Systemic risks in vietnam,s financial system and macroprudential implications

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM  a thesis for THE DEGREE OF MASTER IN PUBLIC POLICY SYSTEMIC RISKS IN VIETNAM’S FINANCIAL SYSTEM AND MACROPRUDENTIAL IMPLICATIONS by LE XUAN HUNG Ho Chi Minh city, 2015 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH FULBRIGHT ECONOMICS TEACHING PROGRAM  LE XUAN HUNG SYSTEMIC RISKS IN VIETNAM’S FINANCIAL SYSTEM AND MACROPRUDEN MASTER IN PUBLIC POLICY THESIS CODE: 60340402 supervisors JAMES RIEDEL DO THIEN ANH TUAN Ho Chi Minh city, 2015 i CERTIFICATION I certify that the substance of the thesis has not already been and is not being submitted for any other degree I certify that to the best of my knowledge, any source used and help involed have been acknowledged in the thesis The views stated in the thesis are of my own and not necessarily reflect the views of the Ho Chi Minh City Economics University or Fulbright Economics Teaching Program Author Lê Xuân Hùng ii ACKNOWLEDGEMENTS I would like to express my gratitude to everyone in my family, who has provided me with tremendous support and encouragement during my study and my whole life I would like to express my sincere appreciation to my supervisors - Mr Đỗ Thiên Anh Tuấn and Dr James Riedel, without whom I shall not be able to complete my thesis With rich knowledge, a lot of experiences and great compassion - my supervisors has guided and enlightened me through many hardships of completing this thesis I would like to thank all teachers and staffs in Fulbright Economics Teaching Program (FETP), who have transferred much of their knowledge and experience to me I truly appreciate FETP’s founders for creating such an inspiring program that opened up to me a whole new horizon of knowledge Last but not least, I would like to express my thanks to all of my friends and colleagues, who helped and encouraged me during my time at FETP Author Lê Xuân Hùng ABSTRACT Vietnam is addressing financial instabilities by strengthening its grip onto the banking sector and financial system in general It is done via improving financial safety measures, addressing cross-ownership relations and restructuring non-perform loans Meanwhile, after the global financial crisis, a new line of research related to systemic risks and macroprudential policy had taken center stage with various implications This study explores the application of these implications in reducing systemic risk of Vietnam financial system using qualitative analysis; via (1) formulating the implications of macroprudential approach with emphasis on network theory; (2) identifying the systemic risks in Vietnam financial system during 2009 – 2011 and (3) assessing recent reforms’ ability to reduce systemic risks in the financial sector The results indicate that there are four groups of systemic risks in Vietnam financial sectors: expansionary macro environment, weak currency position, sector-wide degradation of capital quality, and structural weakness at institutional and systemic level Recent reforms are positive in addressing those risks, but only from microprudential perspective Yet, the coverage of macroprudential policies is low and incomplete The study suggests that a more holistic approach is needed in improving financial stability, with specific recommendations including (1) embrace the networked and dynamic nature of financial system; (2) facilitate development of non-bank financial institutions; (3) address regulation transparency and data availability; (4) construct a dependable set of indicators that reflect phases of risks build-up and roll-out and; (5) further consolidate supervision structure TABLE OF CONTENT Certification .i Acknowledgements ii Abstract iii Table of Content iv Table of Abbreviations vii List of Figures ix List of Tables x Chapter 1: Introduction .1 1.1 Instabilities of Vietnam’s financial system 1.2 Objectives and scope 1.3 Research method 1.4 Analysis framework 1.5 Thesis structure Chapter 2: Macroprudential regulation framework .6 2.1 Financial crises 2.2 Principles of financial regulation 2.3 Systemic risks and macroprudential policy 2.3.1 Externalities of systemic