(Luận văn) apply basel ii in risk management in vietnam case study of asia commercial bank , luận văn thạc sĩ

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECNOMICS HOCHIMINH CITY K - ng hi ep w n lo ad ĐỖ THỊ NGỌC SƯƠNG ju y th yi APPLY BASEL II IN RISK MANAGEMENT IN VIETNAM CASE STYDY OF ASIA COMMERCIAL BANK pl n ua al n va ll fu m oi MAJOR: BANKING AND FINANCE MAJOR CODE: 60.31.12 at nh z z ht vb MASTER THESIS k jm om l.c gm SUPERVISOR ASSOCIATE PROFESSOR Dr TRƯƠNG TẤN THÀNH n a Lu n va y te re Faculty of Banking Ho Chi Minh City – 2010 th -i- CERTIFICATE ng hi I certify that the substance of this thesis has not already been submitted for any ep degree and is not currently being submitted for any other degree or qualification w n lo I also certify that, to the best of my knowledge, any help received in preparing this ad thesis, and all sources used have been acknowledged in this thesis ju y th yi Signature: Do Thi Ngoc Suong pl Date: _ n ua al n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re th - ii - ACKNOWLEDGEMENTS ng I owe a debt of gratitude to many people who helped me complete this thesis I hi ep would like to acknowledge the help of all First of all I would like to express my deepest acknowledgement to my supervisor, w n Dr Truong Tan Thanh, for his valuable advice and recommendations lo I acknowledge Mr Tran Van Tam, his assistants from Credit Policy and ad y th Management Department of Asia commercial bank (ACB) with reference material ju I would particularly like to thank the following friend for her support related to yi material: Ms Ho Nguyen Thuy Duong from Asia commercial bank pl n ua al Finally, to my parents, I wish to extend my loving thanks for their encouragement n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re th - iii - ABSTRACT ng hi Vietnam has gradually integrated into the global economy after officially becoming ep a member of the world trade organization (WTO) at the end of 2006 Together with w the process of economy liberalization, the priority of economic sectors is financial n lo banking industry These opportunities help Vietnamese banks get favorable ad conditions in banking activities, but face with a lot of difficulties and show y th ju weaknesses Vietnamese banks can take advantage of capital, modern technology, yi management experience, and to develop the comparative advantage of Vietnamese pl al banking to catch up with international competition and outreach foreign markets n ua However, commercial banks will face more competitive pressure, shows poor n va performance (weak financial resources, small scale, low quality and efficiency, low ll fu professional skill in management, low technology, and high risk), especially are oi m more prone to adverse impact of external shocks (economic crisis, war, etc.) This nh reflects weak capability in reducing risks As Governor Nguyen Van Giau said at Monday (04/05/2009) in an interview published on the government website “The z central bank would continue its efforts to keep the banking system secure and z ht vb review banking and risk management regulations to comply with international k gm first quarter 2009 jm standards”, after 23 banks around the world were taken over or went bankrupt in the l.c This thesis examines a particular case of a joint-stock commercial bank in Vietnam (1) To study the methods of risk management in Basel I and Basel II n a Lu Objectives of this thesis are: om to see the way they manage their risk: credit risk, operational risk and market risk th management at ACB and to expand for other commercial banks y (3) To contribute some recommendations for the improvement of risk te re ACB in participate and at Vietnamese commercial banks in general n va (2) To study the level of Basel I and Basel II application in risk management at - iv - In terms of structure, the thesis has six chapters: Chapter reviews the research background, significance and scope of the ng study hi ep Chapter reviews literature of risk management in Basel I and Basel II Objectives of this chapter will provide a brief overview of the characteristic