Systemic risks in vietnam,s financial system and macroprudential implications

InstabilitiesofVietnam’sfinancialsystem

2 0 0 6 p e r i o d , w i t h l o w inflation,ahighergrowthrate–7%to9%annually– andamoderateleveloftradedeficit.

Early2007,VietnamjoinedtheWTO 1 Itmarkedthestartofaturbulenttimewhenfirmsinp ublic andprivatesectorbegantoexperiencestructuralproblems,risingineffici ency, andwasteofresources.Problemsexhibitedviamacroindicators,including:reduced

GDPgrowth,un em pl oy me n t 2 ,h i g h i n f l a t i o n , p l u m m e t e d e x c h a n g e r a t e s , l i q u i d i t y sh or ta ge i n bankingsector,stagnatedstockmarket,etc.

Areathatreceivedthemostmediacoveragewasfinancialsectorwithbankingsyste mattheepicenter.Vietnam’sbankingsectorexpandedrapidlyduringthisperiodanditstroubl esw e r e p r o n o u n c e d i n d i c a t i o n o f f u n d a m e n t a l w e a k n e s s e s i n f i n a n c i a l s y s t e m I n thispe ri od , w e ca n s e e ma ny k i n d s o f i ssu es - at d i f f e r e n t s e v e r i t i e s : li qu id it y sh o r t a g e , regulationcircumventions,cross- ownership,prevalentNon-performingloans,etc.

Tobefair,itisnotallbadastheeconomyisstillgrowing,andthegovernmentsucceededatre- gainingcontroloftheeconomywithsteadysingledigitinflationratesandabove6%g r o w t h forthefirstquarterof2015.

-2- s u b s i s t e n c e a gr i c u l tu r e w i t h l i t t l e o rn o e n g a g e m e n t w i th t h e m a r k e t ec on om y ( P h u H u y n h , 2 0 1 4 ) localcredit- fueledgrowth,andotherfactors.WithTPPentrance insight,willhistoryberepeate d?

2008globalcrises,theideaofsystemicriskhasrisenasaprevalentapproachtoanalyzeinstabili tiesinfinancialsystem.Themacroprudentialapproach- asawaytoreducesystemicinstabilities - hasemergedas arecommendedpracticein supervisingfinancialsystems.Studiesalso indicatedthattheapplicationofthese theoriesisnotlimitedtodevelopedeconomiesbut alsohighlyapplicableforemergingeconomies(Mihet,2013).

2 0 1 1 , b e s i d e s e x t e r n a l f a c t o r s , a m a j o r s o u r c e o f f i n a n c i a l instabilitiesc amefromwrongdoingsofFIsandshortcomingsofregulations(VELP,2012).Thenegativeconsequ encewasnotlimitedinthosefaultyFIsorwithinfinancialsectorbutalsoaffectednegativelyothe rwell- behavedFIsandtherestoftheeconomy.Itisq u e s t i o n i n g thatwillandhowmacroprude ntialapproach(1)helpwithunderstandingand

Objectivesandscope

2 0 1 1 I t f o c u s e s o n a s p e c t s o f s y s t e m i c r i s k a n d i n d i c a t i o n s o f m i c r o p r u d e n t i a l supervisingapproach’sdeficiencies.Thestudyalsobrieflyreviewsnewregulations(si nce2012)againstmacroprudentialrecommendations.

Vietnamhasabank- basedfinancialsystem,thus,thisliteratureisstronglybiasedtowards reviewingthe effects ofmacroprudential policy on bankingsector Othertypesof financialinstitutions(FIs)areonlyreferred whenneeded WhenmentioningFIs inth econtext ofVietnam,w e m a y u s e c r e d i t i n s t i t u t i o n s ( C Is ) a s a n i n t e r c h a n g e a b l e t e r m t o c o n f o r m t o localliteratures.

Thiss t u d y b y n o m e a n i s g o i n g t o e x h a u s t t h e p r o b l e m o f a p p l y i n g m a c r o p r u d e n t i a l approachi n t o s u p e r v i s i n g V i e t n a m f i n a n c i a l s y s t e m I n s t e a d , i t p u t V i e t n a m f i n a n c i a l instabilitiesi n t h e c o n t e x t o f s y s t e m i c r i s k a n d m a c r o p r u d e n t i a l p o l i c y t o d e v i s e r e l a t e d high-levelimplicationsforfinancialreforms.

Researchmethod

Inthisstudy,thereisnotaconcretehypothesisortheorythatshouldbetested,soweusedani n d u c t i v e a p p r o a c h A n i n d u c t i v e a p p r o a c h d e v e l o p s a t h e o r y f r o m d a t a t h a t i s f i r s t beingc o l l e c t e d T h e c o l l e c t e d d a t a - i n c l u d i n g t h e s t u d i e s r e l a t e d t o f i n a n c i a l c r i s e s , systemicr i s k s a n d m a c r o p r u d e n t i a l p o l i c i e s - w o u l d b e u s e d t o d e v i s e t h e n e e d o f a macroprudentialapproachforVietnam.Fr omtheconstructedframework,wewilldeductthepositionofVietnamintermofmacropruden tialprinciples’application.

Macroprudentialandsystemicanalysisisarelativenewareain Vietnamfinancialpolic ystudy.Thereisalack ofbothdataandresourceforquantitative research.Therefor e,thestudyemploysahigh- levelqualitativeapproachthatbuildsonverbalcommunicationandsoftdata.

Usingqualitative analysismethodsonmacroindicatorsandpolicysummaries, the studyanalyzess y s t e m i c r i s k s o f V i e t n a m a n d p r e d i c t s t h e e f f e c t i v e n e s s o f m a c r o p r u d e n t i a l policiesasasupplementalforcurrentsupervisingtools.

Analysisframework

HymanM i n s k y a n d R o b e r t S h i l l e r ( P i l k i n g t o n , 2 0 1 0 ) 3 T h e i n h e r e n t u n s t a b l e n a t u r e o f financialsystemrequiresthatitmustberegulatedtoprotectwell- beingoftheeconomyasa whole.Brunnermeieretal.

A prudent approach recognizes that the cumulative effects of negative shocks in financial systems do not develop linearly, influenced by externalities related to the behaviors of financial institutions Nicolò et al (2012) identified these externalities as strategic complementarities, fire sales, credit crunches, and interconnectedness To further elucidate the underlying mechanisms of these externalities, the study adopted the perspective of financial systems as complex networks of adaptive agents (Haldane, 2009).

Major financial institutions, including the BIS, IMF, ECB, and OECD member banks, have conducted studies on macroprudential tools and their applications While the specific details may vary, the fundamental approaches are quite similar This collection of macroprudential tools combines existing methods with newly developed strategies to tackle specific macroprudential challenges The new tools are categorized based on various criteria such as purpose, requirements, and models, providing a framework for understanding Vietnam's position on macroprudential policy However, the study does not delve into the specifics of implementation.

Thesisstructure

Thist h e s i s c o n s i s t s o f 5 c h a p t e r s C h a p t e r 1 o u t l i n e s t h e f o u n d a t i o n , t h e c o n t e x t a n d introducesthesymptomsinVietnamfinancialsystemthatraisestheneedfo rmacroprudentiala n a l y s i s C h a p t e r 2 r e v i e w s o t h e r s t u d i e s a n d f o r m u l a t e s t h e a n a l y s i s frameworkformacroprudentialregulations.Chapter3addressesresearch question1and2

4 T h u s , itbecomesmisleadingifregulatorsrelyonordinarysumofindicatorsasameanforp o l i c y m a k i n g bydivingintothedetailsofsystemicrisksinVietnamfinancialsystemandmacroprudentialim plicationsineachcase.Chapter4targetsthelastquestionbygivingabriefsummaryofrece ntregulationsagainstmainstreammacroprudentialtoolsetandimplications.C h a p t e r 5 s u m m a r i z e s t h e f i n d i n g s a n d p r o p o s e s r e l a t e d p o l i c y recommendations.

This chapter explores the foundations of financial stability and the externalities that necessitate financial regulations It identifies the need for systemic risk management as a crucial component of financial regulations and formulates an analytical framework for macroprudential regulations The study emphasizes network theory, highlighting implications that are often overlooked in traditional analyses.

Financialcrises

AccordingtoHymanMinsky’shypothesis[Appendix4],failuresoffinancialsystemsare inevitableduetotheirinherentnature.Onthegoodside,eachoneshedmorelightonhowtheyw o r k a n d h o w t h e y i n t e r a c t w i t h r e a l e c o n o m i e s T h i s i s v a l u a b l e k n o w l e d g e f o r copingwithfuturecrises.Theglobalcrisisin2008isoneofthegreatestcrisesever 5and itdoesli ghtupanimportantideas:topreventfinancialcrises,ensuringthefinancialhealthofindividualfinanci alinstitution(FI)isnotenough.Instead,tokeepcertainFIsfrom triggeringc a s c a d i n g f a i l u r e s – t h a t a f f e c t b o t h r e a l e c o n o m y a n d f i n a n c i a l s y s t e m – w e needaholisticapproachtomonitoringtheeconomy’shealth,creatingincentivestructure sandsettingupregulatoryboundaries.

Brunnermeier( 2 0 0 9 ) s t a t e s t h a t f i n a n c i a l c r i s i s i s t h e s i t u a t i o n w h e n F I s a r e f a c i n g l o wfundingliquidityandlowmarketliquidity 6 Bothformsofliquidityareinfluenc edbythesoundnessofotherFIsvia:(1)liquidityspirals,(2)hoardingoffunds,

Fundingl i q u i d i t y d e s c r i b e s t h e e a s e w i t h w h i c h i n v e s t o r s a n d a r b i t r a g e u r s c a n o b t a i n f u n d i n g F u n d i n g l i q u i d i t y i s h i g h — a n d m a r k e t s a r e “ a w a s h w i t h l i q u i d i t y ” — w h e n i t i s e a s y t o r a i s e m o n e y becausecollateral valuesarehigh (and/ orrising),andhaircuts andmargins are low Marketl i q u i d i t y ishighwhenitiseasytoraise moneybysellingone’sassetsatreasonableprices.C o n v e r s e l y , m a r k e t l i q u i d i t y i s l o w w h e n s e l l i n g t h e a s s e t d e p r e s s e s t h e s a l e p r i c e c o n s i d e r a b l y W h e n market liquidityislow,itisverycostlytoshrinkafirm’sbalancesheet.”—Source:B r u n n e r m e i e r (2009)

Initial Losses (e.g credit) Funding problems Prices move away from Fundamentals

Losses on existing positions behaviortocutbackitsfundingtoothersmayleadtoliquidityspirals[Figure2.1].Otherfac tors(psychology,political,globalmarkets,etc.)acceleratetheprocessfurthersowhenris ks t a c k s u p a n d e v e r y F I a c t s o n i t o w n i n t e r e s t , i t c a n l e a d t o w i d e s p r e a d c o l l a p s e s acrosstheeconomy.

Principlesoffinancialregulation

SimilartoAdamSmith'sinvisiblehandforthegeneraleconomy– infinancialmarkets,itimplicitlyassumesthatwecanmakethesystemasawholesafebysimp lytryingtomakesurethatindividualFIissafe.However,inpracticeitrepresentsafallacy of composition,wheresomepartsofthewholearetruedoesnotmeanthatthewholeistrue.

(2)protectthe essentialbenefitsofordinarypeopleincaseswhereinformationishardorcostlyt oobtain,andm i s t a k e s c o u l d g r e a t l y r e d u c e w e l f a r e ( i e i n f o r m a t i o n a s y m m e t r y ) ; a n d ( 3 ) a d j u s t externalitieswheretheyaresufficientlylargethatthesocial,and overall,costsofmarketfailureexceedboththeprivatecostsoffailureandtheextracostsofregulati on.

Thet h i r d p r i n c i p l e s u g g e s t s t h a t m a n a g i n g c r i s e s i s ani m p o r t a n t a s p e c t o f r e g u l a t i o n s Crisispreventionandmanagementcomponentofregulationsmustactasac ountervailingforcetothenaturaldeclineinmeasuredrisksinaboomandriseinmeasured risksinthesubsequentcollapse(Brunnermeier,2009).Themainobstructionforsuchregulatio nisthepol i ti c s ofboom.Wheninaboom,lending,leverageandrelianceon short- termliquiditybecomemutuallyreinforcingandexcessive(Brunnermeier,2009);itha saddictiveeffectf romeconomics,political,andsocialperspectivesaltogether.

“Systemicisdefinedasriskthatoriginateswithin,orspreadsthrough,thefinancialsector(e.g.,d uetoinsufficientsolvencyorliquiditybuffersinFIs),withthepotentialforsevereadvers eeffectsonfinancialintermediationandrealoutput.”

EuropeanCentralBankhasadifferentdefinitionthatomittedrealoutput,yetinclude da“negative”factorthatdiffersitfromordinarymarketadjustments.

Nicolòa n d L u c c h e t t a ( 2 0 1 0 ) d i v i d e d t h e t e r m i n t o t w o a s p e c t s : f i n a n c i a l a n d r e a l I n which,systemic financialrisk (a)is“theriskthatashockwilltriggeral ossofeconomicvalueorconfidencein,andattendantincreasesinuncertaintyabout,asubstant ialportionofthefinancialsystem”a nd systemic r ea lr is k (b)i s“theriskthatashockwill triggera

8 Continuedby:“preventingthesenegativeexternalitiesfromimpairingthefunctioningofthes y s t e m a n d f r o m s p i l l i n g o v e r t o t h e r e a l e c o n o m y i s a c r u c i a l e l e m e n t o f t h e m i s s i o n o f c e n t r a l b a n k s and of supe rvi sory a u t h o r i t i e s ” Source :E CB ( 20 10 )

Systemicrisksandmacroprudentialpolicy

Externalitiesofsystemicrisks

In 2012, three primary sources of externalities contributing to systemic risk were identified: (1) strategic complementarities, which emerge from the interactions among banks and financial institutions, leading to increased vulnerabilities during the financial cycle's expansion phase; (2) firesales and credit crunches, resulting from widespread asset sell-offs that lower asset prices, weaken balance sheets, and restrict financing, particularly during economic contractions; and (3) interconnectedness, which involves the transmission of shocks, or contagion, through systemic institutions and financial networks Notably, interconnectedness represents a relatively new dimension of systemic risk that has reinvigorated macroprudential thinking, as further discussed in section [2.4].

Anotherway to lookat these externalitiesis provided byG309(20 10 ), wh ic h iscompatiblewithN i c o l ò ’ s c l a s s i f i c a t i o n A c c o r d i n g l y , t h e r e a r e t i m e - s e r i e s n a t u r e d e x t e r n a l i t i e s a n d cross- sectionalnaturedexternalities.Theformergroupofexternalitiesgivesriseto procyclical ityingoodandbadtimes;itiscorrespondingtoNicolò’sexternalitiesas:(1)–goodtime,(2)– badtime.ThelattergroupiscorrespondingtoNicolò’sgroup(3)– duetointerconnectednessoffinancialentities.

Phasesofinstabilities

Afailureinfinancialsystemsmayseemtoappearunexpectedlybutinrealitygraduallyviadifferentp hases.Ateachphase–withdifferenturgencyandlevelofstress–systemicrisksmanifest themselvesdifferently.Itevenbecomesmorecomplexas systemicriskscombinewitho t h e r t y p e s o f r i s k t h a t a r e c h a r a c t e r i z e d b y p a r t i c u l a r i n s t i t u t i o n s a n d c o u n t r i e s

Differenti n d i c a t o r s p r o v e u s e f u l a t d i f f e r e n t p h a s e s a n d h e l p u n d e r s t a n d i n g d i f f e r e n t aspectsoftherisksandtheirmanifestation.Ordinarily 10 ,acrisiscom prisesofthreephasesasoutlinedbyBlancheretal.(2013):

Build- upphase.Systemicrisksaccumulateduetohighexposuretoanoverheatingsector(e.g.r e a l - e s t a t e , s e c u r i t i e s ) , o r s u b j e c t t o p r o c y c l i c a l b e h a v i o r s G r o w i n g c r o s s - b o r d e r exposuresandfundingsources(i.e.capitalflows)alsoacceleratethisphase.Inthis phase,itisimportanttoassessthelikelihoodofasystemiccrisis(e.g.forecasting,earlywarnin g,stress-tests,etc.)andstrengthencounter- cyclicalbuffersdesignedtoabsorbfinancialshock[Figure2.2].