risks 2.3.2 Phases of instabilities 11 2.4 Network anatomy of systemic risk 13 2.5 Macroprudential regulation 16 2.5.1 Development of macroprudential approach .16 2.5.2 Macroprudential policy .17 2.5.3 Macroprudential toolkit 19 2.6 Policy implications Chapter 3: 22 Financial instabilities and systemic risks 24 3.1 Context 24 3.2 Risks build-up 25 3.2.1 Capital inflow 25 3.2.2 Credit growth 27 3.2.3 Biased banking sector .29 3.2.4 Quality of capital 31 3.2.5 Exploitive cross-ownership 32 3.3 Systemic stress materialization in financial sector 33 3.3.1 Liquidity shortage .33 3.3.2 Non-performing loans .35 3.3.3 Real-economy spillovers 37 3.4 Remarks 38 Chapter 4: Reforms in financial sector 40 4.1 Shock absorption capability of credit institutions 40 4.2 Contagions and network structure 42 4.3 Information and regulation framework 46 4.4 Remarks 46 Chapter 5: 5.1 Conclusions 48 Key findings 48 5.1.1 Systemic risks in Vietnam’s financial system 48 5.1.2 Applications of macroprudential policy 49 5.1.3 Benchmark of recent reforms 50 5.1.4 Notes on macroprudential policy implementation 51 5.2 Policy recommendations 51 5.3 Further study 53 5.4 Finale 53 List of References 55 List of Regulations .61 Appendix .62 Appendix 1: Seismic anatomy of financial crises 62 Appendix 2: Financial accelerator effects and macro-financial linkages 62 Appendix 3: BICRA (Banking Industry Country Risk Assessment) score .63 Appendix 4: Theory of financial instability 63 Appendix 5: Network model of systemic risks 64 Appendix 6: Group of 30’s set of macroprudential tools 65 Appendix 7: Motivations for macroprudential policy adoption 66 Appendix 8: Cost of prudential regulations 69 Appendix 9: Capital inflow and the potential build-up of vulnerability 71 Appendix 10: Cross shareholdings, interbank lending and investment vehicles 72 Appendix 11: Shareholding structure in Vietnam’s banking sector 73 Appendix 12: Indicators for identifying global SIFIs 74 Appendix 13: Financial soundness indicators 75 Appendix 14: Macroprudential instruments reference .76 vii TABLE OF ABBREVIATIONS BIS - Bank of International Settlement CAR - Capital Adequacy Ratio CCA - Contingent Claims Analysis CI - Credit Institution CoVaR - Conditional Value-at-Risk DSA - Debt Sustainability Analysis DTI - Debt-To-Income ratio ECB - European Central Bank EU - European Union FETP - Fulbright Economics Teaching Program FI - Financial Institution FSI - Financial Soundness Indicators FTA - Free Trade Agreement GDP - Gross Domestic Product GSO - General Statistics Office IAS - International Accounting Standards IFRS - International Financial Reporting Standards IMF - International Monetary Fund IT - Information Technology JPoD - Joint-Probabilities of Distress JSCB - Joint-Stock Commercial Bank LCI - Law on Credit Institutions LTD - Loan-to-deposit ratio 10 LTI - Loan-to-income ratio LTSF - Loan-to-stable-funding ratio LTV - Loan-to-value ratio NPL - Non-Performed Loan SBV - State Bank of Vietnam SIFI - Systemic Important FIs SOBC - State-Owned Commercial Bank TPP - Trans-Pacific Partnership agreement USD - United States Dollar VAS - Vietnam Accounting Standards VCBS - Vietcombank Securities Company VELP - Vietnam Executive Leadership Program VND - Vietnamese Dong WB - World Bank WTO - World Trade Organization Excessive credit growth 01jan2000 01jan2005 01jan2010 Unit: billion VND 01jan201 0 0 Credit growth in the same period (Data: SBV) Av er ag e ap art me nt pri ce (S ou rce : CB RE 20 14 ) NPL ratios (Source: FETP, 2013) EXPLOITIVE OWNERSHIP Cr edit 200 000 25.4 15.4 22.3 17.8 ... of systemic risk and financial instabilities; (2) motivations, tools and indicators of macroprudential approach in financial system supervision; (3) systemic risks of Vietnam’s economy and financial. .. going to exhaust the problem of applying macroprudential approach into supervising Vietnam financial system Instead, it put Vietnam financial instabilities in the context of systemic risk and macroprudential. .. of financial systems Thus, it becomes misleading if regulators rely on ordinary sum of indicators as a mean for policymaking by diving into the details of systemic risks in Vietnam financial system