The Impacts of Financial Reforms on Competition and Consumer Welfare in the Taiwan Banking Industry

Abstract

This paper analyzes the effects of the two waves of financial reforms implemented between 2002 and 2008 in the Taiwan banking industry. The first financial reform aimed to raise capital adequacy ratio and reduced non-performing loans. The second financial reform encouraged banks to merge. We investigate the impacts of the reforms on market competition and consumers’ welfare. Using a structural model for saving and borrowing demand in a differentiated market, we find that a bank’s capital adequacy rate has a positive impact on the utility of both savers and borrowers. Contrarily, the ratio of non-performing loans has no significant effect. During these reforms, market competition tended to decline while consumers’ welfare also dropped for both savers and borrowers. Nonetheless, when we use counterfactual experiments to isolate the direct effect of reform policies from other factors, we find the first reform actually had little effect on market competition while raised both savers’ and borrowers’ welfare. On the other hand, the second reform reduced market competition, increased savers’ welfare, but decrease borrowers’ welfare.