of w n the 1988 Basel I Capital Accord, touching on its limitations and the reasons that lo prompted its revision in to the new 2004 Basel II Capital Accord ad y th Chapter presents Asia Commercial Bank, a joint-stock commercial bank in ju Vietnam yi pl Chapter presents descriptive findings of risk management practices at ACB ua al Objectives of this chapter are: n (1) To observe the process of risk management at ACB for a period of time va n (from the beginning of 2006 until now) ll fu (2) To evaluate the capacity of ACB’s risk management oi m Chapter presents the tendency in risk management of Asian banks in general, at nh of Vietnamese banks in participate Finally, the thesis ends with Chapter This chapter will give some z z recommendations to improve its risk management system for ACB in ht vb participate, for Vietnamese banks in general k jm om l.c gm n a Lu n va y te re th -v- TABLE OF CONTENTS ng hi ep CERTIFICATE i ACKNOWLEDGEMENTS ii w ABSTRACT iii n lo TABLE OF CONTENTS v ad LISTS OF TABLES viii y th LIST OF FIGURES ix ju GLOSSARY OF TERMS AND ABBREVIATIONS xi yi n va RESEARCH PROBLEM fu Research questions Research objectives ll oi m 1.2.1 1.2.2 Banking landscape Risk Risk management Benefits with the risk management n 1.2 RESEARCH BACKGROUND ua 1.1.1 1.1.2 1.1.3 1.1.4 al 1.1 pl CHAPTER ONE: INTRODUCTION TO THE STUDY METHODOLOGY 1.4 SIGNIFICANCE AND SCOPE OF THE STUDY 1.5 STRUCTURE OF THE STUDY at nh 1.3 z z vb CHAPTER TWO: LITERATEUR REVIEW INTRODUCTION 2.2 OVERVIEW jm Basel I Basel II 11 Innovations of Basel II in comparison to Basel I 14 k gm 2.2.1 2.2.2 2.2.3 ht 2.1 2.4 The effects 18 The benefits 20 n CONCLUSION 21 va 2.5 THE EFFECTS AND BENEFITS IN BASEL I AND BASEL II APPLICATION 18 a Lu 2.4.1 2.4.2 om l.c 2.3 THE STUDY OF APPLYING BASEL I AND BASEL II IN RISK MANAGEMENT 16 n CHAPTER 3: ASIA COMMERCIAL BANK (ACB) 22 Milestones 22 Growth path 24 ACB’s operations 27 ACB’S FINANCIAL PERFORMANCE 30 th 3.2 OVERVIEW OF ACB 22 y 3.1.1 3.1.2 3.1.3 te re 3.1 - vi 3.2.1 3.2.2 3.2.3 ng 3.3 Profitability (%) 30 Liquidity 31 Charter capital, equity, secure capital ratio 31 CONCLUSION 32 hi CHAPTER 4: RISK MANAGEMENT AT ASIA COMMERCIAL BANK (ACB) 34 ep 4.1 RISK MANAGEMENT OVERVIEW AT ACB 34 4.2 RISK ANALYSIS 36 w n lo ad 4.2.1 Credit risk 36 4.2.1.1 Policy on credit risk 36 4.2.1.1.1 Observation of regulations and loan limits 36 4.2.1.1.2 Measures and outlook for loan quality 37 4.2.1.2 Analysis on credit risk 41 4.2.1.2.1 Observation of regulations and loan limits 41 4.2.1.2.2 Credit quality 43 4.2.1.3 ACB’s limitations in credit risk management 50 4.2.2 Market risk 50 4.2.2.1 Policy on market risk 50 4.2.2.2 Analysis on market risk 53 4.2.2.2.1 Observation of regulations and limits 53 4.2.2.2.2 Measure and outlook risk market 55 4.2.2.3 ACB’s limitations in market risk management 61 4.2.3 Operational risk 62 ju y th yi pl n ua al n va RISK MANAGEMENT DEVELOPMENTS AND COMPLIANCE 63 4.4 CONCLUSION 64 ll fu 4.3 oi m 5.1 at nh CHAPTER 5: TENDENCY IN RISK MANAGEMENT OF ASIAN BANKS IN GENERAL, OF VIETNAMESE BANKS IN PARTICIPATE 65 TENDENCY IN RISK MANAGEMENT OF ASIAN BANKS 65 z 5.1.1 Basel II Implementation schedule in Asia 65 5.1.2 Capital adequacy requirements in Asia 68 5.1.3 Challenges on risk management for Asia 70 5.1.3.1 Challenges on credit risk 70 5.1.3.2 Operational risk challenges 71 5.1.3.3 Challenges for regulators 72 5.1.4 The future of Basel II (Basel III) 72 z ht vb k jm gm 5.2 TENDENCY IN RISK MANAGEMENT OF VIETNAMESE BANKS 73 om l.c 5.2.1 Legal and regulations 73 5.2.2 Financial performance 76 5.2.2.1 Profitability 76 5.2.2.2 Liquidity 77 5.2.2.3 Efficiency 78 5.2.2.4 CAR 79 5.2.2.5 Asset Quality 80 5.2.3 Risk management 81 5.2.3.1 Bank for Investment and Development of Vietnam (BIDV) 81 5.2.3.2 TECHCOMBANK (TCB) 84 5.2.4 Rating of Moody's 88 5.2.5 Implementation challenges for Vietnamese bank system 88 5.2.5.1 Cost of implementation 88 5.2.5.2 Inadequate supervisory capacity 89 5.2.5.3 Accurate credit risk factor estimation and calibration across many different portfolios 89 5.2.5.4 A sound approach to operational