Research motivation/ Rationale
In recent years, Vietnam has actively integrated into the global economy, marked by its participation in the WTO and TPP This integration presents numerous opportunities and challenges for the Vietnamese economy To navigate these circumstances effectively, Vietnam must focus on leveraging its advantages and transforming challenges into opportunities for growth.
The banking sector is crucial to the economy, serving as a barometer for its health To enhance competitiveness on the global stage and achieve business objectives effectively, all members of Vietnam's banking system must engage with international standards, laws, and regulations However, the World Bank and leading credit rating agencies indicate that risk management practices in most Vietnamese commercial banks are inadequate, which poses a threat to the sustainable development of the banking sector in Vietnam.
The Basel Accord, an international treaty on capital adequacy in banking operations, has garnered significant attention from the banking industry since its launch nearly 20 years ago In August 2014, the State Bank of Vietnam (SBV) mandated 10 banks to implement Basel II by 2018, with plans to extend its application to additional banks thereafter As commercial banks navigate the complexities of compliance, ongoing studies on Basel II remain relevant and insightful, despite the limited number of introductory articles focused solely on the Accord and SBV's regulations.
This graduation thesis focuses on the practical application of the Basel II Accord in the risk management practices of Vietnamese banks, aiming to provide a comprehensive understanding of its implications and effectiveness.
Research objective
This thesis evaluates the implementation of the Basel II Accord as a crucial standard for risk management in Vietnamese commercial banks, highlighting the urgency of compliance It analyzes the operational efficiency and evaluation scale of these banks in recent years, revealing their limitations in applying Basel II standards Ultimately, the thesis proposes solutions to enhance risk management capabilities within Vietnam's banking sector, addressing the challenges faced in adopting Basel II effectively.
Subject and scope
This thesis examines the applicability of Basel II standards in the risk management practices of commercial banks in Vietnam While Basel II encompasses numerous regulations pertinent to banking supervision, this research focuses on key aspects directly related to the implementation of the Accord in Vietnam It highlights essential regulations for identifying risk factors and the quantitative standards necessary for calculating minimum capital adequacy requirements These measures are crucial for banks to effectively manage credit risk, operational risk, and market risk, particularly emphasizing Pillar 1 - Minimum Capital.
Requirements is exclusively studied, while Pillar 2 - Supervisory Review Process and Pillar 3 - Market Discipline is finitely mentioned with the main content
Due to challenges in accessing comprehensive information from the entire banking system, this thesis focuses on a select group of banks, specifically state-owned commercial banks and joint-stock commercial banks, for analysis The data utilized in this study spans from 2011 to 2016.
Research methodology
This thesis synthesizes existing research on risk management and statistical models widely utilized by major commercial banks globally It employs a selective secondary database to objectively analyze and evaluate relevant issues The secondary data sources primarily include industry reports, annual reports from the State Bank of Vietnam and commercial banks, government agency websites, as well as publications from the World Bank, international organizations, and reputable journals.
The method of data analysis is simultaneously used throughout the thesis for synthesis, study and evaluation
This study is limited by both objective and subjective factors, resulting in a lack of comprehensive reports on the entire banking system Consequently, it will utilize data provided by various banks, focusing on a representative sample that includes state-owned commercial banks, large joint-stock commercial banks, and small to medium-sized joint-stock commercial banks.
Structure of research
The thesis includes three chapters:
Chapter 2 : Current situation of the application of the Basel II Accord in the risk management in Vietnamese commercial banks
Chapter 3: Solution to improve efficiency of the application of the Basel
II Accord in the risk management in Vietnamese commercial banks
LITERATURE REVIEW
Theoretical background of Basel II Accord and risk management
1.1.1 Risk management operations in commercial banks a Commercial banks
A bank plays a crucial role in the economy as a unique business entity, primarily because its primary product is currency In a market economy, banks function as financial intermediaries, facilitating the transfer of savings from individuals or organizations with surplus funds to those in need of financial resources.
In Vietnam, the Law on Credit Institutions 2014 establishes a comprehensive framework for commercial banking governance, defining commercial banks as entities engaged in various banking and business activities aimed at profitability This includes state-owned commercial banks, joint-stock commercial banks, and limited liability banks, highlighting the diverse nature of the banking sector in the country.
