By Betty Hou, Aileen Chuang and Janice Huang Edward Lin spent the past month reaching out to 10 Taiwanese banks for a first-home mortgage. The 32-year-old came away empty-handed.

Some banks told him they had scant mortgage capacity left and offered steep rates, others required him to become a wealth management client first. Out of options, he turned to a rural agricultural credit union in Miaoli, in western Taiwan, to avoid defaulting on his purchase contract.

“I’ve literally been scrambling everywhere just trying to sort this out,” said Lin, an office worker in the island’s technology hub Hsinchu. Lin’s ordeal illustrates how an unprecedented AI investment surge is squeezing Taiwan’s banking system.

Supply chain partners of firms including Taiwan Semiconductor Manufacturing Co. are snapping up loans at a record pace, with loans for working capital growing almost eight times faster than mortgages. The liquidity pressure mirrors a global debt binge with borrowing surging to fund data centers and pushing banks to their limits.

In response, Taiwanese banks are now rationing credit, raising rates and squeezing lending to non-tech firms, creating a liquidity crunch that is rippling across the broader Asian loan market. Retail depositors are draining their savings or taking out personal loans to make leveraged bets on tech stocks, adding to the pressure.

“The era of cheap money in Taiwan is over,” said Woods Chen, chief economist at Yuanta Securities Investment Consulting. “AI is unleashing borrowing demand on an unprecedented scale.”Taiwan’s banks made a record NT$1.04 trillion in loans in July, bringing the total in the first seven months of the year to NT$4 trillion ($126 billion)according to the Financial Supervisory Commission. Both corporate and consumer loans posted all-time high increases in July.

As borrowing demand surges, local banks are steering funds toward deals offering higher returns or promising growth prospects, according to bankers familiar with the matter, who asked not to be identified discussing private information. Since June, a key gauge shows the fastest deterioration in market liquidity in about four years.

Corporate loan rates have jumped 0.90 percentage point, while mortgage rates have climbed to almost 3%, from as low as 2.2% last year. Consumers and small firms are having a harder time getting crucial loans just as Taiwan is cementing its status as a growing wealth center for global lenders such as UBS Group AG and HSBC Holdings Plc.

Among the island’s newest standout billionaires is Lin Tsung-chi, founder of a firm that started out making furniture in the 1980s and now manufactures server rails for data centers. Like many firms in the AI ecosystem, Taiwanese suppliers are burning through cash upfront to meet booming orders from Nvidia Corp. and Microsoft Corp. Companies need fast capital to secure components, build inventory and expand capacity, driving wave after wave of loans, bonds and equity-linked financing at home and abroad.

A growing number of tech clients are pressing for loan approvals within two months, compared with the typical process that takes up to three months, the bankers said. Taiwan’s tech sector generally presents brighter prospects than traditional exporters, many of which are still recovering from past US tariffs, or property developers hit by the central bank’s campaign to cool housing prices, they said.

The consequences are being seen across the economy, with lenders boosting deposit rates to attract savings and maintain adequate cash levels, while raising borrowing costs broadly to protect margins. Corporate borrowers are paying 50 to 90 basis points more than just a few months ago, according to the bankers.

Even top-rated clients face 10- to 20-basis-point hikes on syndicated loans, one of them said. The banking sector’s average liquidity coverage ratio — a metric of its ability to withstand short-term cash outflows — stood at 115.52% in July, above the 100% regulatory minimum, according to the FSC.

The loan-to-deposit ratio, meanwhile, has climbed to 72.96%, approaching its previous high of 73.07% set in 2020. Smaller businesses shut out of the AI boom are finding the doors to bank credit also closing.

At one regional bank, land-acquisition and construction loan approvals have gone from as many as 30 a week to zero in some weeks, according to one banker. The lender has effectively told some property developers not to bother applying at all for the time being. Taiwan’s central bank is aware of the rising problems.

Most recently policymakers kept their benchmark rate unchanged and partially eased some housing-market controls. Governor Yang Chin-long called for “persuasion and coordination” among regulators, state-backed lenders as well as Chunghwa Post Co., the island’s largest deposit-taking institution, to help small and medium-sized businesses struggling to secure financing. “The problem is that funding remains unevenly distributed,” Yang said after a rate decision on Sept. 17.

“If a company is doing very well and carries very little risk, banks will naturally prioritize lending to it — that’s simply how business works.”Growth has been barreling ahead, with the economy expanding 13% year-on-year in the second quarter. Outstanding mortgage loans rose 4.6% to NT$11.95 trillion in August, according to the latest data from the central bank.

On Sept. 22, a Taiwan central bank official said the authority will meet with some lenders to better understand concerns over the funding squeeze. Current data show no overall shortage of liquidity in the banking system, said the official, who will seek to clarify whether financing difficulties in some areas stem from lending practices or broader structural factors.

Some banks have shifted their consumer lending mix toward higher-margin areas in the current quarter. Mortgages are burdened by a cooling housing market and offer thinner margins than unsecured personal loans, which are increasingly used by retail traders to invest in stocks, the bankers said.

Bank loans to companies and individuals for working capital needs, including stock investments, rose by a record NT$823 billion in July — nearly eight times the increase in home-purchase loans, FSC data show.

The FSC underscored that deposit growth is still outpacing loan growth that it sees “no obvious signs of abnormal conditions.”“The FSC will continue to monitor banks’ operating conditions and capital allocation, and take appropriate action when necessary,” the regulator said in response to questions from Bloomberg.

Still, the cash squeeze is also reverberating through Asia’s broader loan market, where Taiwanese banks have long been a key source of funding for borrowers grappling with geopolitical risks and higher-for-longer interest rates, according to syndicated-loan bankers covering the region. The island’s lenders have been pulling back from recent offshore deals, turning more selective based on transactions profitability or sometimes sitting them out altogether, the bankers said. To some this is a luxury problem and may benefit the economy in the long run.

“While this could be seen as an imbalance, it could also be treated as the resources going into more productive and more lucrative sectors,” said Bumki Son, an economist at Barclays Plc. “On a similar note, this helps to reduce investments into unproductive sectors and over a medium-term help to facilitate restructurings and productivity gains.”