10Wea r e n o t c o n s i d e r i n g t h e r e c o v e r y p h a s e o f t h e f i n a n c i a l s y s t e m b u t f o c u s i n g o n t h e w a y a cr i s is g e t s t o i t s t r o u g h W e a l s o s k i p t h e c a s e w h e n a c r i s i s h a s m u l t i p l e t r o u g h s , w h i c h c a n b e d i v i d e d in tomany smal le r ones.

Shockmaterialization.Inthisphase,imbalancesstarttorollout.Two conditionsforth isphasetoformare:

(higher)magnitudeofthetriggershock 11and (higher)fragilityofthe system(asthe accumulatedresultofexcessiverisk- takingduringbuildupphase).Inthisphase,thepriorityisassessingofpotentiallossinfinancials ystemandrealeconomy.

Amplificationandpropagation.Inmostcrises,shocksarenotcontained withinfinan cial systembut transmittedto the broadersystem, including othersectors (and potentiallyothercountries’financialsystems).Inthisphase,thepriorityshifttounderstandingtra nsmission

11 T h e s h o c k c a n b e e n d o g e n o u s o r e x o g e n o u s a n d l a r g e r t h a n a c e r t a i n t h r e s h o l d e g , G D P o r f i s c a l s h o c k s , e x c h a n g e r a t e o r h o u s i n g p r i c e s h o c k , f a i l u r e o f a s y s t e m i c a l l y i m p o r t a n t F I ( B l a n c h e r etal.,2013) tightening ofbanklendingsta ndards borrowerdebtserviceproblems/ d e c l i n i n g assetquality tighter credit conditions

/credit crunch funds more expensive

The global financial crisis has led to a decrease in available funds, resulting in an economic slowdown in the home country This slowdown has caused a reduction in both consumption and investment spending, which in turn has led to decreased lending to households and corporations Additionally, there is a diminished demand for loans due to unfavorable economic prospects and increased borrowing costs.

Feedback loop between bank problems and the real economy domestic bank problems andamplificationmechanisms(e.g.linkagestopology,fire- sales,contagions,adversefeedbackloops[Figure2.3],etc.)

Figure2.3:TransmissionChannelsofanExogenouslyInducedCreditSupplyShock slowereconomicgrowth o f foreignmarkets reducedexporttoforeigncountries furthertighteningoflendingst andards

Source:Beneš,ệtker-Robe,Vỏvra(2009).Author’sadaptation.

Networkanatomyofsystemicrisk

Thee s s e n c e o f t h e f i n a n c i a l s y s t e m i t s e l f a n d i t s r e l a t i o n t o t h e r e a l e c o n o m y c a n b e naturallycapturedasanetwork[Figure2.4],whichcanbesub- dividedintosmallerones.Therea r e m a n y t y p e s o f c o n n e c t i o n12be tw ee n f i n a n c i a l e n t i t i e s13depending o n w h i c h aspectwewanttostudy.Forexample,bankingsystems canbemodeledbyagentsthatareconnecteddirectlythroughmutualexposuresintheinterba nkmarketandindirectlythroughh o l d i n g s i m i l a r p o r t f o l i o s o r s h a r i n g t h e s a m e m a s s o f d e p o s i t o r s T h e n e t w o r k viewprovidesimplicationsthatcanhardlybedevisedfromthet raditionalviewoffinancialsystems.

12 e g liability-assetconnection – whereliabilitiesofaninstitutionareassetsof others;informationc o n n e c t i o n – w h e r e i n s t i t u t i o n s s h a r e c e r t a i n i n f o r m a t i o n a n d b e h a v e i n a c o o r d i n a t e d w a y ( e g i n v e s t i n t h e s a m e a s s e t s , h a v e t h e s a m e o w n e r ) ; r e g u l a t i o n c o n n e c t i o n – w h e r e i n s t i t u t i o n s a r e u n d e r the s am eo p e ra t i on r e s t r i c t i on s ; etc.

Whenlookingunderthelensofnetworktheory,theexternalitiesthatcausedsystemicriskscanbedes cribedasdifferentkindsofcontagioninfinancialnetworks.AccordingtoCont(2012),thes econtagionscanbeoffollowingtypes:

Balancesheetcontagion.T h ed e f a u l t o fa n F I m a y l e a d t o t h e wri te - downofassetsheldbyitscounterpartiesandconsequently,leadstoitsinsolvency.

Spiralsofilliquidity.Marketmovesandcrediteventsmayleadtomargincalls,whichleadt o thedefa ultofinstitutionsthatlacksufficientshort-termfunds.

Procyclicalfeedbackeffects.Firesalesofassetsduetodeleveragingcanfurtherdepreciatea s s e t pr icesandleadtolossesinotherportfolios,generatingendogenousinstability.

14 I n networktheory,cascadingfailuresusuallybeginwhenonepart ofthesystemfails.Whent hish a p p e n s , nearbynodesmustthentakeuptheslack forthefailedcomponent Thisint urnoverloadst h e s e no de s , causing th e m t o f a i l as we l l , prompt ing a d d i t i o n a l n o d e s t o f a i l on ea f t e r a n o t h e r i n a v i c i o u s c i r c l e

Figure2.4:Macro-financiallinkagesbetweenrealandnominal(i.e.financial)economy.

Haldane( 2 0 0 9 ) n o t i c e d t h e s i m i l a r i t y o f g l o b a l f i n a n c i a l s y s t e m – a n d t h e g l o b a l c r i s i s happened within –with various socialand natural phenomenons.Using networktheory, heexplainedtheemergenceofcomplexityandhomogeneityastwoprimarycharacteristicsofmo dernfinancialnetworks.ThisintuitiveworkofHaldanehaslaidthegroundformany macroprudentialandsystemicriskstudieslateron.

H a l d a n e ( 2 0 0 9 ) I n w h i c h , f o r smalln e g a t i v e s h o c k s , a m o r e d e n s e l y connectedf i n a n c i a l n e t w o r k ( c o r r e s p o n d i n g t o a m o r e d i v e r s i f i e d p a t t e r n o f i n t e r b a n k liabilities)enhancesfinancialstability.Beyonda certainthreshold,largershocksareamplifiedbysuchdenselyconnectednetworkleading tomorefragilesystem.Therefore,factorsthatimproveresilienceundercertaincondi tionscanbeasourceofsystemicrisksunderothers.

GalatiandMoessner(2011)restatedthesefindingsbyreferringtotheresearchofGaiandKap adia(2008)andNieretal.(2008).Theyconstructedartificialhomogeneousnetworksof banksandanalyzedtheeffectofanidiosyncratic shockontheresilienceofthenetwork.Bothfoundnon- lineareffectsofnetworth(i.e.sizeofthebank)andnetworkconnectivity(thep r o b a b i l i t y t h a t o n e b a n k h a s l e n t t o a n o t h e r b a n k ) o n c o n t a g i o n T h e s e r e s u l t s illustratethatthefinancial systemislikelytohavearobust-yet-fragiletendency– whilethelikelihoodofcontagionmaybereducedbygreaterconnectivity;thepotentialimpactofas hockhasamuchlargerscale.

The concept of "too-big-to-fail" may not adequately capture the complexities of institutions with significant network importance, leading to the emergence of the term "systemically important financial institutions" (SIFIs) This new terminology encompasses not only institutions that are too interconnected to fail but also financial structures that are too intercorrelated to fail "Too interconnected to fail" refers to financial institutions with extensive bilateral exposures, while "too intercorrelated to fail" highlights the tendency of individual financial institutions to engage in risky behaviors collectively, particularly when the government must intervene to safeguard the entire sector, such as banking or the stock market.

[OverviewA] La st ly ,i t is wo rt hm e nt i on i ngt oo non- traditionaltofailpr in ci pl e,w h e r e non- interesta c t i v i t i e s m a y l o w e r t h e r i s k f o r i n d i v i d u a l b a n k s y e t i n c r e a s e t h e s y s t e m i c risklevel(More&Zhou,2014).

Macroprudentialregulation

Developmentofmacroprudentialapproach

9 8 6 i n a documentregardinginnovationsininternationalbankingfromBIS.Initially,itwasdefineda sa p o l i c y t h a t p r o m o t e s “thes a f e t y a n d s o u n d n e s s o f t h e b r o a d f i n a n c i a l s y s t e m a n d paymentsm e c h a n i s m”.I n s u b s e q u e n c e y e a r s , i t e v o l v e d s l o w l y , a n d i t s m e a n i n g convergedt o t h e u s e o f p r u d e n t i a l t o o l s w i t h t h e e x p l i c i t o b j e c t i v e o f p r o m o t i n g t h e

15 C a n beconsideredasaformof moralhazard stabilityofthefinancialsystemasawhole.Itisoftendefinedincontrasttoitsantonym,“ microprudential”– w h i c h e m p h a s i z e s t h e s a f e t y o f t h e i n d i v i d u a l i n s t i t u t i o n s w i t h i n (Clement,2010).Aftertheglobalfinancialcrisis(2008)thetermwasputinspotlightasaprefe rablew a y t o a v o i d s u c h c r i s i s i n t h e f u t u r e Sincet h e n , i t s u s a g e h a s r i s e n r a p i d l y a longwiththenumberofrelatedstudies.

The surge in research following the global crisis has led to a deeper exploration of macroprudential policy This includes the development of financial distress indicators based on balance sheet and market indicators, early warning signals, financial contagion assessments, macro stress tests, SIFI classification, and macro-financial linkages Additionally, the interaction of these policies with monetary and fiscal measures has become a critical area of focus.

(GalatiandMoessner,2011).Internationalfinancialinstitutions andr e s e a r c h b o d i e s a l s o i s s u e d g u i d e l i n e s , i n d i c a t o r s ( e g I M F ’ s f i n a n c i a l s o u n d n e s s indicatorsandECB’smacroprudentialindicators(Agresti,BaudinoandPoloni(2013))a ndexecutivereviewstobroadentheapplicationofmacroprudential policyinbothdo mesticandinternationalcontext.

Untillatelythatmacroprudentialpolicyisconsideredasanintegratedapproach.However,from e a r l y 2 0 0 0 s c o u n t r i e s a l r e a d y a p p l i e d m a c r o p r u d e n t i a l t o o l s a n d p r i n c i p l e s ; w i t h variedlevelsofapplicationandsuccess; toaddressstabilityissuesoftheir financialsystem[Appendix7].Recently, Cerutti, ClaessensandLaeven(2015) revie wedtheusageof12macroprudentialpo li ci es o n a s a m p l e o f 1 1 9 e c o n o m i e s ( b o t h e m e r g i n g a n d d e v e l o p e d ) overthe2000-

13periods.Theresultssuggestthatmacroprudentialpolicieshaveasignificante f f e c t o n c r e d i t d e v e l o p m e n t y e t i t s e f f e c t i v e n e s s v a r i e s b y c o u n t r i e s a n d instruments.I ta l s o h i g h l i g h t s t h a t c i r c u m v e n t i o n o f p o l i c i e s i s a r e a l c h a l l e n g e f o r a successfulimplementationofmacroprudentialpolicy.

Macroprudentialpolicy

Asapolicyframework,macroprudentialapproachprotectssystemicsafetybyutiliz ingatop downview ofthefinancial systemandconsidering thecorrelationand commonexposureacrossinstitutions.Italsodiffersfrommicroprudentialapproachbyemphas izingtheendogenousnatureofsystemicriskinsteadofconsideringitasexogenous.

Ultimate objective Avoidm a c r o e c o n o m i c c o s t s l i n k e d tofin ancia l instabi lity

“Exogenous”( i n d e p e n d e n t o f i nd iv id u ala g e n t s ’ b e h a v i o r )

Indetail,macroprudentialpolicy ischaracterized byitspurposes(Groupof30,2010 )of

(3)usingtoolsofprudentialsupervisionwiththegoalofreducing systemic risks and increasingthe resilience ofthe financialsystem to absorbsuchrisks.

Thep r o c e s s o f m a c r o p r u d e n t i a l p o l i c y i m p l e m e n t a t i o n s h o u l d r e c o g n i z e c o m p l i m e n t a r y relationshipw i t h o t h e r a r e a s o f e c o n o m i c p o l i c y.I tm u s t i n f o r m a n d b e i n f o r m e d b y monetary,fiscal,andothergovernmentpolicy(G30,2010).

Therearethreelayersofdefensethatmacroprudentialpolicycanprotectfinancialsystem’sstabilitywh enfullyemployed(DeNederlandscheBank,2010).First,ittriestoidentifyandeliminates y s t e m i c r i s k s i n f i n a n c i a l s y s t e m ( i e i d e n t i f i e r ) ; s e c o n d , s m a l l e r s h o c k s a r e disarmedautomaticallyviaimprovedresiliencyofthesystem(i.e.stabilizer);finally,whentherearef inancialcollapses,itpreventsacascadingfailurebyimprovedabsorptioncapabilityofindividu alFIs(i.e.absorber).

Macroprudentialtoolkit

Thefoundationfor macroprudentialregulations shouldbeasetofindicators 16tha t allo wquantitative assessmentofFIs’behaviorsthereforeitispreferablethattheseindicatorsare backedwithmodelsthatexplaintheirchannel ofeffect.Themodelsthatcanbeused asfoundationformacroprudentialinstrumentsarealreadydescribedin[Appendix14]

Macroprudentialt o o l s e t i s q u i t e c o m p l e x a n d s t i l l e v o l v i n g ( D e N e d e r l a n d s c h e B a n k 2010).Itincludesbothexistingmicroprudentialtoolsandnewinstrument s(Blancheretal.2013).D u e t o t h e w e a l t h o f t o o l s t h a t c a n b e u s e d f o r m a c r o p r u d e n t i a l p u r p o s e , i t i s requiredthatthesetoolstobeclassifiedaccordingtotheirpurpo se,target,andapplicationdetail(i.e.canbeusedunderwhichcircumstances).Weshallnotgeti ntotechnicaldetailsofeachtoolbutstayontheconceptuallevelofitsfunction.Anintui tivewaytoclassifymacroprudentialtoolsandindicatorsisbyprojectingthemagainstp hasesofcrisismanifestationa n d t h e i r t a r g e t – a s d o n e b y C l a e s s e n s , G h o s h a n d M i h e t ( 2 0 1 3 ) T h i s classificationi n d i c a t e s t h a t e a c h i n s t r u m e n t / i n d i c a t o r c a n b e u s e f u l t o a d d r e s s c e r t a i n combinationsofrisktypesandphase sofinstabilities’manifestation[Appendix6].

16Inthisstudy,there isadistinctionbetweentools (i.e.instruments)andindicators Toolsare useda c t i v e l y w h e t h e r b y t h e m a n d a t e o f r e g u l a t i o n s o r v o l u n t a r i l y t o w a r d s a s p e c i f i c p u r p o s e ; w h i l e i n d i c a t o r s are used passively for decision suppor tan d/orday-to-day operat ion s.