risk 89 n a Lu n va y te re th - vii - ng 5.2.5.5 An efficient strategy for data gathering and management 90 5.2.5.6 An overarching economic capital framework for enterprise risk management 90 5.2.5.7 Approach-related challenges 90 5.2.4.7.1 Standardize Approach-related challenges 90 5.2.4.7.2 IRB Approach-related challenges 91 hi ep 5.3 CONCLUSIONS 92 5.3.1 5.3.2 Asia 92 Vietnam 93 w CHAPTER 6: RECOMMENDATIONS 95 6.2 JOINT-STOCK BANKS 96 6.3 ACB 98 lo STATE BANK OF VIETNAM (SBV) 95 ad n 6.1 y th IMPLICATION FOR FURTHER STUDY 100 ju 6.4 yi BIBLIOGHAPHY 102 pl n ua al n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re th - viii - LISTS OF TABLES Table 1.1: Benefits with the risk management ng hi Table 2.1: Pillar 12 ep Table 2.2: Pillar 12 Table 2.3: Pillar 13 w Table 2.4: Compare (IRB) between Basel I and Basel II 14 n lo Table 2.5: Compare (standard) between Basel I and Basel II .15 ad Table 2.6: “Ripple Effect” of Basel II 19 y th Table 3.1: ACB’s products and service 25 ju yi Table 3.2: ACB’s business performance structure in 2009 .26 pl Table 3.3: ACB’s net income structure in 2008 and 2009 .26 al ua Table 3.4: ACB’s growth orientations 26 n Table 3.5: ACB’s subsidiaries (As of 31st December 2009) 28 va n Table 3.6: ACB’s profitability from 2004 to 2009 31 ll fu Table 3.7: ACB’s liquidity from 2004 to 2009 31 oi m Table 3.8: ACB’s charter capital, equity, secure capital ratio from 2004 to 2009 32 Table 4.1: ACB’s observation of regulations and loan limits (As of 31st December 2009) 42 nh at Table 4.2: ACB’s provision for loans from 2007 to 2009 43 z Table 4.3: ACB’s daily reserves (As of 31st December 2009) 54 z vb Table 4.4: ACB’s liquidity option (As of 31st December 2009) 54 ht Table 4.5: ACB’s components of tier and tier capitals, and risk weighted assets from 2007 to 2009 55 jm k Table 4.6: ACB’s factors of market risk sensitivity (As of 31st December 2009) 58 gm Table 5.1: Approaches and options of Basel II in Asia 65 om l.c Table 5.2: Basel II implementation schedule in Asia 67 Table 5.3: Capital adequacy requirements in Asia 68 a Lu Table 5.4: The future of Basel II 72 n Table 5.5: Vietnamese banks' rating of Moody's .88 n va y te re th - ix - LIST OF FIGURES ng hi Figure 1.1: The structure of risk ep Figure 2.1: The structure of the Basel II Framework .13 w Figure 2.2: Basel II affects a variety of constituents, whose needs for information are interdependent 18 n lo Figure 3.1: ACB’s business performance from 2004 to 2009 25 ad Figure 3.2: ACB’s organizational chart 27 ju y th Figure 3.3: ACB’s shareholder structure (As of 31st December 2009) 28 Figure 3.4: ACB’s branch network growth from 2004 to 2009 .29 yi pl Figure 3.5: ACB’s branches nationwide (As of 31st December 2009) 29 ua al Figure 3.6: ACB’s human resource development from 2004 to 2009 30 n Figure 3.7: ACB’s current ratio, ROE, ROA from 2004 to 2009 31 n va Figure 4.1: ACB’s organizational chart in risk management 34 ll fu Figure 4.3: ACB’s analysis by group from 2005 to 2009 44 m Figure 4.4: ACB’s analysis by collateral from 2006 to 2009 45 oi Figure 4.5: ACB’s analysis by types of customers from 2004 to 2009 46 nh Figure 4.6: ACB’s analysis by types of loans from 2004 to 2009 47 at z Figure 4.7: ACB’s analysis by industry from 2004 to 2009 48 z vb Figure 4.8: ACB’s analysis by contingencies and commitments from 2004 to 2009 48 ht Figure 4.9: ACB’s analysis by types of geography from 2004 to 2009 49 jm Figure 4.10: ACB’s analysis by types of maturity from 2004 to 2009 49 k gm Figure 4.11: CAR of some commercial bank 57 l.c Figure 4.12: ACB’s liquidity gap into relevant maturity grouping from 2006 to 2009 59 Figure 4.13: Group’s exposure to interest rate risk from 2007 to 2009 60 om Figure 4.14: ACB’s exposure to foreign currency exchange rate risk from 2006 to 2009 61 a Lu Figure 5.1: Vietnamese banks' net interest margin from 2003 to 2008 76 n Figure 5.2: Vietnamese banks' return on average total assets from 2003 to 2008 77 va n Figure 5.3: Vietnamese banks' loan to deposit ratios from 2003 to 2008 .78 te re Figure 5.4: Vietnamese banks' cost/income