Vietnam- based commercial banks are:
Take deposit and provide loans
Send remittance and provide payment services
Provide financial and advisory services b Risks of commercial banks
According to ISO 31000, risk is the effect of uncertainty on objectives
Uncertainty refers to the potential for unforeseen events and the influence of internal and external factors that may lead to adverse outcomes Risks arise from this unpredictability, representing unplanned occurrences that can have financial repercussions, potentially resulting in losses or diminished earnings Commercial banks are particularly susceptible to various risks, as their operations inherently involve unexpected factors that could lead to financial losses.
Figure 1 Major risks in banks
Source: Global Association of Risk Professionals
There are many ways to classify risks By the most commonly used classification, risks in commercial banks include: credit risk, market risk, operational risk, and other risks
Credit risk emerges when borrowers fail to meet their debt repayment obligations as outlined in their credit agreements Key indicators of credit risk for commercial banks include the ratio of bad debt to total debt, the bad debt to equity ratio, and the bad debt on loss reserve ratio Additionally, factors such as the potential for debt to escalate into high bad debt and the prevalence of non-collateralized debt further contribute to assessing credit risk.
Market risk refers to the potential losses or damages that banks face due to fluctuations in various market factors, such as interest rates, exchange rates, stock market volatility, commodity price shifts, and changes in fuel or agricultural product prices Key forms of market risk include cost risk associated with interest rate changes, currency risk arising from portfolios with multiple currencies, liquidity risk, and risks linked to diversifying investments across different types of bonds.
Operational risk in commercial banks stems from man-made issues, technical breakdowns, and inadequate processes that can lead to significant financial losses Although this risk has long been inherent in banking activities, it has gained increased attention in recent years The complexity and strict regulation of banking procedures make errors more likely, as professional negligence can result in inaccurate information and flawed operational decisions This type of risk is escalating due to the expansion of bank scales, diversification of services, a more complex business environment, and heightened reliance on technology.
Banks may encounter various risks in their operations, including legal risk, liquidity risk, and moral hazard, depending on their management objectives Effective risk management is crucial for commercial banks to navigate these challenges successfully.
In the realm of commercial banking, risk and expected return are interdependent variables, where lower risk typically correlates with higher business efficiency Modern risk management principles emphasize that "No risk is not profitable" and advocate for managing risks rather than avoiding them While it is impossible to completely eliminate risks, banks can strive to limit their occurrence and mitigate their impact Consequently, recognizing risks in banking operations and actively seeking diverse strategies to manage and reduce these risks is essential for the bank's survival and growth.
Risk management in Vietnamese commercial banks is crucial for ensuring the safety and stability of the banking and financial system, as well as fostering economic development It involves assessing the desired risk levels against the actual risks faced by the business, particularly during investment decisions Organizations forecast potential risks, analyze and evaluate them, and implement corrective measures to mitigate occurrences or adjust risks to acceptable levels Essentially, risk management is a comprehensive and systematic approach that focuses on identifying, controlling, and reducing risks to minimize losses and their adverse effects by employing various management techniques.
1.1.2 Basel II Accord a The advent of Basel Accord
The rapid growth of international finance has led to significant challenges, including a series of financial crises and the notable collapse of Herstatt Bank in West Germany, which triggered a domino effect across the banking and finance sectors To mitigate the risk of a global banking crisis, the central monetary authorities of the G10 established the Basel Committee on Banking Regulatory and Supervisory Practices in late 1974 This committee aims to create unified risk control frameworks and enhance the safety of international banks, with its headquarters located in Basel, Switzerland.
The Basel Committee serves as a collaborative platform for member countries to discuss and align on the supervision of commercial banking operations, aiming to establish a unified framework While the BCBS does not possess legal supervisory authority, it focuses on creating guidelines and standards to protect commercial bank operations The Committee encourages central banks and supervisory boards to closely monitor their respective banking activities and implement policies that adhere to banking safeguard techniques relevant to each member country The Committee recognizes that weaknesses in a nation's banking system, regardless of its development status, can pose significant risks to financial stability both domestically and globally.