Restrictions related to borrower, instrument, or activity

Restrictions on financial sector balance sheet (assets, liabilities) Buffer based policies Other

Time varying caps/limits/rules on:

DTI, LTI, LTV margins, hair-cuts lending to sectors credit growth

Time varying caps/limits on:

Mismatches (FX, interest rate) Reserve requirements

Countercyclica l capital requirements, leverage restrictions, general (dynamic) provisioning

Levy/tax on specific assets and/or liabilities

Accounting (e.g., varying rules on mark to market) Changes to compensation, market discipline, governance

Contraction ary phase: firesales, credit crunch

Adjustment to specific loan-loss provisioning, margins or hair-cuts (e.g., through the cycle, dynamic) Liquidity limits (e.g., Net Stable Funding Ratio, Liquidity Coverage

Ratio) Countercyclica l capital requirements, general (dynamic) provisioning Levy/tax (e.g., on non-core liabilities) Standardized products

OTC vs on exchange Safety net (Central Bank/Treasury liquidity, fiscal support)

Contagion, or shock propagation from SIFIs or networks

Varying restrictions on asset composition, activities (e.g.,

Volcker, Vickers) Institution- specific limits on (bilateral) financial exposures, other balance sheet measures Capital surcharges linked to systemic risk Tax/levy varying by externality (size, network) Institutional infrastructure (e.g., CCPs)

Resolution (e.g., living wills) varying information, disclosure

Enhancing resilience Dampening the cycle Dispelling gestation of cycle

Time-varying risk Cross-sectional Key risk: distribution of risk; opacity; complexity

Maturity transfor mation amplification channels/tools Intra-financial system activity Leverage

Countercyclical capital buffers Restrictions on distributions Maximum leverage ratios

(4a) Sectorial capital requirements targeted at real-economy lending

(4b) Sectoral capital requirements targeted at intra- financial system activity

(7) Loan to value and loan to income restrictions

Terms and conditions of transactions (8) Margining requirements

Use of central counterparties Design and use of trading venues (including ‘circuit breakers’)

Forp r a c t i c a l p u r p o s e , E u r o p e a n S y s t e m i c R i s k B o a r d ( E S R B , 2 0 1 5 a ) g i v e s a s i m p l e r classificationthatbasedontheprimarygoalsofthetools.Therear efourgroupoftools respectivet o t h e f o u r p r i m a r y g o a l s o f m a c r o p r u d e n t i a l ( 1 ) e x c e s s i v e c r e d i t g r o w t h a n d leverage;

Forashortsummary,toreducesystemicrisks infinancial networks,therearefollo wingareasofintervention:(1)shockabsorptioncapabilitiesofFIsasnetworknodes;

At the strategic level, the government should adhere to solid and consistent principles to effectively limit systemic risk According to Haldane (2009), there are three key areas for government action: first, enhancing data and communications to improve understanding of network dynamics following a shock, which aids in informing public communications; second, implementing regulation to ensure appropriate control over the damaging consequences that may arise from the failure of large, interconnected institutions; and third, restructuring the financial network to minimize the risk of future systemic collapse.

At a tactical level, models, tools, and indicators are essential for implementing strategic recommendations to manage systemic risk These models provide insights into critical aspects such as capital buffers, systemically important financial institutions (SIFIs), contagion effects, and interlinkages They also establish the necessary tools that regulators can utilize to control systemic risks effectively These tools, which include indicators and instruments, must be grounded in actual data and serve as "beacons" to guide financial institutions' activities, while the instruments enable regulators to exert their authority Additionally, the application of these tools should vary based on the current state of the economy to effectively address prevailing issues Ultimately, the information provided—including the tools, their characteristics, and selection criteria—remains a primary concern for regulators.

Atr e g u l a t i o n / o p e r a t i o n l e v e l , t h e i n d i c a t o r s a n d i n s t r u m e n t s n e e d t o b e f o r m a l i z e d a s documents/ instructionst h a t h a v e p r e c i s e m e a n i n g a n d s i m p l e a d h e r e n c e F i n a n c i a l instit utionsshouldexpecttoreceiveinstructionsinaconsistentandprecisemanner.Theyalsonee dthesupportfromregulatorsintheformoffeedbackandservices.

Thischapter enumerates factors that contributed to theaccumulat ion ofsystemi criskin Vietnam’sfinancialsystemduringtheperiodof2006–

2011.Intheend,itsummarizes fourgroupsofrisks and relatedmacroprudential in struments foreach case Noticedthat Vietnamdidnotfaceafull- blowncrisisinthisperiod;somesymptomsaremissingornotclearlyexhibited(e.g.defaultcontag ions).

Context

2011.Thesymptomswereprominent:liquidityshortage,highlevelofNon- performingloans,unconstrainedinterestandexchangerates.Theseproblemscontributedtoth econsiderablereductionof GDPgrowthratefrom7-8%rangeto5-

Thedevelopmentofinstabilitiesinthefinancialsystemcanberoughlydividedintothreep hases[Overview B;section2.3.2].Inwhich,thebuild upphaseisassociatedthera pidexpansiona n d c o l l a p s e o f t h e s t o c k m a r k e t ; t h e m a t e r i a l i z a t i o n p h a s e i s m a r k e d w i t h doubled i g i t i n f l a t i o n a n d h i g h i n t e r e s t r a t e s i n 2 0 0 9 –

2 0 1 0 ; a n d t h e a m p l i f i c a t i o n a n d contagionp h a s e s t a r t e d b y 2 0 1 0 w h e n l i q u i d i t y s h o r t a g e a n d f i r e - s a l e s c y c l e 17star t t o deteriorateassetpricesandhelpedformalargeamountofNPLsacrossCIs.Itisnoteworthyt hatbecausetheinstabilitiesinVietnam’sfinancialsystemhavenotmanifestedintoafull- blowcrisis,thesymptomsofeachphasearelesssharplyseparated.

17Evidencedbythesharpdeclineinresidential real- estateabsorptionratefrom 105%to85%from Q 3 / 2 0 0 9 –Q1/2010(Ho ChiMinhcity).Source:(Savills, 2015)

Risksbuild-up

Capitalinflow

Thei n w a r d s c a p i t a l f l o w ( a f t e r j o i n i n g W T O ) l e d t o t h e e x p a n s i o n o f s t o c k - m a r k e t a n d real- estatebubbles[OverviewB].Banks,whicharemajorplayersinthefield,arequickly drawni n t o t h e l o o p h o l e A s a c o n s e q u e n c e , c o m m e r c i a l b a n k s s t a r t e d n e g l e c t i n g t h e primaryr o l e o f d i f f u s i n g t h e e x c e e d e d c a p i t a l t o t h e r e a l e c o n o m y A l a r g e a m o u n t o f creditwasdirectedtotheseprofitableareas.Evenwithsafetyconst raintsfromSBV,theyareoftenbypassed;especiallyinsmallerbankswithclosertiestorealest ateandsecuritiestradingfirm.Thetrendhascreatedinitialvulnerabilitiesinthebankingsector andtherealeconomy.

Meanwhile,Vietnam’sforeign- exchangeposition,measuredbythestabilityofitsforeignreserves,isweak.Vietnam’stra dedeficithaswideneddespitemultipleVNDdevaluations[Figure3.1].Ifitwasnotreceivingal argeamountofremittancesrangingUSD6-

Inwardscapitalflowmayincreasesystemicrisk[Appendix9].Furthermore,cheapfundingliquidity has high impact onfinancial stability because market liquidityand fundingliquiditycanbemutuallyreinforcing,leadingtoliquidityspirals(Brunnermeier,2009).

Thei n c r e a s e d r i s k d u e t o t h e s u r g e o f c a p i t a l i n f l o w r e q u i r e s t h a t t h e g o v e r n m e n t t o increasecounter- cyclicalbuffers,restrictionsonprudentratios(e.g.LTV,LTI)and

01jan2007 01jul2008 01jan2010 Date 01jul2011 01jan2013

Official ER Unofficial ER sectoralre qu ir em en t s ( e g i n c r e a s e r i s k we ig ht o f c e r t a i n s e c t o r ) Ho we ve r, t h e r e i s n o t manyregulationupdates inthefirsthalfofperiod,whichcanbeconsidereda sasignofboompolitics.

Inhindsight,wecanseethattheever- changingnatureofcrossbordercapitalflowrequirestheg o v e r n m e n t t o h a v e a n a d a p t i v e p o l i c y M a c r o p r u d e n t i a l p o l i c y r e c o m m e n d s t h a t regulatorss h o u l d e m p l o y a r u l e - b a s e d a p p r o a c h i n t h i s s i t u a t i o n ( B r u n n e r m e i e r , 2 0 0 9 ) , wheretheprudentrequir ementsareadjustedinapredictablemanner.

Limitedsectorallendingcanalsobehelpful.Lendingtocertainsectorshouldberestricteddueto theirriskprofileand to limit assetbubbles.It is no t toconfusedwithdirect ional l ending– w h i c h i s a l s o a k i n d o f s e c t o r a l i n t e r v e n t i o n – i n t h e c a s e o f V i e t n a m w h e r e lendingtocertainsectorswasencouraged(e.g.SOEs).

Source:Author’scalculation.Data:SBV,Vinacapital.

Creditgrowth

Source:Author’scalculations.Data:IMF.

Vietnam’sbanklendingwasexpandedby33percentyearoveryearduringtheseyears.Itist h e s t r o n g e s t g r o w t h r a t e r e c o r d e d b y a n y ASEANc o u n t r y , I n d i a , a n d C h i n a S u c h a robustexpansionimposedariskofaccompaniedparallelriseinnon- performingloansasalready notedintheAsianfinancialcrisis(Corsetti,PesentiandRoubini,1999).Itcanalsober e l a t e d t o t h e b u i l d - u p p h a s e o f c r i s e s w h e r e u n c o n t r o l l e d c r e d i t g r o w t h c a n h e l p formin gleveragetrapsacrossboththefinancialsystemandtherealeconomy.

Furthermore,creditgrowthisalsohigherthandepositsand GDPgrowth.Accordingtoa reportby(VCBS,2011),theaveragecreditgrowthduring2000–

2010was32%whiletheaveragegrowthofdepositsandGDPwere29%and7.15%respectively.Th econsequencewast h e r a t i o s o f l o a n s / d e p o s i t s a n d l o a n s / a s s e t s o f V i e t n a m e s e b a n k i n g s e c t o r r e a c h e d

130.7%a n d 7 6 6 % r e s p e c t i v e l y i n 2 0 1 0 , w h i c h w e r e t h e h i g h e s t l e v e l i n A s i a H ig he r creditgrowth(above20%ormorethanthreetimesGDPgrowthrate)candest abilizetheeconomybyincreasingliquidityrisk.

Duetostrategicinteractionsofbanksinexpansionaryperiods,itisunderstandablewhyincon sideringperiodcommercialbanksformedhomogeneitystructure[3.2.3]andstackedupcreditimbal ances[3.2.4].Thissituationindicatescomplementaryexternalitiesthatdemandadjustment.

In an expansionary macro environment, as indicated by key economic indicators, government intervention through fiscal and monetary policies becomes essential Key macroprudential tools for managing risks include countercyclical buffers and reserve requirements However, credit expansion introduces uncertainties, particularly in the form of sovereign risks, where potential government actions can negatively impact the financial environment, such as sudden foreign exchange depreciation or interest rate changes Therefore, macroprudential policy necessitates continuous assessment of these risks using tools like Debt Sustainability Analysis, Macro Stress Tests, and Regime Switching Models During periods of heightened risk, regulators are advised to utilize forward-looking tools in addition to traditional backward-looking and prudent approaches.

Figure 3.4: Market share in banking sector.

Small JSBs (4.6%) Large JSBs (31.8%) Large JSBs (25.1%)

SOCBs (48.2%) Med JSBs (15.4%) SOCBs (58.5%) Med JSBs (12.5%)

Large JSBs SOCBs Med JSBs Small JSBs Large JSBs SOCBs Med JSBs Small JSBs

Market share by assets, 2010 Market share by credit, 2010

Large JSBs: Assets > VND 60 trillion Med JSBs: Assets > VND 50 trillion Med JSBs: Assets > VND 20 trillion restrictions.F o r w a r d - l o o k i n g t o o l s 18c an a c t a s a risk19sig n a l t h a t i n c e n t i v i z e s C I s t o further d i v e r s i f y / d e l e v e r a g e t h e i r p o r t f o l i o s W e c a n c o n s i d e r t h i s s i t u a t i o n a s a c a s e o f publicg oods,whereindicatorsusagearenon-rivalryandnon-excludable.

Biasedbankingsector

Source:Author’scalculation.Data:IMF,SBV.

Whilebankingsectorhadtotalassetsupto200%GDPin2011(SBV),non- bankFIsandthestockmarketstayedrelativesmall.Non- bankFIs(includingpeople’screditfunds)onlyaccountedfor17%GDPand8%totalfinancialasse ts.Thesizeofstockmarketisroughly20%oftotalGDP.Thesenumbersshowthesignificanc eofthebankingsectorastheroleofcreditproviders.TherelianceonSOCBsasthemajorcredit source–withnearly3/5oftotalcreditamount– posedarisksincealargecreditamountis divertedintoinefficient

18 Toolsthathaspredictingcapabilities.e.g.CoVar,CoPoD,ReturnsSpillovers,DistressS p i l l o v e r s , SovereignFunding Shock Scenarios,Asset PriceModels,… ( Blancheretal.,2013 )

SOEssector 20 ,whichsymbolizedbythedefaultofVinashin.Themainmotivationforsuchbiasis“le ading”industriesneedastablesourceofcapitalforlong- terminvestmentasinthecaseofsuccessfulbank- orientedeconomieslikeJapan,KoreaorGermany.However,lacko f c o m p e t i t i o n f o r c r e d i t i s a b i g g e r r i s k s a s d e m o n s t r a t e d i n c o u n t l e s s o t h e r c a s e s (Asiancountriesin 1997crisis,China,Greece,etc.)duetomoralhazard.

Insidet h e b a n k i n g s e c t o r , t h e r e v e n u e s t r u c t u r e i s a l s o s k e w e d I n w h i c h , t h e i n t e r e s t incomeaccountsformuchofthebanksincome.AccordingtoVCBS( 2010),theinterestincome’saveragecontributionintotalincomeoftenlargestbankswas76.8

3 5 % ) , N a v i b a n k (93.1%)andMekongDevelopmentBank(98.8%).Thisbiasimplieshigherliq uidityriskinbankings e c t o r b e c a u s e b a n k s w a n t h i g h e r p r o f i t a n d t h u s s e e k f o r l a r g e r i n t e r e s t r a t e difference,w h i c h a r e o f t e n l o n g - t e r m p r o j e c t s I t w o u l d c a u s e i n c r e a s i n g m i s m a t c h o f creditterm(i.e.short- termfundingforlong-termloans).

Anothermacroprudential implicationis thatlargerinstitutionsmust beforcedtoact inamoreprudentmannersincethereareexternalitiesrelatedtosizeandinterconnectednessofeac hinstitution.BygivingprioritiestoSOCBs,thegovernmenthaseliminatedthecountervai lingforcethatmakesbanksmoreprudent.Furthermore,largeSOCBsareexposedtonotonlyus ualcreditriskbutalsotoriskfromotherSOEsandtheirsubsidies 21 Thisrelationshipisharmful duetothefactthatVietnamgovernmentguaranteedliquiditystatusofthesebanks.Whent heywritedownalossbeyondtheirabsorptioncapability,it indirectlyreducesthestatere sourceforotherinvestments.Inthiscase,evenifitdoesnotmaterializeintoaliquiditycrisis,itdo esaffectthewell-beingoftherealeconomy.

Identificationofsystemic importantfinancialinstitutions(SIFIs) isapartof macrop rudentialp o l i c y Y u k s e l ( 2 0 1 4 ) p r o p o s e d a f r a m e w o r k t h a t c a n b e a d a p t e d f o r domesticSIFIs (D -S IFI s)

[Ap pe nd ix 12] Aft er id en t if i c at i on st e p, it sug ge st st ha tS IF Is beingp u t u n d e r s t r i c t e r r e g u l a t i o n a n d s u r c h a r g e d f o r t h e i n c r e a s e d e x t e r n a l i t y I t i s noteworthythatSIFIsregulationshouldnotbeputagainstconsolidationeffortsinbanki ng

21 E.g. thecaseofAgribankFinancialLeasingCompanyII,Vinashin. sector 22( i.e merge&acquisition,increasecharteredcapitalrequirements) sinceits mainpurposeistoaddresstheexternalitiesofSIFIs(andSIFIisnotonlyaboutassetsiz e,butalsoa b o u t i n t e r c o n n e c t e d n e s s , c o r r e l a t i o n a n d r e v e n u e s t r u c t u r e [ 2 4 ]) A l a r g e r b a n k – adequatelycapitalized–thatactsprudentlyisactuallybeneficialtothesystem.

Qualityofcapital

Alongw i t h c r e d i t d e f i c i t , V i e t n a m ’ s f u n d i n g m a r k e t i s a l s o h e a v i l y s k e w e d t o w a r d t h e shortt e r m , d r i v e n b y c u s t o m e r s w h o s e e b a n k s a v i n g s a s a p r i m a r y w a y t o i n v e s t t h e i r fundsintheshortterm(McKinsey,2012).Themiss-matchbetweenshort- term(i.e.risky)andm e d i u m - t o - l o n g t e r m a s s e t s i s o n e o f t h e m a i n f a c t o r s t h a t d e s t a b i l i z e t h e f i n a n c i a l system,e speciallywhenthereiscreditcontraction[3.2.3].