ratios from 2003 to 2008 79 th Figure 5.6: Vietnamese banking system's asset quality from 2006 to 2008 80 y Figure 5.5: Vietnamese banks' CAR from 2003 to 2008 79 5 and borrowing targets for 2009 were raised significantly The policy interest rate was also lowered rapidly ng - The policy stimulus helped the economy to stage a rebound in the second hi ep quarter of 2009 After dipping to 3.1% in the first three months, real GDP growth accelerated from April to record a first half gain of 3.9% w n - Following to Standard & Poor’s forecast and estimation for 2009 – 2012: lo ad ju y th yi pl n ua al n va ll fu m oi Source: The report of Standard & Poor’s Ratings Detail by Standard & Poor's Ratings Services, Vietnam is assessed as following: at nh - z z ht vb k jm om l.c gm n a Lu n va financial system, and evolving policy framework These weaknesses increase the th This credit rating reflects the country's low-income economy, developing y - te re Source: The report of Standard & Poor’s 6 vulnerability of the economy to severe shocks that could significantly increase the public financial burden Healthy economic growth prospects, reinforced by ng the government's persistent efforts in economic restructuring, partly offset these hi ep weaknesses A modest level of external indebtedness also supports the government's credit quality w Overview of the Vietnamese banking system n 4.2 lo In its transition to a market-oriented economy, Vietnam had to fundamentally ad - y th change the infrastructure of its economy In the case of its financial ju infrastructure, the period from 1988 to 1992 marked drastic changes, initiated by yi pl the structural shift from a mono-banking system to a two-tier banking system in al ua 1988 Under the mono-banking system, one entity accounts for both central and n commercial banking responsibilities; whereas, under the two-tier system, the va n central bank controls monetary policies, leaving the commercial banks to handle fu ll commercial banking activities m Under the two-tier system, the State Bank of Vietnam retained the oi - at nh responsibilities of the central bank, specifically responsibilities for monetary z policies Commercial banking responsibilities were transferred to the two newly z vb created state-owned commercial banks By creating a two-tier banking system, ht the government had hoped to create a competitive banking system that would jm k respond more efficiently to the demand and supply of credit, thus creating a gm system of financial intermediaries capable of responding to the needs of om l.c - individuals and businesses in a market oriented economy From 1988 to the Asian Financial Crisis in 1997, the SBV proved adept at a Lu implementing interest rate policies to mobilize funds and control inflation n During this period, interest rate control was the key ingredient in the monetary va n policies implemented by the SBV The commercial banks assess those monetary y th lending te re policies and economic conditions to determine the cost of borrowing and 7 - The reforms of the late 1980s and early 1990s have had a positive effect on Vietnam’s banking system, as evidence in the steady increase in deposits and a ng diversification in lending However, reforms have not gone far enough As hi ep unveiled by the Asian Financial Crisis, the two-tier banking system of Vietnam has proved inadequate in its role of the financial intermediary w n - In early 2008, as imbalances threaten to destabilize the economy, the SBV began lo ad to reassert direct control over interest rates in the country Prior to February y th 2008, commercial banks were free to set deposit and lending rates according to ju market conditions and their funding positions By May, however, they were yi pl required to set lending and deposit rates at no higher than 1.5x the SBV's prime ua al interest rate From August, even inter-bank lending rates were similarly n restricted With inflation showing signs of moderation and economic va n uncertainties rising, the SBV began using its new powers to engineer a reduction fu ll in borrowing costs The central bank