Since its inception in 1975, the Basel Committee has developed various documents and instruments to fulfill its objectives In 1988, it introduced the Basel Capital Accord, known as Basel I, which established an 8% minimum capital requirement for measuring credit risk This framework gained popularity not only among member countries but also among many nations with internationally active banks In June 1999, the Committee proposed a new framework consisting of three main pillars, leading to the official enactment of Basel II on June 26, 2004.
Brief history of the Basel Capital Accord:
1988: The first Basel Accord (Basel I) was introduced
1992: The Basel I came into force
1999: A framework for a new capital agreement was proposed with the First Consultative Package (CP1)
2001: The second Consultative Package (CP2)
2003: The third Consultative Package (CP3) was proposed in April and the new version of the Basel Accord (Basel II) was finalized in November
2004: The Basel II came into force
2010: As the Basel II could not stop the global crisis, Basel III was born b Summary of Basel I
Basel I regulations mandate that banks maintain a minimum Capital Adequacy Ratio (CAR) of 8% to mitigate potential risks This requirement is crucial for ensuring that commercial banks can absorb losses while protecting the interests of depositors.
Capital Adequacy Ratio (CAR) Total capital
Total capital is divided into: Tier 1 capital (core capital-base equity) and Tier 2 capital (Supplementary capital)
Risk Weighted Assets (RWA): Basel I only mentions credit risk, and the risk weight varies from asset to asset: RWA Basel I = Asset * Risk weight
According to Basel I, the risk weight of assets is divided into four levels
Table 1 Risk weight (Basel I) Risk weight Asset classification
0% Cash and gold held in the bank
Obligations on OECD Government and U.S treasuries
Securities issued by government agencies;
Claims on municipalities 50% Residential mortgages, …
All other claims such as corporate bonds, debt from less- developed countries, claims on non-OECD banks, equities, real estate, plant and equipment
As the global financial industry evolves and new risk factors such as overnight, swap, and option transactions emerge, commercial banks are encountering a range of risks that rival traditional credit risk The limitations of Basel I have become increasingly apparent through G10 practices and consultations with other central banks, highlighting the need for a more comprehensive approach to risk management in banking operations.
Risk weights only distinguish the group of assets by the loan subject, regardless of the actual activity quality of the subject
The minimum capital adequacy ratio of 8% only covers credit risk, while ignoring other types of risks such as market risk and operational risk
The Accord does not catch up with the development of new financial instruments such as derivatives and debt securitization
The Accord does not take into account the benefits of diversification of portfolio which is indicated to reduce risk
Some of Basel I regulations cannot be applied for parent banks, foreign branches, or a merger
Despite several revisions, the Basel I Accord had significant limitations In June 2004, the Basel Committee on Banking Supervision (BCBS) introduced Basel II as a comprehensive framework to replace Basel I.
Lessons learned from experiences of Basel II application from developing
1.2.1 The application of Basel in the commercial banks of some developing countries outside the G-10
A survey by the Financial Stability Institute of the Bank for International Settlements (BIS) revealed strong interest in Basel II risk management standards among governments in both developed and developing non-G10 countries This interest is particularly important for nations aspiring to join the World Trade Organization (WTO), as it underscores the global emphasis on safety supervision and effective risk management practices Notably, Thailand's experience serves as a relevant example in this context.
Thailand adhered to Basel I regulations in the early 1990s and implemented Basel II standards in 2008 The Bank of Thailand (BOT) and the Bank for International Settlements (BIS) unanimously agreed to enhance the risk assessment model, focusing on worst-case scenarios to ensure a reasonable Capital Adequacy Ratio (CAR) of real capital The BOT accelerated the full implementation of the minimum CAR by 2013, which Thai banks have consistently maintained in line with international standards Thai banks possess ample capital, with equity comprising 90% of total capital, easily fulfilling the new minimum capital requirements under Basel II As of September 2015, quantitative studies by the BOT indicated that the Tier 1 capital ratio for Thai banks was 11.1%, while the CAR stood at 15.6% Additionally, foreign bank branches averaged a Tier 2 capital ratio of 17.4%, significantly exceeding Basel II recommendations, demonstrating that Thai banks have successfully met Basel requirements.