Assetsqualityofbanksinthisperiodisquestionable.Whilemostbanksmeettherequire m entof minimum CAR 9% bythe end of 2010, the figuresare unreliable due to thedifferencesinloanclassificationbetweenVietnamAccountingStandard(VAS)and InternationalAccountingStandard(IAS/IFRS).VASis muchmoretolerancetoNPLsthanI A S / I F R S 23 T h e r e f o r e , o n l y a s m a l l n u m b e r o f b a n k s d i d n o t m e e t t h i s r e q u i r e m e n t , includingAgribank(6.1%),MaritimeBank (8.1%),Vietinbank(8.6%),andNamVietBank(8.9%)

(VCBS,2011).Moreinteresting,allbanksweresuccessfulatachievingCARratioa ft e r a s h o r t p e r i o d o f t e n b y i n c r e a s e t h e i r c h a r t e r e d c a p i t a l – e v e n d u r i n g a p e r i o d o f fundingshortage.

CARi s a n i m p o r t a n t p r u d e n t i a l i n d i c a t o r t h a t reflectsa k e y a s p e c t o f s y s t e m i c s a f e t y – absorption capabilitiesofFIs.Unreliabilityoftheseindicatorscreatedafoundational riskforVietnamfinancialsystem.

23“Accordingt o I A S , o n c e a p a r t i a l a m o u n t o f l o a n i s d u e b u t u n p a y a b l e , t h e w h o l e a m o u n t o f l o a n willbeclassifiedasanon- performingloan.Moreover,somebanksalsotakeadvantageofloanr e s c h e d u l i n g a s a w a y t o l o w e r t h e i r a c t u a l N P L s , a s r e s c h e d u l e d l o a n s a r e n o t c o u n t e d a s N P L s S o m e o t h e r b a n k s a v o i d c l a s s i f y i n g t h e i r l o a n s i n t o g r o u p 3 -

Furthermore,b a n k i n g s e c t o r w a s a l s o u n d e r c a p i t a l i z e d a s m a n y b a n k s u n a b l e t o m e e t Decree141charteredcapitalrequirementofdespitemultipleextension s.ByJune2011,ayearaftertheduedateofDecree141,therewerestill15commericalbanksu nabletometitsrequirementofVND3trillion(NguyễnĐứcTrung,2013).

I i s t h e l a t e s t i n s t a l l m e n t w i t h e x p l i c i t m e n t i o n i n g o f p r o b l e m s t h a t l e a d t o t h e globalfinancialcrisis.Interestingly,itisnotintendedtosupersedeBaselIIstandard sbutratherstrengthenexistingthreepillarsofBaselII(BIS,2010).ItimpliesthatBaselIIis asoundstandardandarequiredintermediatesteptowardsBaselIII.

Inoverall,thethreepillarsofBaselII:minimumcapitalrequirements,supervisoryreviewand informationdisclosures;areconformantwithmacroprudentialpolicy.Thewea knessthatwasaddressedbyBaselIIIwasoffbalance- sheetexposures,procyclicaldeleveragingprocessandbytheinterconnectedness ofsys temicinstitutions (BIS,2010).WhenputinVietnamcontextatthemoment,itisclearl yindicatedthatcorrectlyimplementedBaselIandIIandheadingtowardsBaselIIIarelogicals tepstoensurefinancialsystemsoundness.

Exploitivecross-ownership

Ownership exposure between banks and businesses is not inherently problematic, as it is a common financing method However, issues arise from the source of capital used for ownership acquisition Equity plays a crucial role in calculating safety ratios for financial institutions and is typically viewed as long-term capital When equity capital is sourced from short-term funds, it can lead to exploitative incentives for controlling owners to leverage banks for quick profits In Vietnam during this period, such behavior was prevalent in many Joint Stock Commercial Banks (JSCBs), resulting in a fragile structure that undermined the stability of the financial system.

AccordingtoVELP (2012),fromearly 2000s, banksandbusinessin Vietnam starte dtoformcomplexfinancialrelationships.Asnapshotin2012givesaglimpseintothiscompl exity[Appendix10,Appendix11].Cross-ownershipwasaccelerated partlythanks

25Anindebtedownerfacetighterconstraintsandhavetomeetpaymentterms. toD e c r e e 1 4 1 T h i s d e c r e e p u t a p r e s s u r e o n c a p i t a l n e e d f o r b a n k s w h i l e t h e r e l a t i v e stagnationofthestockmarkethasmadecapitalacquisitionbecame muchmo redifficult,whichinturncreatedmoreincentivesforbankstocircumventtheregulationframework.

Vietnamcross- ownershipissueserodedsafetyindicatorsofbank,thusmakebanksmuchlessabsorb enttocredit andliqu idityr isks;worse,it c re at ed afalsesenseofsecurityby keepi ngthoseindicatorsincheck.Exploitive ownershipisalsoharmfulbylimiting risk- diversifyingnature ofbanksbytargetingandconcentrating credit towardscertain (often risky)p r o j e c t s r e l a t e d t o t h e c o n t r o l l i n g - o w n e r s I n a n o t h e r w a y , d i s t o r t e d i n c e n t i v e s o f exploitivecross- ownershipsshifttheexposurestructureclosertoaringnetwork 26- whichi s themostfragileofallfinancialnetworkstructures.

Systemicstressmaterializationinfinancialsector

Liquidityshortage

G D P T h e announcedmotivationwastocompensatefortheeffectsoftheglobaleconomicre cession, however,itismorelikelythatbanksareputintosupportmodeduetocreditcontraction that arise from domesticissues In January2009, the governmentdecided 27to use VND 17

26 A configuration inwhichall liabilitiesofabankare heldbyasingle counterparty(Acemogl uet.a l , 2013)

Decision No.131/QD-TTg trillion(USD1billion)tosubsidiesloansinterestrates 28 TheVND17trillionsubsidycanhelpi n j e c t V N D 6 0 0 t r i l l i o n ( U S D 3 5 b i l l i o n ) i n t o t h e e c o n o m y w i t h i n a y e a r(LeT h i ThuyVan,2010).

28“UndertheDecision,short- termloancontractswithmaximumdurationofeightmonthsands i g n e d anddisbursedfrom1February 2009to31December2009willgetinterestrateassistanceoff o u r percentperannum.Theinterest- rateassistanceisofferedtofirmsinbusinessandm a n u f a c t u r i n g s e c t o r s an d n o t fo r co m pa n ie s i ns e r v i c e s , educa tion , so c ia l , h e a l th , a nd c u l t u r a l an d f i n a n c i a l s e c t o r s T h e p a c k a g e f o c u s e s o n i n v e s t m e n t s t i m u l u s , i s t o e a s e t h e f i r m s ’ d i f f i c u l t i e s , c r e a t e n ewjobsandthenincreasedomesticconsumption” Source:LeThiThuyVan(2010)

Attheendof2009,mostofJSCBsonceagainsufferedshortageofliquidity– thistimeonalargerscale.SBVwasnotabletoquicklysuppresstheshortageanymore.Interestrat eofinterbanklendingspikedupto30%andeverybankwascompetingforliquidity wit houtregardingmaximuminterestratelimitissuedbySBV.

Int h e f a c e o f m o u n t i n g d i s t r e s s , a d a p t i v e p o l i c i e s ( e g t i m e - v a r y i n g b u f f e r s a n d t i m e - varyingprovisioningpractices)asmentionedin[Appendix14]couldbevaluabletools.Atthese m o m e n t s , r e g u l a t o r s a l s o n e e d t o o l s t o a n a l y z e t h e a m p l i f i c a t i o n m e c h a n i s m s o f distressinordertoactinaprudentmanner.Besides,assetspricesalsoneedtobemo nitoredcloselyduetopotentialfiresales.

Non-performingloans

Liquidity shortages and non-performing loans (NPLs) represent significant risks in the financial sector, with NPLs reflecting the materialization of credit risk The high levels of NPLs stem from the collapse in collateral values related to securities and real estate, as well as issues arising from directed credit to state-owned enterprises (SOEs), cross-ownership exploitation, and ordinary non-payments Notably, SOEs account for 53% of total NPLs, underscoring the severity of directed loans The two main components of NPLs highlight critical issues: the first indicates fire-sales externalities caused by market dysfunction, leading to increased credit risk, while the second points to a credit crunch resulting from deteriorating balance sheet indicators due to debtor non-payments These factors mutually reinforce each other during periods of instability.

ReportedlevelofVietnam’snon- performingloansreportedbySBVandcommercialbanksconsistentlyappearstobeundercontrol However,theirtruevolumeislikelytobemuchhigherthanreportedfigures.FitchRating sNPLratiorecalculationbasedonIAS/IFRSin2011was13%

(VCBS,2011).Furthermore,NPLscontributedtocreditrisknotonlybyitsmagnitude b u t a l s o b y i t s p e r s i s t e n c e I n F e b r u a r y 2 0 1 4 M o o d y ’ s e s t i m a t e d t h a t n o n - performingloansinthecountry’sbankingsystemstillconsistedofatleast15%ofitstotalassets.I t i s m o r e t h a n t h r e e t i m e s t h e c e n t r a l b a n k ’ s o f f i c i a l r a t i o o f 4 7 % “

Capital remainsi n a d e q u a t e t o a b s o r b t h e e x t e n t o f p o t e n t i a l l o s s e s s t e m m i n g f r o m p e r v a s i v e weaknessesinassetquality,”saidGeneFang,Moody’svice-president.

NPLisacomponentinthecoresetofFinancialSoundness Indicatorsfordeposit- takinginstitutions (IMF,2006).Itisusedtodevisecapitaladequacy/ assetquality 29of FIsandtomeasurecontagionsinthecaseofdistress.

Thep r o m p t i d e n t i f i c a t i o n o f i m p a i r m e n t v i a N P L s i s c r u c i a l f o r t h e i d e n t i f i c a t i o n o f vulnerabilities.Duetoitsimportance,macroprudentialguides tookeffortstostandardize thecalculationofnon- performingloans(NPLs)andotherimpairedassets(Agresti, BaudinoandPoloni,2013 ).ThegeneralconsensusforsuchcalculationstandardisIFRS.InV ie tn am ,d if f er en c es b e t w e e n VASa nd I A S /

I F RS a re p o s i n g a sa m a j o r obs ta cl ef or reliablemacroprudentialanalysis.

29Respectively:NPLsnetofprovisionstocapital/NPLstototalgrossloans Source:IMF(2006)

Real-economyspillovers

Since2008,VietnamGDPgrowthratewentover6%onlybrieflyandconstantlydippedintherang eof5%.WhencomparedtopriorperiodsandthetrajectoriesofAsiacountriesatthesamedev elopmentphase(e.g.China,Taiwan,Korea,Malaysia,etc.)itisarguablethatVietnameconomyis under-performing.

DIAL 30(2010) concludesthatinformalsectorsufferedsignificantlyfromthedifficulteconomicsitua tionin2008and2009.InHCMC,c l e a r recessivepatternsareobserved,withadverseconsequences onhouseholdwellbeingandpoverty.

InSeptember2012,Standard&Poor’srevisedVietnam’sBICRAscore[Appendix3]from“Group1 0”(highestrisk)to“Group9”.Showingimprovedbankingsystemoutlook,butitwas(andstillbe) inthegroupofhighestrisklevelintermsofbotheconomicandindustryrisk.

ItisalsonoticeablethattheinstabilitiesinVietnamhasbeencontrolledsuccessfullybythegovernme ntinthesensethatitdidnotcreateawidespreadchainofdefaultinfinancialinstitution s.T h a n k s t o t h a t , t h e p r o p a g a t i o n o f s h o c k i n t h e f i n a n c i a l s y s t e m w a s l e s s visiblydemonstrated.However,wecanseethatcertainkindsofexposuresbetweenfinanci ali n s t i t u t i o n s d o e x i s t ( F E T P , 2 0 1 3 ) ; i n c o n s e q u e n c e s , t h e r e a r e a r g u a b l y interconnectednesse x t e r n a l i t i e s i n t h e f i n a n c i a l s y s t e m T h i s s i t u a t i o n i m p l i e s t h a t t o prepareforthegrowingofthefinancialmarket,exposuresrelati onsbetweenCIsmustbeunderstood.

30GSO:GeneralStatisicOffice.IRD-DIAL:Institutderecherchepourledéveloppement– aF r e n c h re searcho rgan isa tion , original andu ni qu e onth eEu ropeandeve lopment resear chscene.

Remarks

Vietnam's financial situation closely resembles that of other Asian countries during the 1997 crisis, particularly Thailand and South Korea, where a weak financial and economic structure, coupled with a significant decline in foreign capital, triggered a chain reaction of currency devaluation, falling exchange rates, and soaring inflation In both instances, biased investment incentives resulting from government protection of the banking sector emerged as a significant systemic risk This risk was able to evade public scrutiny due to the lack of available indicators and insights at the time The combination of these factors suggests that systemic risk operates on a different level, which current tools are unable to detect, leading to a lack of intervention Therefore, a macroprudential approach is essential in both cases to identify and mitigate these risks effectively.

Vietnam's financial system faces systemic risks categorized into four main groups: an expansionary macro environment characterized by capital inflow and credit growth, a weak currency position, widespread degradation of capital quality across sectors, and structural weaknesses at both the system and institutional levels To address these risks, a macroprudential policy approach provides regulators with essential principles and tools for analyzing and mitigating financial imbalances However, due to data limitations, implementation costs, and country-specific constraints, not all macroprudential measures are suitable for Vietnam The applicable macroprudential implications during this period include the establishment of counter-cyclical buffers, rule-based policies such as caps on leverage ratios to counter market fluctuations, restrictions on sectoral investment to prevent asset bubbles, facilitation of non-bank financial institutions, and the convergence of Vietnamese Accounting Standards (VAS) towards International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS).

31 E v e n thoughVietnam pr ob l e m s aremuchendogenous, the cri si s of2008does r ev e r se d the trend o f t h e c a p i t a l i n f l o w t o t h e c o u n t r y I t a l s o r e f l e c t e d t h e f a c t t h a t s y s t e m i c r i s k a t g l o b a l l e v e l c a n a f f e c t negativelytoaneconomy.

Vietnamwassuccessfulatavoidingacatastrophiccascadeinthisperiod.However,these ri sk sw e r e n o t r o l l e d o u t f u l l y a s t h e l e v e l o f N P L s i s s t i l l h i g h a n d b a n k i n g s e c t o r i s showingsignsofrevertingbacktothepreviousposition 32 Itisarguablethatthepr eviousshockswerenotstrongenoughtocreate acascadingfailure Providingthatt hefinancialsystemcontinueto growthfurtherinsizeandcomplexityandalargerpot entialshockinthefuture,whatwillbethethresholdforarobust-yet- fragilitytriggerforVietnamfinancial system?

ThischapterbrieflyreviewsCircular13(2010),Decision254(2012),Circular02(2013),Circular36(2014)ontheirsystemicriskreductionaspects.Theseregulationswereselectedb ecausetheyarerelatedprudentialratios,limitsandstructureofbankingsector.Thebe nchmarkcriteriaareconsistentwithimplicationsfromchapter2andchapter3.

Shockabsorptioncapabilityofcreditinstitutions

TheshockabsorptioncomponentsofVietnamfinancialregulationsaremainlycarriedoutvi aprudentratiosmandatedbySBV.Specifically,SBVgivesinstructionsonassetsclassification ,riskweightsandcalculationformula.