began lowering its policy interest rates, m oi from October 2008 when it peaked at 14%, to 7% by February 2009 At the at nh same time, reserve requirements were also lowered to release more liquidity to the commercial banks The SBV also offered to buy back compulsory bills that z z it had earlier sold to banks to mop up excess liquidity in the money markets The vb ht relief to borrowers, however, is a lot less than one would expect, given the rapid k jm easing of monetary policy Banks had continued to be selective in making new loans in early 2009 In part, gm - l.c this reflected a more conservative attitude among lenders in a weak economic om environment A number of banks were also constrained by balance sheets that a Lu had been weakened by the volatility of the past two years However, a domestic n liquidity shortage was also an important reason for banks' reluctance to lend va n Banks continue to face difficulties attracting deposits at interest rates below the th restricted at the same level, banks face low positive or even negative margins on y related to still-high inflation expectations With their lending rates similarly te re 10.5% ceiling implied by the SBV's 7% prime interest rate This is possibly 8 their loans This naturally reduced their eagerness to lend As a result, bank lending grew by a relatively weak 2.67% in the first quarter of 2009 Only when ng the government's interest rate subsidy scheme began to show its impact in April hi ep did lending grow more robustly - By Moody’s, Vietnamese banks’ average rating is assessed as following: w n lo ad ju y th yi pl n ua al n va Source: Moodys (2009) Market share ll fu 4.2.1 Competition in the market has been to some extent driven by the limited oi m - at nh geographic diversification of the banks, which focuses primarily on the domestic market The operations of the domestic banks are highly concentrated in the z z Vietnamese market which is vulnerable to the cyclicality of a few economic vb ht sectors The Vietnamese banks’ operations remain concentrated in urban areas – jm namely Hanoi and Ho Chi Minh City Rural communities have little exposure to k om l.c gm banking services This situation offers a large market to tap in the longer term n a Lu n va y te re th Source: The report 2009 of Moody’s 9 - ACB's market share statistic Items Yoy growth 2009 ACB’s ng (As of 31st December hi balance ep 2009) market market Banking ACB (VND ACB ACB share share as of sector compared to 31/12/09 billion) w n lo Deposits from 47.52 26.98 6.60 62,361 79.03 37.73 3.53 0.84 ad 134,502 end-2008 1.11 customers y th ju Outstanding loans to yi the economy pl 4.2.2 ua al Source: Internal reports of ACB Foreign strategic stakes in Vietnamese banks n Given the strong interest of foreign investors, as well as the government’s n va - ll fu willingness to sell its stakes in a number of state-owned entities, the foreign oi m presence in the Vietnamese financial sector will rise In the medium term, if nh prices are right, investors are likely to buy the government’s shareholdings in at the relevant banks Possible upcoming deals involve the equalization of BIDV z vb Strategic tie-ups with global players – aimed at strengthening franchises and ht - z and Mekong Housing Bank k jm market positions – have been common, as illustrated by the table below: om l.c gm n a Lu n va y te re th Source: The report 2009 of Moody’s 10 - The number of overseas institutions wanting stakes in local banks is also growing Such tie-ups aim to leverage the resulting synergies and each party’s ng respective expertise, creating a stronger healthier entity Foreign bank hi ep investments have contributed to the banks’ franchise development through improved risk management, better quality of service and greater product w n innovation Additionally, such investments have strengthened the sector by lo In the next 5-10 years, a further shake-up of the sector is inevitable Fewer and y th - ad improving corporate governance and transparency ju larger banks will help stabilize the financial system, as long as the mergers result yi pl in well-managed