II, making the Thai economy in general and its banking sector in particular stronger b Experience from Indonesia
Under current regulations, Bank Indonesia (BI) has aligned its capital definitions with Basel framework standards for Tier 1 and Tier 2 capital Notably, there is a threshold for Tier 2 capital, which cannot exceed 100% of Tier 1 capital While BI's capital requirements do not fully adhere to Basel II, certain aspects of the existing regulations are more conservative These include considerations for current year profits, investments in instruments from other financial institutions, and deferred income tax assets.
Bank Indonesia (BI) has started implementing Basel II capital recommendations for non-Islamic commercial banks, easing the monitoring process by differentiating supervisory roles and methods based on various banking segments As of June 2014, non-Islamic commercial banks represented 94.55% of Indonesia's total bank assets, with a consistent Capital Adequacy Ratio (CAR) exceeding 16% over the past six years The nominal capital of Indonesian banks has notably increased, tripling since 2008 to reach IDR 564 trillion by the third quarter of 2014, enabling banks to sustain a capital ratio of approximately 11% In June 2014, foreign banks led with the highest CAR at 28.36%, followed by regional banks at 17%, state-owned banks at 16.5%, and domestic banks at 16.24%.
The Bangko Sentral ng Pilipinas (BSP) implemented the Basel Accord early on to mitigate risks in the banking sector In applying Basel II requirements, the BSP has tailored these guidelines to fit the unique context of the Philippine banking system Currently, the BSP has issued Basel I, Basel II, and Basel 1.5 guidelines, with ongoing efforts to fully achieve Basel II compliance.
The Bangko Sentral ng Pilipinas (BSP) has adapted its minimum Capital Adequacy Ratio (CAR) and methodologies in line with the Basel Accord, implementing a new funding framework in June 2014 that establishes a minimum CAR of 10% To align with Basel II recommendations, the BSP revised the calculation methods for minimum capital requirements to effectively manage credit risk Additionally, guidelines for minimum capital allocation to address market risk were updated, focusing on the organization of market risk costs within portfolio assets according to modified credit risk principles To streamline Basel II, the BSP introduced Basel 1.5, reflecting adjustments in capital adequacy standards.
By the end of 2007, the Central Bank of Sri Lanka (CBSL) established capital maintenance guidelines aligned with Basel II requirements, applicable across the banking sector Currently, Sri Lankan banks implement the first pillar of Basel II, utilizing the Standardized Approach for credit and market risk, along with the Basic Indicator Approach for operational risk All banks are required to maintain a core capital ratio of 5% and a common equity ratio of 10% Additionally, the implementation guidelines for the second pillar were enacted in April 2012.
In 2013, commercial banks were mandated to maintain capital against various risks, leading to the issuance of the Basel II third pillar guidelines, which emphasized the importance of disclosures based on IFRS Banks in Sri Lanka are required to adhere to both Sri Lanka's accounting standards and IFRS for financial reporting and disclosures The introduction of integrated risk management directions has significantly enhanced the effectiveness of capital and risk identification Concurrently, reports have been generated in compliance with Sri Lanka's accounting standards, covering financial instruments, their presentation, measurements, and necessary explanations.
1.2.2 Lessons learned from the Basel practice in risk management in countries around the world
The Basel II Accord establishes international standards for risk management in commercial banking operations, originally aimed at large international banks in the G10 group Its effective framework has since been adopted by the banking sector in various countries, including developing nations, due to its scientific approach to risk assessment and safety supervision.
The implementation of the Basel II Accord is influenced by the development level of a country's banking sector and economy Since the risk management techniques outlined in Basel II are tailored for advanced commercial banks, national regulators must choose relevant components to integrate into their legal frameworks for commercial banking operations Generally, the Basic Indicator Approach (BIA) and Standardized Approach (SA) are favored methodologies among most countries.
Countries need to establish a tailored Basel II roadmap, outlining specific steps and phases, while regularly reviewing it to align with the evolving economic landscape Additionally, a quantitative impact study should be conducted to assess commercial banks' acceptance of state-issued safety supervision regulations.
