the Executive Yuan in Taiwan, announced while in ofﬁce
in May 1999 his government’s decision to establish a ﬁnancial supervisory institution, and
in January 2000 pushed for the reform of ﬁnancial supervision in Taiwan. Hopefully, the
resulting reforms will serve to increase both the efﬁciency and the independence of ﬁnancial
supervision in Taiwan and thereby enhance the operation and development of local ﬁnancial
institutions. While Taiwan’s Ministry of Finance (MOF) was working on these important
issues which would have a long-term impact on the ﬁnancial environment, the U.S. Congress
passed the Gramm-Leach-Bliley Act of 1999 on November 5 of that year (Leach, 1995;
FSMA, 1999; and Seidman, 1998). At present, the U.S.A. is entering a new era of ﬁnancial
cross-function operations. As the barriers that have separated the securities, insurance,
and banking sectors are removed, the ﬁnancial supervisory system will consequently need
to be radically overhauled (Kaufman and Kormendi, 1986; Levine, 1997; Saunders and
Walter, 1994; Thichove et al., 1994). Furthermore, these developments are driving the U.S.