and profitable entities Such developments would occur against the backdrop of stricter regulatory ua al - n requirements from the SBV, growing competition, and the strengthening role of va n the banking sector The higher minimum capital requirement by 2010 could just fu ll be one of several factors pushing consolidation oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re th ad ju y th yi -1- pl ua al n APPENDIX 5: COMPARISON BETWEEN VIETNAM'S REGULATIONS AND BASEL I n va oi m ll Bank's own capital: fu 5.1 VIETNAM'S REGULATIONS (CIRCULAR No 13/2010/TT-NHNN) nh BASEL I Deductions at Components of capital Limits Limits Components of capital Deductions z - From Tier 1: commercial advantages - From total capital: + Investments in unconsolidate d banking and Hybrid Tier - Perpetual, callable, financial (HT1) non-cumulative subsidiary preference shares companies + Investments in the capital of other banks and financial institutions (at the discretion of national authorities) Minimum Tier ratio = 4% Tier k jm ht om l.c gm HT1 cannot exceed 15% of Total Tier - Ordinary shares/ common stock - Perpetual, noncumulative preference shares - Disclosed reserves (e.g Retained profit, General reseves) vb Tier (Core/NonHybrid) z Minimum Tier ratio = 4% Tier an Lu va n y te re - Professional investment and losses development funds + Investments - Undistributed profits in the capital of other banks and - 50% of the additional value financial of fixed assets institutions - 40% of the additional value + Investments of investment securities which are - Financial reserve funds up controlling to 1.25% of total asset at risk stakes in - Convertible bonds or insurers or preference shares: securities + Minimum years initial or companies remaining term + Balance of ac th - Total Tier cannot exceed 100% of Tier Capital instruments (convertible bonds, preference shares or subordinated debt) must not exceed 50% of Tier capital - Charter capital (paid-up - From Tier 1: capital and contributed + Commercial capital) advantages Reserve funds for + Any supplementing charter capital accumulated si eg cd jg hg ad ju y th yi -2- pl n ua al va BASEL I VIETNAM'S REGULATIONS (CIRCULAR No 13/2010/TT-NHNN) Perpetual, cumulative preference shares - Undisclosed reserves Upper Tier - Revaluation reserves (a discount of 55%) - General provisions up to 1.25% of total asset at risk n investment in one entity in excess of 15% capital oi m ll fu at nh + Balance of investment in + Unsecured all entities in + Redeemable only with SBV excess of 40% approval capital (excl + Cumulative excess of 15% + Step-up allowed after capital years mentioned - Subordinated debt: above) + Minimum 10 years maturity - From total + Unsecured capital: + Cumulative + Any reduction z z jm ht vb k Total Tier cannot exceed 100% of Tier om + Redeemable before maturity in value of reonly with SBV approval value fixed + Step-up allowed after assets years + Any reduction an Lu - Dated subordinated debt Lower Tier - Dated preference shares l.c gm Lower Tier cannot exceed 50% of Tier va n in value investment securities of y te re ac th si eg cd jg hg ad ju y th yi -3- pl ua al n Note: Total Tier = Lower Tier + Upper Tier − Tier ratio = (Hybrid Tier + Core Tier 1)/RWA n va − m ll fu Risk weighted assets (RWA) oi 5.2 nh z RW Maturity < year Sovereign Banks PSE (in domestic Non-OECD (in foreign currency) OECD Maturity < year Non-OECD OECD om l.c Secured with houses, land use rights or houses attached with land use rights of borrowers or with those assets which have been leased by borrowers but are allowed by their lessees to be used by lessors as mortgages during the lease term an Lu Corporate Banks All others OECD MDB Non-OECD OECD 100% OECD Non-OECD currency) gm Mortgage Sovereign k 50% domestic Maturity criteria OECD criteria jm PSE (in Type ht Banks OECD Non-OECD currency) Maturity criteria vb 20% Sovereign OECD criteria z Type 0% VIETNAM'S REGULATIONS (CIRCULAR No 13/2010/TT-NHNN) at BASEL I va n y te Maturity > year si Loans granted to subsidiary, jointventure and associated companies Non-OECD ac th No difine