The successful implementation of the Basel II Accord hinges on several critical factors, including the current state of a bank's risk management system, the estimated costs and benefits, the level of pressure from the central bank, and the preparedness of competing banks For central banks, essential considerations for Basel II implementation encompass national priorities, the readiness of legal and management frameworks, compliance with accounting standards, availability of skilled human resources, the integrity of corporate governance, market discipline, and the credibility of credit rating agencies.
1.2.3 Basel II implementation roadmap in Vietnam and its benefits
The State Bank of Vietnam (SBV) is currently consulting on the fourth draft Circular regarding the minimum Capital Adequacy Ratio (CAR) for banks and foreign bank branches This initiative aims to enhance risk management and ensure capital safety in alignment with Basel II standards The proposed roadmap outlines the steps for implementing these crucial regulations.
II in the entire banking system is proposed by the SBV in two phases:
In February 2016, ten banks in Vietnam, including Vietcombank, VietinBank, BIDV, MB, Sacombank, Techcombank, ACB, VPBank, VIB, and Maritime Bank, began implementing Basel II standards The objective is for these banks to largely comply with the Basel II requirements by the end of 2018.
By 2020, commercial banks are expected to establish their own equity capital in accordance with the Basel II standards, with a goal for at least 12-15 banks to successfully implement these guidelines, as outlined in the National Assembly's resolution on the economic restructuring plan for 2016-2020 dated August 11, 2016.
CURRENT SITUATION OF THE APPLICATION OF THE BASEL
Current situation of the financial capacity of Vietnamese banking system
The banking sector has successfully met growth targets and stabilized the macro economy while managing inflation through effective monetary policy From 2011 to 2012, the economy faced significant challenges, including high inflation, low foreign exchange reserves, elevated lending rates (18% to 21%), liquidity issues, high bad debt levels, an unstable gold market, and fluctuating exchange rates However, since mid-2012, macroeconomic conditions have gradually improved, with the Consumer Price Index (CPI) under control During this period, the banking sector has adapted flexibly, prioritizing growth support by reducing interest rates and implementing effective credit policies and programs that aid enterprises and contribute to economic development and social security.
From 2012 to 2015, the State Bank of Vietnam (SBV) undertook significant reforms to enhance the banking system's liquidity and streamline commercial bank operations, focusing on non-performing loans (NPLs) and financial transparency In 2013, the SBV initiated the second phase of financial consolidation by reinforcing regulations on Capital Adequacy Ratio (CAR) and managing bad debts through the establishment of the Vietnam Asset Management Company (VAMC), aligning risk management practices with Basel II standards The finalization of Circular No 13/2010 in 2014 directed banks to adopt Basel II risk management approaches By 2015, the SBV intensified efforts in restructuring and merging banks while addressing bad debts, facilitating mergers and acquisitions (M&A), and considering compulsory mergers for underperforming banks, with active involvement from state-owned commercial banks (SOCBs) and foreign investors.
Vietnam's integration commitments enable foreign banks to invest in local banks by purchasing shares, providing local banks with access to international capital from strategic partners Economists note a significant trend in banking restructuring from 2016 to 2020, marked by increasing participation of foreign capital Reports from foreign investment funds reveal ongoing interest in Vietnam's banking sector Under Decree 60/2015, which allows a ceiling foreign ownership rate of 30%, Vietnamese commercial banks are actively pursuing strategic partnerships and increasing foreign ownership For instance, Vietinbank's foreign ownership rose from approximately 12% in 2012 to 28% in 2014, while Vietcombank's ownership increased from 5% in 2012 to 20% by the end of the period.
Between 2012 and 2014, banks like ACB and SCB saw a significant rise in foreign ownership, reaching 30%, which enabled them to avoid being classified as weak banks Additionally, VIB benefited from a strategic partnership with the Commonwealth Bank of Australia, which holds a 15% stake valued at approximately 600 billion VND This influx of foreign capital has greatly enhanced the financial capacity of domestic commercial banks.
