The political intervention in financial institutions after democratic transitions induces the prevalence of privileged loans and damages banking regulations. This is an important cause of the local financial crises between 1998 and 1999. The process of financial restructuring is also subject to political interference. The packages include liquidating financial institutions, privatizing public banks, and strengthening financial regulations and corporate governance. The experience of financial restructuring demonstrates that the resolution and capacity of governments to implement reforms are constrained by several political conditions. First, the cooperation of parties, local factions, and inward-oriented conglomerates in campaign contributions, mobilizations, and policy favors render the incumbents unable to enforce financial regulations and implement reforms. Local factions and inward- oriented conglomerates even participate in the decision-making of the KMT governments, rendering financial regulations and financial restructuring even more difficult. Local factions stop to dominate government decision-making after year 2000. Since DPP was a minority government, oppositions that back local factions were able to block reform proposals. It is until rising non- performing loan ratio and bank losses force governments to liquidate bad loans and bad banks. On the other hand, the local financial crises and financial restructuring also affect political players. Many financial institutions has gone bankrupt, rendering politicians relying on these institutions unable to survive. The slow progress of financial restructuring postpones the improvement of banking regulations and also damages the competitiveness of financial institutions. After several years of financial restructuring, the nonperforming loan ratio has reduced and the privileged loans are also curbed. The merging of banks, resulting in a few dominant banks, however, creates new regulatory problems.
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