Circular1 3 ( 2 0 1 0 ) w a s i s s u e d i n O c t o b e r 2 0 1 0 a f t e r t h e p e a k o f i n s t a b i l i t i e s a n d w a s intendedt o r e p l a c e D e c i s i o n 4 5 7 ( 2 0 0 5 ) o n p r u d e n t r a t i o s o f b a n k i n g s e c t o r a n d a l s o partiallyaddressownershipstructureproblem.Mainrequire mentsofCircular13was:(1)to raisetheminimum CapitalAdequacyRatio (“CAR”)from8% to9%;(2) tosetrequiredsolvencyratiotobe15%,calculatedbasedonthevalueofoutrightreceivablecredit assetsandd e b i t a s s e t s 33 ;

EventhoughCircular13wasnotstrictcomparedtointernationalstandards,bySeptember201 1,t h e r e i s a d e f i c i t o f V N D 1 7 , 6 3 8 billionb e t w e e n c h a r t e r e d c a p i t a l s o f a l l S O C B s compared totherequirementsofCircular13.Moreover,theleverageratiosofthesebanksar econsistentlyhigherthanthoseofJSCBs(NguyễnĐứcTrung,2013).Compoundedwiththeir p o s i t i o n a s t h e p r i m a r y c r e d i t p r o v i d e r f o r J S C B s [ F i g u r e 3 5 ] , t h o s e b a n k s w i l l continuetobeamajorsourceofsystemicrisk.

Circular36(2014)isthelatestrevampofprudent indicatorsthatupdatesandsupersed esmanypreviouslegaldocuments 34 Itisalargedocumentwith5chaptersand32artic les,showingt h e c o m m i t m e n t t o s t r e n g t h e n t h e f i n a n c i a l s e c t o r T h e c i r c u l a r c o n t a i n s n e w substancesasfollow(SBV,2014):(1)refiningownership- limits,publicationandcalculations;

( 6 ) a d d i n g p r o v i s i o n s o n restrictions for capital contribution, share purchasing among subsidiaries of FIs; (7) adding provisiononmaximumratioofloanoutstandingandthetotaldepositsensuresolvencyofCIs T h e i n i t i a l i m p r e s s i o n i s , e v e n t h o u g h b r o a d e r t h a n C i r c u l a r 1 3 , C i r c u l a r 3 6 s t i l l targetsatthesameobjectives:ownershipstructureandliquiditystatusofindividualC Is.

Regardings h o c k s a b s o r p t i o n a s p e c t , C i r c u l a r 3 6 s t i p u l a t e s t h e f o l l o w i n g c a p i t a l provisioninginstruments:equitycapital&minimumcapitalsafetyrati o(i.e.CAR),solvencyratio,maximumshort-termcapitalsourcesusedasmediumandlong- termloans,ratiooftotal- lending-to-total- depositsandpartialsectoral limitation forsecurities&real estatel o a n s ( r e d u c i n g r i s k w e i g h t f r o m 2 5 0 % t o 1 5 0 % ) T h i s s e t o f i n s t r u m e n t s a l s o super sedespreviousupdatesmentionedinCircular13.

3 a n d C i r c u l a r 3 6 t o c o n t r o l t h e c a p i t a l p r o v i s i o n i n g o f C I s i s s t i l l p u r e l y microprudential( i e f o c u s i n g s o l e l y o n i n d i v i d u a l C I ’ s f i n a n c i a l h e a l t h ) 35 T h i s s e t o f instrumentshascovered3primaryaspectsofbalancesheetsupervi sing:riskonassetsside(CAR),riskonliabilitiesside(short- termdepositsusedformediumandlong- termloans)andsolvencyrisk(solvencyratio).However,foreachaspect,onlyasing leinstrumentisintroducedanditiscompletelymissingofcounter- cyclicalbufferscomponentsaswellas other macroprudential tools Thepoor set ofinstruments also meanmany risks canpassby

34Decision03(2008),Circular15 (2009),Circular13(2010)and amendments Source:SBV (2014)

The inclusion of macroprudential requirements in policy is crucial, as low capital instrument coverage in Circular 36 hampers regulators' ability to measure leverage and assess borrowers effectively This limitation leads to an inadequate systemic risk buffer and liquidity charges Additionally, the fixed parameters for each financial instrument lack a theoretical basis, reflecting regulatory rigidity that diminishes effectiveness in extreme scenarios For instance, during systemic liquidity shortages, a higher solvency ratio should be mandated, but implementing new regulations can be a lengthy process Furthermore, Circular 36's relaxation of credit to the securities and real estate sectors, coupled with the potential for TPP membership and a stable macroeconomic environment, raises concerns about future instabilities amid persistently high levels of non-performing loans (NPLs).

Asdiscussedinpreviouschapter,theunderlyingrisk factorsofVietnamfinancialsyste moperateonadifferentdimensionandwerenotaddressedfullyintherecentreforms.T hesimplistici n d i c a t o r s i n t e r m o f f o r m , p a r a m e t e r a n d d a t a s o u r c e c a n b e b e n e f i c i a l f o r complianceandadministrationpurposebutitcanhardlycapturethecom plexityofVietnamfinancialsystem;thereforecertainriskdimensions(e.g.systemicrisks)mayavoi dregulatoryscrutiny.

Together,thetwocircularsbringstricterrequirements uponbankscomparedtoprev iousregulations.Itisalignedwithinternationalpracticesandmacroprudentialpolicy.However,the sec i r c u l a r s d i d n o t b r i n g a n y n e w i n s i g h t i n t o V i e t n a m f i n a n c i a l r e g u l a t i o n s I t i s , indicatedbytherelianceonexistingapproach,whichwehaveshowntobeproble maticinpreviouschapter.Moreover,withoutreferring toanyinternationalstandard,it seemsthatSBVisstilloperatinginitsownsphere.Furthermore– illustratedbythecomplianceissuewithCircular13– itraisesquestionsregardingregulationinterpretationandenforcementsimilartowhath appened.

Contagionsandnetworkstructure

Theconceptofcontagionsandtheroleof networkstructureinVietnamfinancial regu lationsarecarriedoutvialimitingsizeofownershiplinksandofindividualloans.In theperiodof2006–2011theyareoftencircumventedviatheformationofproxyenterprises.

InMarch2012,thePrimeMinisterissuedDecision254(2012)toaddressthehighlevelofNPLs.T h e p l a n i s t o u n w i n d o w n e r s h i p s t r u c t u r e o f c o m m e r c i a l b a n k s a n d t o i m p r o v e banksresiliency,withguidancetoenforceprudentratiosandrestructuresub- standardCIs.AnoticeablepointisthedecisiontoputtheSOCBsatthecenterstagebydemand ingthatSOCBs expand their directive position and enforce more control onthe creditmarket. Thisisa q u e s t i o n a b l e a p p r o a c h a n d i m p l i e s t h a t S B V i s n o t w i l l i n g t o r e l i n q u i s h p o w e r t o embracemarketprinciples.Itisalsoagainstmacroprudentialprinciplessinceite ncourageslargerandmoreinterconnectedSOCBswithhighpotentialofhavingmoralhazard.

In June 2013, SBV issued Circular 02 (2013) to enhance asset classification, risk provisioning, and the utilization of provisioning by credit institutions and foreign bank branches, requiring banks to calculate non-performing loans (NPLs) using formulas aligned with international standards (Campbell and Pham, 2014) However, the implementation faced a delay of one year, extended to 2015 by Circular 09 (2015), due to the unpreparedness of commercial banks On a positive note, Circular 09 introduces stricter measures compared to Circular 02, particularly regarding corporate bonds and the periodic assessment of collateral to ensure values reflect current market conditions when determining the specific amount for provisioning (ADB, 2014).

C i r c u l a r 3 6 I n C i r c u l a r 3 6 , t h e r e a r e a r t i c l e s p o i n t i n g a t l i m i t i n g e x p o s u r e s , w h i c h including:restrictiononshareholderslending(addressingmisali gnedincentives);prohibitionoflendingtoboardmembers,boardmembers’ relatedentit iesandowningofunlistedbonds(addressingmoralhazard);limitationsonmaximum loanstosinglecustomerand groupsof customers(addressinglimitationonlargeexposures); limitationonshare purchasingandcapitalcontribution(addressingintra-financialexposures).

Ingeneral,thereformshavedonewellataddressingstaticandeasytocalculateexposures(share holdingratios,NPLs,etc.)insidethefinancialsystem.Therearegoodcoverageand

Dec is ion 493 (2005) detailedo p e r a t i o n a l g u i d a n c e O n t h e o t h e r h a n d , o n c e a g a i n t h e r e i s n o n e w i n s i g h t provided.M a c r o p r u d e n t i a l r i s k d i m e n s i o n s a n d r e l a t e d i n s t r u m e n t s w a s n o t m e n t i o n e d throughoutt h e n e w r e g u l a t i o n s , i n c l u d i n g : d y n a m i c n a t u r e o f e x p o s u r e s d u e t o complementaryb e h a v i o r , h o m o g e n e i t y o f b a n k i n g s e c t o r , m a r k e t g u i d a n c e i n c a s e o f heightenrisk(i.e c ountervail fire- salesandhaircuts effects), measurement ofconnectednessandcontagionlevel/ risk,SIFIsexternalities,etc.

Them a i n w a y t o i n c r e a s e n e t w o r k r o b u s t n e s s i s s e g m e n t i n g a n d d i v e r s i f y i n g Currentre fo rm s’ separationofownershipstructurebetweenbanks,securitiesco mpaniesandinsurancecompaniesisastandardpractice.Becausenon- bankFIshasdifferentrisknaturethanbanks,theycanhelp absorbcertaintypeof shockfr omaffectingthe realeconomy.However,theemphasisonbanksandtherelativeweaksecuriti esandinsurancesectorsstillindicatessuboptimalmarketstructure.

Evenwiththerecentbankingreformswithmerge&acquisitionactivitiesandgovernmenttakeo vers,t h e g e n e r a l s t r u c t u r e a n d r e v e n u e m o d e l o f c o m m e r c i a l b a n k s h a v e h a d fewchangesto their skewness.Banks still rely muchon interest rates andconsumer deposits asthemainsourceofprofit(KPMG,2013).

Global Financial Markets Real economies

Duetothelackofinformation(e.g.marketstate)CI’sadjustments– whenlookingfromthenetworkperspectives– maynotbeoptimal.Therefore,accuratemarketindicatorsareneededtoguideCIs’adjustm ents 37 Byprovidingaccurateindicators,regulatorscanincreasethe robustness of the system without having tointervene much in market structureori n d i v i d u a l C I s a c t i v i t i e s – w h i c h c a n b e v e r y c o s t l y I n o t h e r w o r d s , i t i s n e e d e d t o reduceinformationasymmetrybetweenmarketagents.Thereisnomentioninthereformsabout

“beacon”indicatorsortheroleofSBV(oranotherbureau)tocreatesuchone.Thein- effectindicators(interestrates,reservesratio,exchanges,NPLsratio,CAR,etc.)arenotabletorefle ctfullyandaccuratelymarketconditionandcontextspecificcondition(sectoral,bilateral )ofCIs.Thus,theseindicatorscanonlyguideoperationalactivitiesandhavelittleeffectonstrat egicdirectionofCIs.

Informationandregulationframework

Overall,therecentregulationupdatesconsiderably strengthenedthelegal framew orkforbankingsector.However,theyshowedthatSBVstilllacksthecapacitytodetermi netruesoundnessofindividualbanksaswellascollectivewell- beingofthebankingsector.Thel a c k o f a u t o n o m y f o r S B V a l s o p o s e s a r i s k d u e t o t h e i n a b i l i t y t o t i m e l y a d d r e s s t h e shortcomingsitcanfind.These limitations highlightthene edto transfer bankoversight responsibilitiesf r o m S B V t o a n i n t e g r a t e d s u p e r v i s o r y a g e n c y a s p l a n n e d b y t h e government(JayK.RosengardandHuynhT heDu,2014;TôNgọcHưng,2013).

Networknatureoffinancialsystememphasizesacentralizedapproachindatacolle ctionandsupervisionbecauselinkagesbetweendifferentkindsofCIscanhavehighvolumeandthu ss t r o n g l y a f f e c t s y s t e m i c s t a b i l i t y A n i n t e g r a t e d s u p e r v i s i o n b u r e a u c a n h e l p improvinginformationconcentrationandpoliciescoordinationbetweendifferentmar kets.ItcanalsoenforcedataconformantacrossFIsandfacilitatetheprocessofdatacollection, dataminingandsystem-wideindicatorsgenerationforregulators,FIs,andgeneralpublic.

Att h e e n d o f t h e d a y , t h e m a i n g o a l i s t o i m p r o v e c o o r d i n a t i o n a n d s t a n d a r d i z a t i o n i n monitoringandregulatingallFIsacrossthefinancial system.Areformtow ardsasinglesupervisingbureauisnotahardrequirementaslongaswecanachievetheaforementi onedgoals.I n o r d e r f o r a m a j o r r e s t r u c t u r e t o h a p p e n , t h e r e n e e d t o b e c h a n g e s t h a t a r e f a r beyondthescopeofthisdiscussion.

Remarks

When looking fromthe perspective ofmacroprudential policyas a protectorfor thefinancialsystem– withthreecomponents:identifier,stabilizerand absorber[2.5.2]– wecanseethattheidentifiercomponentisweakduetothesimplisticnatureofindicators,thestabi lizercomponentisweakduetorigidity(i.e.lack ofadaptationcapability)of regulatio na n d t h e a b s o r b e r c o m p o n e n t i s u n d e r m i n e d b y V A S ’ s t o l e r a n c e n a t u r e a n d persistentregulationloopholes.

Ins u m m a r y , t h e c u r r e n t r e f o r m t o o k a n i n s t r u c t i o n a l a p p r o a c h w i t h t h e o b j e c t i v e s o f constrainingcapitalandownershipstructureofindividualCIs.Thisi sessentiallyamicroprudentialapproach.Thetheoryofsystemicriskindicatesthatbesidesrisksste mmed fromimprudentbehaviors;CIsarealsounderotherriskdimensions– inwhichsystemicisamajor one.The lowcoverageandsimplistic natureoftheregula tionshasshowntobeineffectiveinthepastandwithoutmajorconceptualupdateitissetuptofai linaddressingtheseriskdimensions.It i s recommended thatVi etna m f in an ci a l reg ulationsincorporat e componentsr e s p o n s i b l e f o r : i s s u i n g e a r l y w a r n i n g w h e n s t r e s s b u i l d s u p , p e r f o r m i n g system- widestresstestsandplanningofcounteractpolicywheninstabilitiesmanifest.

Keyfindings

SystemicrisksinVietnam’sfinancialsystem

Thestudyidentifiedfourgroupsof systemicriskinVietnamfinancial systemduringt heperiodof2006–2011:(1)expansionarymacroenvironment,

(3)sector- widedegradationofcapitalqualityinbankingsystem,and(4)structural weaknessesatbot hinstitutionalandsystemiclevel.

InVietnam,expansionaryriskcamefromtheinflowofcapital,highlevelofcreditgrowth(moret han20% inthoseyears), a nd –to a lesserlevel – generaleconomy gr owt h The inflowo f c a p i t a l r a i s e d c o l l a t e r a l v a l u e i n f i n a n c i a l s e c t o r ( a n d p r i c e s i n t h e g e n e r a l economy)andvia differentmechanisms(leverage,balancesheeteffects,etc.)ledtoacceleratedc r e d i t g r o w t h T h e s e e f f e c t s a r e m u t u a l l y r e i n f o r c i n g a n d t h u s c r e a t e d excessiveleverageinthefina ncialsystem– whichisasystemicrisk.Itisworthnotingthateventhoughgeneraleconomygrowthisgoodforfinanci algrowth,optimismofcontinuouseconomicg r o w t h m a y f e e d i n t o t h e c y c l e o f e x c e s s i v e l e v e r a g e a n d t h u s a c c e l e r a t e t h e build- upofriskfurtheruntilfinancialinstabilitieshappen 38

Asasmallandunder- developedeconomy,Vietnamis thedestinationofexternalcapitalseekingp r o f i t 39 wheni t b e c o m e s b e t t e r c o n n e c t e d w i t h t h e r e s t o f t h e w o r l d A w e a k curre ncyposition(indicatedbyhighinflation,continuousdeficit inaccountbalance,an ddepreciatedc u r r e n c y v a l u e a s a c o n s e q u e n c e ) a n d a n e x p a n d i n g f i n a n c i a l s y s t e m i s a n idealenvironmentforhit-and- runbehaviors.W e a k currencypositionisbothasymptom andavectorofriskbecauseitshowsthatthefinancialsystemisvulnerabletothereversionofexternal capital flow.Duringthis period,highinflation anddeprecatedexchange rate

39 R O I i n e m e r g i n g c o u n t r i e s w i t h h i g h g r o w t h r a t e ( e g V i e t n a m ) a r e o f t e n h i g h e r w i t h h i g h e r v o l a t i l i t y T h e s e i n v e s t m e n t s c a n b e d u a l p u r p o s e s o f a p r o f i t e a r n i n g v e h i c l e a n d a r i s k d i v e r s i f i c a t i o n item. hasaddedmuchstresstobothfinancialsystemandrealeconomy,whichcanbeconsideredasystemic risk[OverviewB].