The number of banks decreased
In response to the rapid growth of banks and services, the Government approved Project No 254 in 2012, focusing on restructuring credit institutions, particularly commercial banks Over nearly three years, several weak commercial banks were merged into larger entities, while the State Bank of Vietnam (SBV) urged parent banks to address issues with struggling foreign and joint venture banks Currently, eight commercial banks with 100% foreign ownership, including ANZ, HSBC, and Standard Chartered, operate in Vietnam The SBV is also refining legal frameworks to tackle cross-ownership issues and enhance the efficiency and capital of bank branches and transaction offices.
Table 2 Types and quantities of banks in Vietnam
SOCBs and joint stock banks
State owns dominant shares 05 05 05 05 05 04 04 Joint Stock Commercial Bank 37 37 34 34 30 28 31
Subsidiary banks abroad 50 50 50 48 46 47 51 Banks with 100% foreign own capital 05 05 05 05 05 06 08
Source: SBV annual report, www.sbv.gov.vn and authors' compilation
The increased capital scale, guaranteed liquidity, improved reputation
The restructuring of credit institutions as per the Government's plan has led to a notable increase in the chartered capital of commercial banks By the end of 2015, the chartered capital of State-Owned Commercial Banks (SOCBs) reached VND 144.999 billion, marking a 0.54% rise from 2014, while commercial joint stock banks saw an increase to VND 186.147 billion, up 2.97% from the previous year Notably, 10 joint stock banks have chartered capital exceeding VND 10,000 billion, with VietinBank leading this group Additionally, the total assets of commercial banks surged significantly, growing from VND 1.069 trillion in 2007 to VND 6.515 trillion in 2014, and reaching VND 6.753 trillion by August 2015 The implementation of minimum charter capital regulations has prompted some banks to enhance capital mobilization from both domestic and international shareholders, with strategic capital contributions reaching up to 30% in 2016.
As charter capital increases, the Capital Adequacy Ratio (CAR) of banks in Vietnam has shown improvement, rising from an average of 10.95% in 2010 to 13.25% in 2013, before slightly decreasing to 12.19% in 2015 State-owned commercial banks (SOCBs) consistently report the lowest CAR, ranging from 9% to 10%, while joint-stock commercial banks maintain a more acceptable CAR of approximately 12.5% to 15% In contrast, foreign and venture banks boast a high average CAR of around 30% However, when accounting for all operational and market risks as required by Basel II, the actual CAR of many commercial banks may be lower than reported, indicating a concerning trend of unsustainable development within Vietnam's banking system.
Figure 2.CAR of the commercial banking system
Between 2007 and 2010, the average credit growth rate was approximately 35% per annum, while from 2012 to 2014, it decreased to around 10-11% per annum This trend indicates that during the earlier period, credit growth significantly outpaced GDP growth by 5-6 times, highlighting a low capital efficiency In contrast, from 2012 onwards, credit growth has consistently remained more than double the GDP growth rate.
Thanks to the decisive actions of the Government and the State Bank of Vietnam (SBV), along with the efforts of commercial banks, the non-performing loans (NPLs) ratio significantly dropped from 17% in 2012 to just 3.8% in 2014 Notably, some banks, including BIDV, Vietcombank, and Vietinbank, have achieved even lower NPL ratios of less than 2% per annum Since 2014, the banking sector has continued to stabilize, contributing to a healthier financial environment.
The banking sector has shown notable performance variations, with foreign and venture banks leading at 35.25%, while joint stock commercial banks average around 14.8%, and state-owned commercial banks lag at 7.09% Overall, the entire banking system has demonstrated an improvement in debt quality, with a macroeconomic environment that supports increased credit availability This trend indicates a reduction in financial capacity pressures, fostering a more conducive atmosphere for economic growth.
Figure 3.Credit growth and GDP growth
Source: Reports to the SBV and author synthesis
Positive business performance of the bank
Since 2012, the banking sector has experienced a decline in after-tax profits, largely attributed to challenging economic conditions Commercial banks are now required to allocate more resources for risk provisions, while simultaneously facing rising operating and management expenses.
