In cases where shares are used as collateral, a strict regulatory framework is in place that relates to the holding by banks of shares in enterprises. For instance, Article 74 of our Banking Law stipulates that commercial banks may not invest in enterprises. For these reasons, Taiwan banks do not have a large number of shares in their portfolios. Real interest rates are declining. If the interest rates on the one-year time deposits of Taiwan ' s five major clearing banks less the annual rate of increase in the consumer price index are taken as the level of the real interest rate, it is clear that interest rates have declined in each year since 1990.
Banks are well capitalized and their ability to handle risk is still high.
Furthermore, the government has recently taken steps to revise the Income Tax Law . It has also broadened the scope for the writing off of bad debts and has speeded up the process for doing so in order to strengthen the ability of banks to respond to problem loans. The government intends to strengthen and simplify the legal process with regard to what exactly constitutes a bad debt. Banks will in future be able to determine themselves when a debt is deemed to be bad. Finally, although the average return on assets of Taiwan banks has declined, these banks continue to maintain high capital adequacy ratios.