Int h e a n a l y z e d p e r i o d , V i e t n a m b a n k i n g s e c t o r w a s p l a g u e d w i t h p r o b l e m s r e l a t e d t o undercapitalization(e.g.bankcannotmeetdecree141requirementsafterm ultipledelays),reductiono f c a p i t a l q u a l i t y ( e g v i a c r o s s - o w n e r s h i p s t r u c t u r e ) , u n r e l i a b i l i t y o f p r u d e n t ratios(e.g.NPLsratio,CAR).The seproblemswereprevalentinbothSOCBsandJSCBs,thusinturnmakingthebankingsystem muchlessabsorbenttomacrovariationsasshownin[3.3].Compoundingtotheseproblemsis thetolerantnatureofVASwhencomparedtoIAS/

IFRS(evidencedbydifferentfiguresreported byeachstandard) Itintroducedlarge v o l a t i l i t y o f p r u d e n t i n d i c a t o r s v i a l a r g e r r o o m f o r e r r o r a n d f o s t e r i n g r e g u l a t i o n circumventionsinCIs.

Vietnam's commercial banks exhibit significant structural weaknesses at both individual and systemic levels At the institutional level, there is a notable homogeneity in their revenue structures, business behaviors, and types of operations Systemically, these weaknesses are characterized by the prioritization of state-owned commercial banks (SOCBs), inconsistent regulatory frameworks, and poor compliance These issues undermine the financial network's structure, rendering it more vulnerable to specific shocks, such as liquidity crises and cross-border capital flow disruptions.

Applicationsofmacroprudentialpolicy

The primary objective of macroprudential tools is to address expansionary risks, as preventing instabilities is more cost-effective than managing them These tools include buffers and restrictions, monitoring instruments, and forward-looking indicators Buffers and restrictions, such as counter-cyclical buffers, distribution limits, provisioning practices, and leverage ratios, help mitigate the pro-cyclical behavior of credit institutions (CIs) Additionally, stress tests and sustainability models can benchmark risk progression The study emphasizes the importance of forward-looking indicators as guiding "beacons" for CI operations Crucially, these tools should be implemented in a rule-based and adaptive manner, rather than being fixed and rigid.

Regardingthesecondriskvector,weakcurrencypositionisamacrovariable,interventioninthis areaisoutofscopeofmacroprudentialpolicy.Macroprudentialreactioninthiscaseisindirect.Its uggeststoolstodampennegativeeffectsandmeasuretheimpactofcross- borderactivitiesforCIs’operation.

Bankingsectoranditsfundingsourcesarealsomainobjectivesofmacroprudentialpolicyduet o t h e i r i m p o r t a n c e T h e i n s t r u m e n t s ’ f o r t h i s p u r p o s e i s w e l l c a p t u r e d i n m a n y financialsoundnesstoolsets(e.g.FSI,BaselIII).ForthecaseofVietn am,adaptingtheseframeworksforthebankingsectorcanbethemostefficientpath.

Toaddressstructuralproblem,macroprudentialrecommendationistodiversifyand segmentthefinancialnetworktoaddresiliencyandtoisolateshocks.InVietnam,itca nrelatetounder-developmentofnon- bankFIsandhomogeneityinsidethebankingsector.Regardingregulatorystructureweakn ess,itisindecisiveduetoitspoliticalnature.

Benchmarkofrecentreforms

Althoughi t p l a y e d a p o s i t i v e r o l e i n s t a b i l i z i n g V i e t n a m f i n a n c i a l s y s t e m 40 ,t h e c u r r e n t reformis missing macroprudential components responsible for:issuin gearly- warning ofstressb u i l d - u p , p e r f o r m i n g s y s t e m w i d e s t r e s s t e s t s a n d p l a n n i n g o f c o u n t e r - a c t p o l i c y wheninstabilitiesmanifests.Besides,coverageof(bothmacroandmicro)prude nttoolsislowandlacksystemicriskcomponents(e.g.correlationwithGDPgrowth).

Furthermore,thereisnotmuchchangeinthegeneralapproachutilizedbySBV,whichismo reinstructionalthanincentivize.CombinedwithpolicycredibilityofSBV,thereisstillariskofre gulationcircumventionashappenedbefore.

Finally,itshowedreluctanceinfosteringanadaptiveandrobustfinancialsystem.Thisis indicatedbytheemphasisofSOCBs,lowtransparency(i.e.thefoundationofregulationsf igurearerarelydisclosed)andthelackofrule-basedtools.

Notesonmacroprudentialpolicyimplementation

Eventhoughmacroprudentialapproachisbeneficialforvariouscases[Appendix7],therear eobstaclesthatpreventitfromfulladoptionacrosstheeconomy Thestudyidentifi edseveraldifficultiesinimplementingmacroprudentialpolicy.

First,duetowiderangeandsubtledifferencesbetweenmacroprudentialtools,itishardtodecide whichone(andtowhichextent)shouldamacroprudentialinstrumentbeapplied.

Second,i m p l e m e n t i n g m a c r o p r u d e n t i a l t o o l s c a n b e c o s t l y i n t e r m o f e x e c u t i o n c o s t (regulationresearch anddeploymen t),operat ioncost(on- goingregulationcost and reductiono f C I s p r o f i t ) a n d t h e u n c e r t a i n t y i n v o l v e d ( n e w a p p r o a c h ) T h e r e f o r e , i t i s questionableifthecostoutweighsthebene fitsandthebestactionisno-action[Appendix8].

Finally – related to but separated from cost –in order to perform macroprudential analysis,regulatorsneednewkindofsystemicdataandbetterdataaccuracy.Thisisnot merelyacostp r o b l e m b e c a u s e i t a l s o n e e d s n e w m i n d s e t f o r p o l i c y f o r m u l a t i o n a n d n e w infrastructurefordatacollection.

Policyrecommendations

FromtheabovefindingsandputtingVietnam’scontextintoperspective,thestudydevisesthefo llowingpolicyrecommendationsinregulatingVietnam’sfinancialsystem.

Refinethecurrenttoolset.Macroprudentialpolicy isnotareplacement formicro prudentialpolicy.Instead,itisasupplementaltooltoaddressproblemsbeyondthescope o f c u r r e n t p r u d e n t i a l p o l i c y T h e r e f o r e , t h e p r e r e q u i s i t e f o r s u c c e s s f u l macroprudentialpolicy implementations is thereliability of existing microprudentialtools.Itimpliesthatthegovernmentshouldcontinueto monitor ban ks’prudentratiosclosely, helprecapitalizecommercialbanks,restructureNPLs,stre ngthencreditriskanalysis,andpromotegovernancetransparency.

To effectively address systemic risk, it is essential to enhance the current supervisory toolkit, which is currently too simplistic As demonstrated in Chapter 2, this inadequate toolset fails to fully identify both idiosyncratic and systemic risks within the financial sector.

Tobettercoveridiosyncraticrisks–besidesstrengtheningexistingtools– thegovernmentshoulde x p a n d t h e c o v e r a g e o f t o o l s t o b o t h l e n d e r a n d b o r r o w e r s i d e s E x a m p l e s o f borrowersideindicatorsare:loan-to-valueratio,loan-to- incomeratio.Theseindicatorsarea l re a d y a v a i l a b l e a s p r u d e n t i n d i c a t o r s a t i n d i v i d u a l i n s t i t u t i o n s ; h o w e v e r , t h e y a r e n o t availableasaggregatedindicators.

Diversifythecompositionofbankingsector.C o m m e r c i a lbanksshouldfurtherdiversifyt heirr e v e n u e s t r u c t u r e I t w o u l d r e d u c e t h e c o n c e n t r a t e d e f f e c t o f s h o c k s t h a t t a r g e t banking sector Meanwhile, thegovernment need toanticipate and preparefor thesechangesinsectorstructureaswellbecauseitmaystemtoo-non- traditional-to-failtypeofrisk.T h e u n d e r - d e v e l o p e d n o n - b a n k s e c t o r s c a n b e a b i a s i n V i e t n a m f i n a n c i a l s y s t e m Facilitatingd e v e l o p m e n t o f t h i s a r e a c a n h e l p i m p r o v e c a p i t a l a l l o c a t i o n a n d i n c r e a s e financi alresiliency,butitwouldneedfurtherinvestigation.

Constructa d e p e n d a b l e s e t o f i n d i c a t o r s t h a t r e f l e c t p h a s e s o f r i s k b uild- upa n d ro ll ou t E a c hp h a s e o f f i n a n c i a l c y c l e h a s d i f f e r e n t c h a r a c t e r i s t i c s a n d t h u s i n s t i t u t i o n s reactd i f f e r e n t l y t o t h e s a m e r e a d i n g i n e a c h p h a s e I n h a r d t i m e , m a r k e t r e a c t s m o r e stronglytoreal-timedata.Instableperiods,long- termindicatorshavemoreweightandcansteerthesystembetter.

TherapidlychangingnatureoffinancialmarketsimpliesthatVietnamfinancialregulatingburea us(e.g.SBV)shouldputeffortinconstructingaguidingmodel(e.g.USFinancials(201 5))andemployingmacrostresstestaspublicindicators.Theseindicatorscanserveasinputf o r a d a p t i v e r u l e - b a s e d p o l i c i e s t h a t a d a p t b e t t e r t o c h a n g i n g n a t u r e o f f i n a n c i a l

41 R i s k thatoriginatesfromwithinfinancial system system.AreliablepublicindicatorcanalsoserveascoordinationsignalforCIs,itwouldi mproveregulatorpredictioncapabilityintimeofdistress.

Thecoverageoftheseindicatorsshouldbeconsideredonfollowingbasis:theexternalitiesita d d r e s s e d a n d p h a s e s o f i n s t a b i l i t i e s A n e x a m p l e o f t h e s e i n d i c a t o r s m a y i n c l u d e : aggregationofmicroprudentialindicators,resultofsystem- widestresstests,GDPatRisk,ListofSIFIs,CoVaR/CoPoDofSIFIs.

Standardizefinancialdatatowardsinternationalstandards.Datainacurracyhasshowntob e a b i g o b s t a c l e i n i m p l e m e n t i n g b o t h m i c r o - a n d m a c r o p r u d e n t i a l p o l i c y T o ap pl y macroprudentialanalysis,itisimportanttohavedet ailed,up-to- dateandaccuratedata.TherecentchangeallowingSBVtohavedirectandautomatedaccessto keyindicatorsofCIsisintherightdirection.Further,Vietnamregulatorsshouldreducet hegapbetweenVASandIAS/

Furtherstudy

Overall,thisstudysetsmorequestionsthananswers.Otherthanbroadrecommendations,itdidnotget intointricatedetailsofthemacroprudentialapproach.ForthecaseofVietnam,theres h o u l d b e s t u d i e s t o c o m p a r e e f f e c t i v e n e s s o f s p e c i f i c i n s t r u m e n t s a n d t h e a c t u a l pr ospectoftheirimplementation.

Frompersonalperspective,wethinkthatnetworkbasedmodelingoffinancialsystemcanbe f r u i t f u l i n t h e n e a r f u t u r e , w h e n d a t a c o v e r a g e i s i m p r o v e d I n t h e f i e l d o f c o m p u t e r science,t h e r e i s m u c h p r o g r e s s i n t h e s u b - f i e l d o f a g e n t - b a s e d m o d e l i n g 42and a r t i f i c i a l intelligencethatcanfacilitatesuchstudies.

Finale

Agent-based modeling (ABM) is a computational approach used to simulate the actions and interactions of autonomous agents, including individuals and organizations, to evaluate their impact on the overall system In the context of financial development, integrating capital into an economy is crucial; otherwise, wealth may rapidly exit the country Additionally, the swift pace of global financial movements necessitates a proactive strategy to create systems that align with international standards.

I n t h e a g e o f s u b - milliseconds transactions (ComputerWorld, 2008), thereis simplyno time fora translator.Withoutproperinterpretationofdata(e.g.balancesheet)wecannotleveragemodernt oolstoanalyzethedataforgovernanceandpredictionpurpose.

GiventhecontextofVietnam,itcanbebeneficialtobealatecomertothefinancialgame.Macrop rudentialpolicyisjustanexample.Thereareavastamountofstudiesfromwhichwec a n l e a r n I n f a c t , m o s t o f o u r p r o b l e m s w e r e e x p e r i e n c e d a n d r e s o l v e d b y s i m i l a r e conomiesa t s o m e p o i n t i n t h e p a s t T h e m i s s i n g p i e c e i s a c o n d u c t i v e s t r u c t u r e t h a t allowsrapidpolicyfeedbackandsaneadoptionofinternationalpractices.Contrarytoothe rsectors, therateofchangeismuchlessofa problem.Withitsspeedandagility,Vietnam’sfinancialsectorcanadaptquicklyaslongaschangesb enefitthemajority./.

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Financial crises resemble earthquakes in that they result from prolonged pressure accumulation, leading to sudden releases of financial stress, akin to seismic shockwaves These crises stem from solvency imbalances and specific triggering events, causing credit contractions that ripple through financial institutions and damage the real economy While scientists can often predict where earthquakes might occur, economists have struggled to accurately forecast financial crises Notably, financial crises tend to inflict greater economic damage compared to earthquakes, although they usually do not result in human casualties This difference allows for more regulatory measures to manage economies, with each nation implementing its own strategies to safeguard its financial system.

Unlikeinclassicaldicho tomy, therealeconomy andthefinancia lsector haveclos eties andcaninfluenteachother,atleastintheshort-to- mediumterm.Itisagreedthatmonetarypoliciesoftentakeeffectontheeconomyrelativequic klycomparetofiscalpolicies;andthus,monitoredcloselybybothfinancialandnon-FIs.Thisrelationcreatesaloop,whichexplainedasthefinancialacceleratoreffect[figure].Aderivativefromthisideaissystemiccrisesinvolvefeedbackeffectsbetweentherealeconomyan dthefinancialsector.

Ita l s o e x p l a i n s “ M a c r o - f i n a n c i a l l i n k a g e s , ” w h i c h r e f e r s t o t h e i n t e r a c t i o n b e t w e e n t h e financialsect orandthedomesticeconomy.Macro- financiallinkages canalsobeusedtoexaminelinkagesfrominternationalfinancialflowst oaneconomy,orfromaneconomy’sfinancialsystemtotherestoftheworld.

Economicrisk:Theanalysisofeconomicriskofabankingsectortakesintoaccountthest ructureandstabilityofthecountry'seconomy,includingthecentralgovernment'smacroe conomicpolicyflexibility;actualorpotentialeconomicimbalances;andthecreditriskofeco nomicparticipants mainlyhouseholdsandenterprises.

Industryrisk:Theviewofindustryriskfactorsinthequalityandeffectivenessofba nkregulationandthetrackrecordofauthoritiesinreducingvulnerabilitytofinancialcr ises,aswella s t h e c o m p e t i t i v e e n v i r o n m e n t o f a c o u n t r y ' s b a n k i n g i n d u s t r y - - i n c l u d i n g t h e industry'sriskappetite,structure,andperformance- andpossibledistortionsinthemarket.Industryriskalsoaddressestherangeandstabilityoff undingoptionsavailabletobanks,includingtheroleofthecentralbankandgovernment.

Thef i n a n c i a l i n s t a b i l i t y h y p o t h e s i s , d e v e l o p e d b y t h e l a t e e c o n o m i s t H y m a n M i n s k y , referstothenaturaltendencyofthefinancialsystemtoundergop eriodicwavesofcrisesandb a n k r u p t c i e s T h e f i n a n c i a l c r i s i s c a n l e a d t o a g e n e r a l e c o n o m i c d e c l i n e b e c a u s e lendingf a l l s a n d b u s i n e s s e s t h a t r e l y o n b o r r o w i n g t o m a i n t a i n t h e i r g e n e r a l s c o p e o f operationdeteriora te.During anextendedperiodofprosperi ty,these edsofcrisis spontaneouslyg e r m i n a t e a s l e n d e r s b e c o m e t o o o v e r c o n f i d e n t t h a t l o a n s w i l l b e r e p a i d Thisoverconfidencecau sesthemtomakebadloans,whicheventuallyresultindefaults,asubsequentreductionincredite xtension,andthepossibilityofsystem-widecollapse.