Foreign&venture banks Joint stock commercial banks SOCBs
Figure 4 ROA of Vietnamese banking system
Figure 5 ROE of Vietnamese banking system
From 2013 to 2015, the Return on Equity (ROE) and Return on Assets (ROA) for commercial joint stock banks in Vietnam were consistently lower than the figures recorded between 2008 and 2012 Specifically, in December 2013, the sector's ROA and ROE were 0.22% and 1.36%, respectively, with slight improvements by 2015, reaching 0.43% and 4.01% However, larger capitalized banks demonstrated significantly higher ratios during this period For instance, Vietinbank reported ROA and ROE of 1.7% and 19.9% in 2013, which decreased to 1.2% and 10.4% by 2015 Similarly, MB's ROA and ROE were 1.97% and 27.5% in 2013, dropping to 1.3% and 14.7% in 2015 Overall, the performance indicators of certain commercial banks in Vietnam surpassed those of joint venture banks and branches of foreign commercial banks.
Between 2012 and 2014, the State initiated a proposal to reform the banking inspection organization and operations, aligning with the strategic development goals for the banking sector From 2014 to 2016, the State Bank of Vietnam (SBV) concentrated on identifying weaknesses in the internal auditing system In 2014, the SBV selected ten commercial banks—Vietinbank, Vietcombank, BIDV, Techcombank, ACB, MB, VPbank, Maritimebank, Sacombank, and VIB—to pilot Basel II risk and capital management from 2015 to 2018, with plans to extend this framework to other banks by 2018 As commercial banks underwent mergers and reorganizations, they quickly established effective governance and control mechanisms while addressing internal weaknesses Many banks transitioned to one-member limited liability structures, with state-owned banks providing senior staff to enhance management Additionally, commercial banks formed various committees, including Policy, Risk Management, and Compensation Committees, to support their Boards.
Figure 6.Liquidity of Vietnamese banking system
Capital mobilization Loan-To-Deposit Ratio
Based on inspection and supervision results, the State Bank of Vietnam (SBV) has enhanced monitoring and implemented targeted corrective and preventive measures to ensure the stability, safety, and effectiveness of commercial banks' operations The SBV promotes the utilization of available liquidity within safe limits and encourages investments in government bonds and other securities to bolster capital flow into the economy and improve liquidity.
Financial strength is essential for Vietnamese commercial banks to invest in modern technology, expand their networks, and enhance human resource quality, ultimately improving governance to meet international standards As of the end of 2015, the banking sector represented a significant portion of Vietnam's financial system, holding 75% of total financial system assets, with outstanding loans reaching VND 4,656 trillion, or 111% of GDP This substantial scale positions bank credit as the primary capital channel in the economy, contributing 40% to 45% of total social investment.
Current situation of the application of the Basel II Accord in Vietnamese
2.2.1 Current situation of the application of the Basel II first pillar
The minimum Capital Adequacy Ratio (CAR) is a crucial indicator of a bank's capital strength, designed to safeguard depositors from potential risks and enhance the stability of the global financial system This ratio assesses a bank's solvency and its capacity to manage risks effectively By maintaining the required CAR, banks establish a protective buffer against financial shocks, ensuring the safety of both their operations and their depositors' funds.
Table 3 CAR of Credit Institutions in Vietnam and some Asian countries
Source: Orientations and Solutions to Restructure Vietnam's Banking System in 2011- 2015
The financial capacity of the banking system, as indicated by the Capital Adequacy Ratio (CAR), has significantly declined, dropping from 10.8% in 2011 to 9.4% in 2015 During the period from 2011 to 2015, the Risk-Weighted Assets (RWA) of the banking system grew at an average rate of 19.4% per annum, outpacing the 15.43% per annum growth of own capital This decrease in CAR is concerning as it approaches the 9% threshold set by the State Bank of Vietnam (SBV) and falls below the ASEAN average of 10.3%.
During unstable economic periods, commercial banks encounter significantly greater challenges than during stable times Increasing the capital adequacy ratio serves as a protective buffer, enabling banks to better withstand shocks from fluctuations in the business environment.
The SBV Research Center highlights that the decline in the Capital Adequacy Ratio (CAR) is primarily attributed to two factors: first, the profitability of commercial banks has decreased, with the Net Interest Margin dropping from 2.5% in 2011 to 2.2% in 2012, and further declining to 1.7-1.8% between 2013 and 2015 State-Owned Commercial Banks (SOCBs) often lead in implementing government preferential credit programs, offering low lending rates around 7% while mobilizing funds at market rates of 4-5% Secondly, the Vietnamese banking sector's efforts to adopt Basel International Standards for CAR calculation have resulted in a slower growth rate of own capital and an increase in Risk-Weighted Assets (RWA).