re 150% Corporate Maturity > year Banks All others Non-OECD eg cd jg hg ad ju y th yi -4- pl n ua al VIETNAM'S REGULATIONS (CIRCULAR No 13/2010/TT-NHNN) Maturity criteria OECD criteria Type m ll fu Type BASEL I n va RW of the credit institution oi 250% Maturity criteria OECD criteria No define at nh - Loans granted for securities investment: z - Loans granted to securities companies; z om l.c gm The words in italic shows the diffirence between rules k jm ht vb - Loans granted for real estate business purposes an Lu va n y te re ac th si eg cd jg hg 1 APPENDIX 6: SAMPLE MODELS ng 6.1 About building model, we can reference following models: hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re th Model Source: Basel Committee on Banking Supervision 2 ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z ht vb Model Source: Kessler (2000) p.112/113 k jm om l.c gm n a Lu n va y te re th Model Source: Hussain (2000) p.210 3 ng hi ep w n lo ad ju y th Model Source: Shah (2001) p.14 yi pl n ua al n va ll fu oi m at nh z z ht vb k jm Rating system design: a Lu - In summarizes, key minimum requirements need: om 6.2 l.c gm Model Source: KPMG (2003) n + Separate borrower creditworthiness and transaction-specific dimensions n va + Meaningful distribution of exposures across grades y for assigning exposures to grades within a rating system te re + Plausible, consistent and detailed rating definitions, processes and criteria th 4 + Written documentation of rating system design, default and loss definitions etc ng - Risk rating system operations: hi ep + Independence of rating assignment process + All borrowers and facilities must be re-rated at least on an annual basis w n + Data collection and storage of key borrower and facility characteristics lo ad Corporate governance and oversight: y th - + Stress testing used in assessment of capital adequacy ju + All material aspects of rating and estimation processes to be approved by yi pl senior management and (all or a subset of) the Board of Directors ua al + Independent credit risk control unit responsible for design/selection, n implementation and performance of internal rating systems va Internal audit (or an equally independent function) to review the rating n + fu ll system and the credit function’s operations at least annually oi Use of internal ratings: m - at nh + Internal ratings and default/loss estimates to play an essential role in credit approval, risk management, internal capital allocation and z z corporate governance vb ht + Rating system broadly in line with minimum requirements for at least k jm three years prior to qualification Risk quantification: gm - l.c + PD estimates must be long-run average of one-year default rates (except om for retail exposures) and must be based on at least a five-year observation a Lu period n + Internal estimates must reflect all relevant, material and available data, n va and must be grounded in historical experience and empirical evidence th important for certain types of exposures, and must be based on a y LGD and EAD estimation should incorporate cyclical variability when te re + Specific reference definition of default and indications of inability to pay 5 minimum data observation period of at least seven years (five for retail exposures) ng + The risk-mitigating effect of guarantees and single-name credit hi ep derivatives can be used to adjust own estimates of PD or LGD, but the adjusted risk weight cannot be lower than that of a comparable, direct w n exposure to the guarantor lo ad + Minimum requirements (legal certainty, effective ness of monitoring, y th control and work-out systems, compliance with internal policies and ju procedures) for eligible purchased receivables making use of the top- yi pl down treatment of default risk and/or IRB treatment of dilution risk Validation of internal estimates: Minimum operational and risk management ua al - n requirements for recognition of additional (to those eligible under the va n Standardized Approach) collateral types, including leases ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re th