Minskyarguesthatatanymomentintime,theeconomyiscomposedofamixofthre etypesofspendingunits—hedge,speculative,andPonziunits.

Aspendingunitsuchasahouseholdorfirmwheretheanticipatedrevenues(inflows)significantlyexce edtheanticipatedpaymentobligations(outflows).

Aspending unitthat mustcontinuouslyincrease its outstanding debttomeetitscurre ntobligationsorpayments.

AccordingtoMinsky,itisthemixtureofhedge,speculative,andPonzispendingunitsatla rgethatdeterminestheoverallfinancialhealthoftheeconomy.

Itisinanextendedr ecovery thatth eseedsofthe downturn areplanted.Spending units forgett h e l e s s o n s o f t h e p a s t a s t h e p a s t b e c o m e s m o r e d i s t a n t

T h e y i n c r e a s e t h e i r outflowsrelativetotheirinflows.Debt-to- incomeratiosrisethroughouttheeconomy.Theeconomymovestoamorevulnerableposition, andsomerandomeventthatwouldhardlyben o t i c e d i n a d i f f e r e n t e n v i r o n m e n t s e t s o f f a c h a i n o f b a n k r u p t c i e s a n d d e f a u l t s t h a t spreadthroughouttheeconomy.

Acemoglu et al developed a stylized economic model featuring a network of banks (nFIs) that operate over three periods In the initial period, banks engage in interbank borrowing to fund projects that generate returns in both the intermediate and final periods The resulting liability structure from these interbank loans shapes the financial network Each bank must also fulfill obligations related to senior claims, which may include payments to retail depositors and commitments like wages and taxes Since returns in the final period cannot be pledged, all debts must be settled in the intermediate period Consequently, a bank with short-term returns below a certain threshold may be forced to liquidate its projects early If liquidation proceeds are insufficient to cover all debts, the bank defaults, potentially triggering a cascade of failures within the financial network as creditor banks may also default on their obligations.

Themodel confirmedHaldane’s (2009) conjectureofrobust-yet-fragilenature of financialn e t w o r k s Theauthorsalsointroduceanewnotionofdistanceoverthefinancialn etwork,calledtheharmonicdistance,whichcapturesthesusceptibilityofeachbanktothedistr essatanyother.Itisshownthat,inthepresenceoflargeshocks,allbankswhoseharmo nicdistancestoadistressedbankarebelowacertainthresholddefault.

1 Avoidingsystemicallyriskylevelsofleverage; a CapitalAdequacyRequirements i Inclusiono f M u l t i p l i e r s R e f l e c t i n g S y s t e m i c I m p o r t a n c e , G r o w t h o f Credit,andMaturityMismatches ii IncreasesinCapitalRequiredagainstTradingBooks iii CountercyclicalCapitalBuffers iv MacroprudentialStressTests b GrossLeverageRatio

Thisgrea te rpro - cycl ical it y i s duet o the irg reat er exposures to in te rnat iona l capitalf low b CoreFundingRatio c CapitalSurchargeonLiquidity

Inthissection,thestudyconsidersinternationalexperiencesfromtwoangles:(1)failures thatraisedtheneedformacroprudential policy and(2)effectiveness ofmacropru dential policyapplication.Forthefirstviewpoint,wetakealookatthelasttwoprominentcrises thatshapemuch ofAsian financial landscape: theAsian financial crisis in1997an dthe Forthesecondperspective,Cerutti,ClaessensandLaeven

Theneedsformacroprudentialpolicyaredemonstratedvia crisesandinstabilities.Wh ensystemicrisksarenotaddressedandtreatedproperly,theriskfactorswillaccumulateand eventuallyrollout as cascaded fa il ur es The tw olarge i nt er na t io na l crises ( th at m oreo rlessa f f e c t e d V i e t n a m ) p r o v i d e d i n s i g h t s o n h o w u n n o t i c e d s y s t e m i c r i s k s c o u l d b r i n g harmstofinancialsystems.

Intheglobalfinancialcrisis(2008),systemicriskswereabletobypassregulatorsscrutinyfors e v e r a l r e a s o n s , i n c l u d i n g : t h e u s e o f c o m p l e x d e r i v a t i v e s t o d i s t r i b u t e r i s k ; v i a t h e unregulatedshadow- banking sy st em ;e xc e ss iv e reliance o nwh ol es al e funding b yb an ks ; under- capitalizationo f b a n k s ; a n d l a c k o f u n d e r s t a n d i n g r e g a r d i n g t h e r i s k p r o f i l e o f innovativefinancialproduct(Kawai&Morgan,2012).Itindicatedthattheregulatorswe re

43“ volatility,c o m m o d i t y p r i c e s h o c k s , a n d o t h e r r i s k s , a n d e x t e r n a l a n d i n t e r n a l t r a n s m i s s i o n c h a n n e l s thatoperatemoreadversely.”Source:Claessensand Ghosh (2

IntheAsianfinancialcrisis(1997),thecontextisdifferent.Itischaracterizedbysystemicrisks associatedwithso-called“double-mismatches”associatedwithborrowingshort- terminforeigncurrenciesand lendinglonger- termindomesticcurrencies(Kawai& Morgan,2012).Theproblemwasgettingmoresever ewhencompoundingwithothersystemicrisks:moralh a z a r d c o m e s f r o m f o r e i g n b a n k s t h a t a r e i n s u r e d d i r e c t l y b y g o v e r n m e n t s ( o r indirectlyviaanIMFbail- out);governmentsubsidizationand/orsupportoffavoredfirms/ industriesinthenameofeconomicgrowthanddecadesofaccountdeficits,peggedexcha ngerateanddeclinedexportprospect(Corsetti,PesentiandRoubini,1999).

Thecase of two cr is es sh ows that d es pi te ofva st ly di ff er en c es ins iz ea nd develop ment level,countriescanfacewithfinancialdifficultiesifsystemicrisksarenottreatedpr operly.

The situationof SouthKorea in199744is n ot much differentto Vietnam(financial system)ad e c a d e l a t e r , w i t h s p e c i f i c c h a r a c t e r i s t i c s o f a c r e d i t - b a s e d f i n a n c i a l s y s t e m :

( 4 ) i n d u s t r i a l a d j u s t m e n t i s o f t e n l e d b y g o v e r n m e n t ratherthanbyfirms; (5)government,banksandfirmsformedclosetiesratherthanstayingat arm’slength;(6)main suppliesoflong-termfundsare fromspecializedbanksinstead ofinvestmentinstitutions(SangYongPark,2003).

Afterthecrisishappened,liquidityratioregulationshavebeenputinplace.Furthermor e,asthehousingmarketwarmedupinthe2000s,loan-to-valueanddebt-to- incomecontrolratiosw e r e a l s o e n a c t e d H o w e v e r , K o r e a d i d n o t h a v e s p e c i f i c m e a s u r e s a i m e d a t t h e time- seriesriskdimension.Itleftloopholesforbankstoraiseexcessiveleveragethrough fund ingwith “non-coreliabilities” leadingto around of crisis-likeevents in2008 (Canuto,

2013).Beginningfrom2010,BankofKoreaintroducedseveralmacroprudentialtoo lstoaddressthevolatilityofcross- bordercapitalflows,whichincludes:macroprudentialstabilitylevy(levyonnon- coreFXliabilities),ceilingsonFXderivativepositions(leveragecaps),taxationonforeign bondinvestment.

In2013,BrunoandShin(2013)didanempiricalstudyassessingthesensitivityofcapitalfl owsto g l o b a l f i n a n c i a l c o n d i t i o n s a f t e r m a c r o p r u d e n t i a l p o l i c i e s d ep lo ye d i n

Ko r e a i n 2010.There isevidence froma varietyof approaches thatthe sensitivityof capitalflows toglobalf a c t o r s r e d u c e d s u b s t a n t i a l l y i n t h e c a s e o f K o r e a f r o m 2 0 1 0 R e m a r k a b l y , t h e dampeningofsensitivityinKoreasitsside-by- sidewithevidencethatKorea’sexperienceisd i f f e r e n t f r o m g r o u p o f c o m p a r a b l e A s i a n c o u n t r i e s ( i n c l u d i n g V i e t n a m ) F o r t h e s e Asianc o u n t r i e s , t h e y s a w a n i n c r e a s e i n t h e s e n s i t i v i t y o f t h e i r c a p i t a l f l o w s t o g l o b a l factorsafter2 010.

Thailandh a s u s e d e l e m e n t s o f m a c r o - p r u d e n t i a l t o o l k i t s s i n c e 2 0 0 2 a n d e x t e n d e d t h e i r usagecontinuously.Areportfr omBankofThailand(BoT,2012)statedthatthesepolicieshelpedcontainforeignexchanger iskinthebankingsector;buildupnon- performedloanbufferd u r i n g g o o d t i m e ; r e d u c e s e c t o r a l i m b a l a n c e i n c r e d i t - c a r d a n d p e r s o n a l l o a n s ; imposewithholdingtaxonforeigninvestmentinbonds.Ont hechallengesside,thereportalsoe m p h a s i z e s o n t h e d i f f i c u l t y o f c o o r d i n a t i o n a n d a p p r o p r i a t e p o l i c y m i x a n d t h e importanceo f p u t t i n g m a c r o - p r u d e n t i a l p o l i c y i n c o n t e x t ( i e i t i s n o t a n a l l - p o w e r f u l solutionand/ orareplacementforexistingmonetarypolicies)

Wang&Sun(2013)performedanempiricalstudyontheeffectivenessofmacroprudentialpolicie sinChinaon171banks.Itconcludesthatbothformofsystemicrisks:timeand&cross- sectionalarepresentedinChina.Somemacroprudentialpolicytools(e.g.,thereserverequirementr a t i o a n d h o u s e - r e l a t e d p o l i c i e s ) a r e u s e f u l b u t n o t g u a r a n t e e p r o t e c t i o n Further,m a c r o p r u d e n t i a l p o l i c i e s h a v e e v e n g r e a t e r p o t e n t i a l t o c o n t a i n s y s t e m i c r i s k i f bettertargeted.

Thereisavailabletheoreticalandempiricalevidenceonthepositiveeffectoffinance onlong- termeconomicgrowth.Accordingly,concernshavebeenraisedabouttheimpactofmac roprudentialpoliciesonthedynamismoffinancialmarketsand,inturn,oninvestmentande c o n o m i c g r o w t h P o p o v a n d S m e t s ( 2 0 1 2 ) t h u s r e c o m m e n d t h a t m a c r o p r u d e n t i a l toolsbeemployedmoreforcefullyduringcostlyboomsdrivenby overborrowing,targeti ngthesourcesofexternalities butpreservingthepositivecontributionof financial marketstogrowth.

Inanalyzingthecostsofhighercapitalrequirementsimpliedbyamacroprudentialapproa ch,Hansonetal.(2011)reportthatthelong- runeffectsonloanratesforborrowersshouldbequantitativelysmall.

Sometheoreticalstudiesindicatethatmacroprudentialpoliciesmayhaveapositivecontri butiontol on g- ru na ve ra ge gr ow th J ea nn ea nd Korinek (2 01 1) ,f or in st an ce ,s ho w thatinamode lwithexternalitiesofcrisesthatoccurunderfinancialliberalization,well- designedmacroprudentialregulationbothreducescrisisriskandincreaseslong- rungrowthasitmitigatesthecyclesofboomandbust.

Duet o t h e w e a l t h o f t o o l s a n d t h e a s s o c i a t e d c o s t o f i m p l e m e n t a t i o n , i t i s n o t a l w a y s beneficialtoapplymacroprudentialpolicyaggressively.Infact,eachcount ry,dependoncircumstancesmaypickdifferentsetoftools.BankofEngland(2011)andBlan cheretal.

(2013)gaverecommendationsregardingtheselectioncriteria.Thetwosetofrecommend ationa r e n o t m a t c h e d p r e c i s e l y b u t r e i n f o r c i n g e a c h o t h e r W h e n c o m b i n e d , theo verallstrategytoselectmacroprudentialtoolscanbesummarizedbelow:

Firstly,t h e s e l e c t i o n o f t o o l s s h o u l d b e c o u n t r y - s p e c i f i c , d r i v e n b y i t s e f f e c t i v e n e s s a n d efficiency:toolsarelikelytodiffer inthei reffectiveness oftacklingsourcesofsystemic risk,a n d t h e i r e f f e c t i v e n e s s m a y v a r y o v e r t i m e a n d a c c o r d i n g t o c i r c u m s t a n c e s I t a l s o needst o c o n s i d e r t h e e f f i c i e n c y o f t o o l s b y c o m p a r i n g t h e b e n e f i t s a g a i n s t t h e c o s t o f implementation,inc ludingenforcementcostandadverseconsequencestemsfromthenewpolicy.

Secondly,toolsshouldbecombinedtoexploittheircomplementarities:tocrosscheckandconfi rmt h e m a t e r i a l i t y o f s o u r c e s o f s y s t e m i c r i s k s t e m f r o m d o m e s t i c m a c r o - f i n a n c i a l imbalances( e g c r e d i t b o o m , a s s e t p r i c e b u b b l e , u n s u s t a i n a b l e p u b l i c d e b t ) a n d c r o s s - borderlinkages,orindividualinstitutionexposures(e.g.size,leverage,interconnectedness).T h e y h e l p p r a c t i t i o n e r s t o a v o i d o v e r r e a c t i n g t o a s i n g l e s i g n a l , o r beinglulledinto afalsesenseofsecurity.

Thirdly,thetoolsshouldbeconsidered basedontheirinherentquality,including: c overage,independence&simplicity.

Finally,inemergingcountries,datagapsareposingasobstaclestobuildingkeysystemicri skindicators(e.g.interlinkagesandcommonexposures),therefore,toolsselectionmu stconsiderofdataavailabilitywithinthecountry(tobuildifneeded).

Vinasiam Bank VID Public Bank Vietnam- Russia Bank Viet-Lao Bank Indovina Bank

7.2% Military Bank Sacombank ACB Eximbank 15% Sumitomo

Vinalines 5.3% 4 Maritime Bank Dong A Bank Phuong Dong Bank Viet A Bank

Gia Dinh Bank 8 3.7% Sai Gon Bank 9

Bao Viet Bank VP Bank

Nam A Bank Mekong Development Bank

EVN An Binh Bank Tien Phong Bank

10% Phuong Nam Bank United Overseas Bank

Lien Viet Post Bank Global Petro Bank

Him Lam 20% 6.1% 10 Habubank 10% Deutsche Bank

Dai Duong Group 9.3% Saigon-Hanoi Bank 2.4% Nam Viet Bank Vietnam International Bank SeABank 20% Société Générale

TKV Commonwealth Bank of Australia

T&T Group Kien Long Bank Techcombank HSBC

-Binh Dinh Power 5.8% 40% 40% 2.7% Masan Group Viet Phuong Group

Tin Nghia Sovico Petrolimex VN Airlines

Note: Shareholding informationisasof30June2011.Shareholdingsbyindividualsarenotdepicted inthediagram.Shareholdingsbyinstitutions oflessthan5percent arenotdepicted exceptfor thosehaving representationin boardsofdirectorsor strategicpartnerstatus.MekongHousingBank and fivejoint-stock banksarenotincludedinthediagram.

2 Shareholdings byagroupofrelatedcompaniesincludingSacomreal,Thanh ThanhCong,BourbonTayNinh,NinhHoaSugar.

5 Includes shareholdingsbyHCMCPartyOffice,KyHoaTourismandTrading,andPhuNhuanConstructionandHousing Trading.

7 Includes shareholdingsbyHCMCPartyOffice,KyHoaTourism&Trading, Saigon Petro,andSaigon TouristHolding.

8 Does notreflecttheVND1000billioncapitalincreaseannouncedinNovember2011andVietCapital’sacquisitionofacontrollingstake.

9 Does notreflecttheVND500billioncapitalincreaseannounced inNovember2011byPhuNhuanConstructionandHousingTrading Co.Ltd.

11 Indirect shareholdingthrough VietnamPost 15 Indirect shareholdingthroughACBSecurities.

12 Indirect shareholdingthroughFPTFundManagementCompany 16 Including shareholdingbyTin NghiaPetroleum.

1 Netassetsundermanag ement(AUM)ornetasse tvalue(NAV)forthefund

2 Forhedgefunds,grossn o ti o n a l exposures( GNE)asanalternativein dicator

Substitutability/ fi n a n c i a l i n s ti t u ti o n infrastructur e( b a n k s )

5 Qualitativeassessmentof‘substi tutability’,w h i c h t a k e s int oaccountthefirm’sm a r k e t shareinvariousfi n a n c i n g marketsandeaseo f substitutabili tybyotherprovider(s)offundin g

1 Qualitativeassessmento f relianceofthemarketo n th eservicesofthe intermediary(foracriticalf u n c ti o n orservice)

2 Marketshare,measuredby (i) tradingasapercentageo fdailymarketvolumeondo mesticexchanges,a n d (ii)if available,global markettransactionvolumei n securities(includingequiti es,bondsandfutures)

1 Turnoverofthefundre latedtoaspecifica s s e t / d a i l y volumet r a d e d regardingthes a m e asset

2 Totalfundturnovervsto talturnoveroffundsi n t hesamecategory/ c l a s s i fi c a ti o n

3 Investmentstrategies (orassetclasses)withl e s s than10marketplayersgl obally

Non- traditionalinsuran ceandnon- insuranceactivitie s(insurers)

1 Notionalamountof over-the- counter(OTC)deriva tives(6.67%)

6 6 7 % ) 3.Tradingandavaila ble-for- sales e c u r i ti e s (6.67%)

20 1 Non- policyholderl i a b i l i ti e s and non- insurancerevenues (6.4%)

1 Structuralcomplexity,me asuredbynumbero f legale ntitiesthatareconsolidate d

2 Ratio(%)ofcollateralp ostedby counterpartiesthathas beenre- hypothecatedbythefu nd

3 Ratio(%)ofNAVm a n a g e d usinghighfre quencyt r a d i n g stra tegies

4 Weighted- averagep o r tf o l i o liquidity( i n day s)/weighted- averageinvestorl i q u i d i t y (indays)

5 Ratioofunencumbered c a s h togrossnotionale xposure(orgrossAUM) Cross- jurisdictionala c ti v i t y (banks)

1 Numberofjurisdictionsi n w hichthemarketi n t e r m e d i a r y and/or itsaffiliatesconducto p e r a ti o n s

(b) Non-banknon- insurer(NBNI)entitiesSources:BCBS;FSB;IAIS;

Thec o u n t e r c y c l i c a l c a p i t a l b u f f e r ( C C B ) T h i si n s t r u m e n t i s d e s i g n e d t o c o u n t e r procyclicalityi n t h e f i n a n c i a l s y s t e m I t i s a i m e d a t b u i l d i n g u p a c a p i t a l b u f f e r d u r i n g periodsofexcessivecreditgrowththatisreleasedwhensystemicrisksmaterialiseo rabate.Byincreasingresilienceduringtheupturn,theCCBsupportsthesustainableprovi sionofcredittothe economy inthe downturn TheCCBcanalsohelp dampen thecre ditcycle duringtheupturn.Thebufferwillbebetween0%and2.5%ofrisk- weighted assets,butcanbesethigherwhenjustifiedbytheunderlyingrisk.

Loan-to-value(LTV),loan-to-income (LTI)anddebt service-to- income(DSTI)caps.Theseinstrumentsareexclusivelybasedonnationallaw.Theyincludecap sthatrestrictcreditinrelationtothevalueoftheunderlyingrealestate(LTVcap)ortheincomeof theborrower(LTI/DSTIc a p ) I n c o n t r a s t t o c a p i t a l - b a s e d i n s t r u m e n t s , t h e y t a r g e t t h e b o r r o w e r s w h o takec r e d i t , r a t h e r t h a n t h e b a n k s t h a t p r o v i d e t h e c r e d i t M a c r o - p r u d e n t i a l a u t h o r i t i e s shouldbeabletoassessLTVandLTI/DSTIratios.

Sectoralrequirements.Sectoralrequirementsenablestricterregulatoryrequirementstobei mposed,forexamplebyincreasingriskweightsforspecificexposuresorminimumlo ssgivendefault(LGD)values.Sectoralrequirementsimprovetheresilienceofbankstorisk inthesectorsconcerned.Theycanalsohaveadampeningeffectoncreditgrowth.

Thesystemicriskbuffer(SRB) T h eS R B i s d e s i g n e d t o p r e v e n t a n d m i t i g a t e s t r u c t u r a l systemicrisks,includingexcessiveleverage.Itisaflexibleinstrumentthatcanbeap pliedto allorto asubsetofbanks, andissubjectto anotificationrequirementfor bufferratesupto3%.

Additionalownfundsrequirementsandcapitalconservationbuffer.W he nt he abovemen tionedi n s t r u m e n t s a r e n o t a d e q u a t e t o a d d r e s s e x c e s s i v e c r e d i t g r o w t h , m acroprudentialauthoritiescanusenationalflexibilitymeasurestoapplyadd- onstoownfundsrequirementsandthecapitalconservationbuffer,subjecttospecificproce duresandauthorization.

Aleverageratio.T h el e v e r a g e r a t i o h i n d e r s e x c e s s i v e o n - b a l a n c e s h e e t a n d o f f - b a l a n c e sheetleveragebylimitingabank’stotalassets(includingoff- balancesheet)inrelationtoitse q u i t y S i n c e i t i s n o t b a s e d o n r i s k - a d j u s t e d a s s e t s , i t a l s o p r o v i d e s a s i m p l e a n d transparentbackstoptosafegu ardagainstmodelandmeasurementerrorintheriskbasedcapitalrequirements.

Netstable fu nd in gr at io (N SF R) T h eN S F R i s a m i c r o - p r u d e n t i a l m e a s u r e , w h i c h willenterintoforcein2018.Developingasound NS FRthatisaimed atlimitingbanks’one yearmaturityandliquiditymismatcheswillgoalon gwaytowardsincreasingthestabilityofbanks’fundingbasestosuddenoutflows.A ma cro-prudentialuseofthe NSFRcouldi m p o s e an(fixedortime-varying)add- onovertheprudentialminimumrequirement.

L C R ) , a r e micro- prudentialmeasures.Theymayalsoincreaseresiliencetoliquidityshocksbyincreasingthesto ckofliquidassetsavailabletocoversuddenoutflows.AmacroprudentialuseoftheLCRcouldimp osea(fixedortime-varying)add-onovertheprudentialminimumrequirement.

Liquiditycharges.L i q u i d i t yc h a r g e s c o u l d c o m p l e m e n t t h e a b o v e q u a n t i t y - b a s e d r a t i o s TheycouldbeaPigouvianlevyreflectingbanks’contributions tosyst emicliquidityrisk (e.g.thedurationoftheirfundingprofileortheirrelianceonwholesalefunding)

Otherstablefundingrequirements.Thesecanbeintroducedatanationallevel,forinstancethroug hloan-to-deposit(LTD)limits.

Largeexposuresrestrictions.Theserestrictionsaremicro- prudentialmeasureswhichcanbefurtherrestrictedforamacro- prudentialpurpose.TheycanbeappliedviaPillar2onasectoralbasistoreduce banks’ ex posuresto a particularsector and/or assetclass (restrictionsonintra- financialexposurescanbeimposedthroughArticle458oftheCRR).Theymaytargetbothdire ctexposuresandexcessive(indirect)interconnectednessamongfinancialinstitutions,thereb yreducingcontagionrisk.

Capital- basedi n s t r um e n t s ( e g s e c t o r a l c a p i t a l r e q u i r e m e n t s , S R B , o w n f u n d s requirem entsandcapitalconservationbuffer).I n t h e c o n t e x t o f e x p o s u r e c o n c e n t r a t i o n , th em a i n f o c u s o f c a p i t a l - b a s e d i n s t r u m e n t s i s t o a d d r e s s c o n t a g i o n r i s k s a r i s i n g f r o m banks’com monexposures andinterconnectedness These instruments areaimedat enhancin gb a n k r e s i l i e n c e t o s h o c k s , b y r a i s i n g c a p i t a l b u f f e r s a n d b y r e d u c i n g b a n k s exposures.Whenappliedonasectoralbasis,theymayalsoaffecttheassetcompositiono fbanks.

Thegloballysystemicallyimportantinstitutions(G-SII)bufferisamacro- prudentialinstrument.I t i m p o s e s a m a n d a t o r y c a p i t a l b u f f e r o n b a n k s i d e n t i f i e d a s g l o b a l l y systemicallyimportant.Thesurchargewillbebetween1%and3.5%andwillbegra duallyphasedinfrom1January2016andwillreachitsfulleffecton1January2019.

Theot he r s ys t e m i c a l l y i mp ort an t i n s t i t u t i o n s ( O -

S I I )b u f f e r i s a n o t h e r m a c r o - p r u d e n t i a l instrument.I t e n a b l e s a u t h o r i t i e s t o i m p o s e c a p i t a l c h a r g e s o n d o m e s t i c a l l y i m p o r t a n t institutions.Anotificationprocedureanda2%upperli mitareimposed.TheO-SIIbufferwillbecomeapplicableon1January2016.

(SRB)canbetargetedattherisksstemmingfromSIIsorthesizeofthebankingsectorwhe nconsideredexcessive.TheSRBcanbeappliedtoasubsetof institutionsasearlyas1Janu ary2014.Forthisreason,somecountriesmayapplytheSRBtoovercomethedeferredapplicationof and/orthelegalcapontheO-SIIbuffer.

Additionalo w n f u n d s o r c o n s e r v a t i o n b u f f e r r e q u i r e m e n t s canbeimplemen tedeitherunderPillar2(whentheSREPshowsthataspecificbankorgroupofbanksarecont ributingtosystemicrisks)orunderthenationalflexibilitymeasures(providedoth erinstrumentscannotadequatelyaddresstheidentifiedrisks).

Additional liquidity requirements can enhance the resilience of Systemically Important Institutions (SIIs) These requirements may be implemented under Pillar 2 when the Supervisory Review and Evaluation Process (SREP) indicates that specific banks or groups of banks pose systemic risks Furthermore, national flexibility measures can be applied if other instruments are insufficient to address the identified risks effectively.

18.Allocation (regional/capital expansion/contract)

20.Transform (i.e sectional expansion/contract) 8.Network metric (centrality, connectness)

9.Regional (geography) boundary 21.Capital injection/widthdrawal 10.Sectional (industry) boundary 22.Sectional reallocation 11.Regulation boundary 23.M a c r o Q e n v i r o n m e n t 12.Network locality (sub groups) 24.Merger and accquisition 13.Network distortions

Aggregationof microprudentia lin di ca t o r s

Inter con nect edn ess relate dto

Stra tegi cCo mpl eme ntar y relatedto

Crunc hes syst em b ou n

Source:Author’scompilation.Others’creditinNotes&References.

Assetsprices,interest rates,e x c h a n g e rate s,etc.fluctuations Qualityofcapital

IdiosyncraticshockI nternationalshockR e a l e con o my sh o ck

Contagions(du eto interconnectedness) Macro- financiallinkagesHerd- behaviors

Financial + prudentratios(CAR ,LTV,LTI,…)

Frequency:High Mark etindexesGovernanc edata

Loan-to-valueandloan- to- incomer e s t r i c t i o n s

Stipulatingprudentialratiosi noperationsofcreditins t it ut ions

Decree02(2013): Oncla ssi fi ca ti on ofassets,levelsandme thodofsettingupofriskprovisi ons,andu s e ofprovisionsaga instcreditrisksinthebankinga c tiv ity ofcreditinstitutions,fo reignbanks’branches

Decree36(2014): Stip ula ti ng minimumsafetylimitsan dratios fortransactionsperformedb ycreditinstitutionsandb ra nc he s offoreignbanks softseparation softseparation

Panic/cascadingfailures JPoD/CoPoDmodel JPoD/CoPoD 11

Fr equency: L ow R e s p o n s i b i l i t y structureI n d e pe n d e n t review Supervisionmodel

Designanduseoftradingv enues(including‘circuitbr eakers’)

DistresschannelUses/ Originates-from requirements(incl.a c c o u n t i n g standards) Softseparation

1 Note:Balancesheet datais amajorsourceof informationtodetermine financialsoundness.

SIB: Domestic Systemic ImportantBanks.Reference:Yuksel(2014),Identifying

6 Note:Thesameindicators/ datacanbeusefulfordifferentphases.Itissimilarform o d e l s andmacroprudentialindicat ors.Thistablehilightthemostimportantones.

7 Note:systemicliquidityriskarisesfromweaknessesinmarketriskmanagementp r a c t i c e s andmarketinfrastructure,andregulatorygaps.Reference:Systemicliquidityr i s k : impr ovingtheresilienceoffFinancialInstitutionsandmarkets,IMF

8 Note:gapbetweenthecredit-to-GDPratioanditslong-termtrend.

9 Reference:B a n k ofEngland(2011),Instrumentsofmacroprudentialpolicy:Ad i s c u s s i o n paperby

11 JPoD/CoPod:Joint-PropabilitiesofDefault/ConditionalPropabilitiesofDefault

12 Firm Firm Households PART2:NETWORKVIEWOFFINANCIALSYSTEM

August 30th,2011 CircularN o 22/2011/TT- NHNNA m e n d i n g Circular13.Rem ovingther a t i o ofloans/ depositsfromraisedc a p i t a l regulate dintheCircular13

May20th,2010 Circular13/2010/TT- NHNNS t i p u l a t i n g PrudentialR atiosInOperationsOfCreditInstitutions.

Aug 10th,2009 No.15/2009/TT-NHNN

Maximumratioofshorttermcapitalsourc etobeusedformedium,longt e r m loans :Commercialbank:30%;F i n a n c e co mpanies:30%;Central

3.Assetprices,interestandexchangerates(D ata:SBV,Vinacapital)

Sept 27th, 2010 Circular No 19/2010/TT-NHNN On amendment, supplement of several articles of the circular no.

13/2010/TT-NHNN March 16th, 2012 Directive No 03/CT-NHNN Inspection, supervision; anti- corruption, violations in monetary sector and banking activity

01jan2007 01jul2008 01jan2010 Date 01jul201101jan2013

4 Unreliable CAR ratio (Source: FETP, 2013)

Tổng tài sản (1000 tỷ VNĐ)

Source:Author’s compilation Figures’ credit in titles.

"Feb"08 1"May"08 1"Aug"08 1"Nov"08 1"Feb"09 1"May"09 1"Aug"09 1"Nov"09 1"Feb"10 1"May"10 1"Aug"10 1"Nov"10 1"Feb"11 1"May"11 1"Aug"11 1"Nov"11

Avg.lendingrates(Data:SBV) NPLratios(Source:FETP,2013)

Promulgatingthelistoflegalcapitallevelsofcr editinstitutions.Requiresthecommercialb a n k s t o havelegal capitalofat leastVND3,000billionbytheendof2010

(VND1,100 billion for the SOCBs and VND70billionforCMbefore).Minimumcapitall evelf o r branchesofforeignbanksremainsatU

Apr17th2009CircularN o.07/2009/TT-NHNN

Interest-rates u b s i d i e s Short- terml o a n contractswithmaximum durationofeightmonthsandsigneda nddisbursedfromFeb1st,2009toD e c 31st,2009willgetinterestratea s s i s t a n c e offourpercentpera n n u m

January01st,2011 The2010LawontheStateBankofVie tnam(SBV)andthe2010Lawo n theC reditInstitutions cameintoeffect

Governmentformallyadoptedaco mprehensivecrediti n s t i t u t i o n s r estructuringpla nand directiono n relatedpolicyactionsi n c l u d i n g enhancingroleofforeignp a r t i c i p a t i o n i n d o m e s t i c commercial banks,incentivesforc o n s o l i d a t i o n ofbanksandaplantodealw ithNPL

Averageapartmentprice(Source:CBRE2014) NPLratios(Source:FETP,2013)