Figure 7.CAR (calculated according Circular 36) of some Vietnamese commercial banks in 2015
As of the end of 2016, the overall Capital Adequacy Ratio (CAR) of Vietnam's banking system stood at 12.68%, surpassing the State Bank of Vietnam's (SBV) regulatory requirement of 9% Many banks exceeded this average, highlighting the importance of maintaining high CAR ratios to ensure financial stability However, with the impending implementation of Basel II regulations, which are more stringent, banks may see their CARs decrease significantly—potentially by 15-30% This necessitates that banks, particularly those not included in the Basel II pilot project with CARs around 9-10%, develop strategies to enhance their Tier 1 or Tier 2 capital to avoid potential risks To secure their CAR, banks must focus on increasing their capital and improving asset management, with Tier 1 capital being prioritized for its reliability and safety.
It is widely understood that the Capital Adequacy Ratio (CAR) of State-Owned Commercial Banks (SOCBs) and joint stock commercial banks with significant state ownership is typically higher than that of private joint stock banks, and larger banks usually exhibit better CAR than smaller ones However, the current CAR for SOCBs and state-dominated joint stock banks stands at 9.48%, which is notably lower than the 12.1% CAR of private joint stock banks.
As of late 2015, BIDV's Capital Adequacy Ratio (CAR) stood at just over 9%, meeting the minimum requirement set by SBV Circular 36 This decline in CAR is attributed to BIDV's failure to complete its planned issuance to a strategic partner in 2015 and the impact of high credit growth Notably, BIDV is the only listed bank that has reached the maximum limit for issuing secondary debt as Tier 2 capital In the first half of 2015, the bank issued approximately VND 3,300 billion in unsecured bonds, which has limited its ability to raise Tier 2 capital under the Basel II framework.
1 capital The amount of capital to be mobilized is not small BIDV is currently in the process of seeking strategic partners
Vietcombank's current Capital Adequacy Ratio (CAR) stands at 10.8%, approximately 7% according to Basel II standards The bank has secured a partnership with a Singaporean entity to facilitate capital sales and plans to issue VND 2,000 billion in bonds If successful, this could elevate Vietcombank's CAR to 12.7%, roughly 9.5% of Basel II's requirements Even without the capital sale approval, the bank is poised to enhance its CAR in 2017 through bond issuance aimed at increasing Tier 2 capital.
VietinBank faces challenges in increasing its capital, having distributed cash dividends at approximately 8.5% of its charter capital in 2015, totaling over VND 37,200 billion Despite a rise in retained earnings of over VND 5,200 billion and supplementary capital from secondary bonds amounting to VND 5,400 billion, the bank's total capital remained above VND 57,140 billion by September 2016 The Capital Adequacy Ratio (CAR) improved by about 0.3% since the end of 2015, reaching 11% under normal calculations While merging with PGBank could provide a pathway to raise an additional VND 3,000 billion in capital, the merger has yet to show signs of completion If finalized in 2017, this merger could significantly enhance the CAR according to Basel II calculations.
Non-state-owned joint stock commercial banks are demonstrating a more favorable capital adequacy ratio (CAR) situation Private joint stock banks, in particular, enjoy several advantages According to audited financial statements, VIB, which has the lowest chartered and own capital among the ten banks, reported a notable CAR at the end of the period.
As of October 2016, VIB reported total assets exceeding VND 90 trillion and owners' equity nearing VND 9 trillion, with a Capital Adequacy Ratio (CAR) of approximately 14.46% When calculated under Basel II standards, this rate is estimated to be around 13%, positioning VIB favorably among its peers In 2015, VIB partnered with HPT Information Technology Services to initiate the "Basel II Standardization Solution" Project, successfully establishing a centralized risk management data system for loan origination and debt recovery The bank utilizes Moody's Emerging Markets RiskCalc tool for assessing credit risk on loans categorized from Group 2 to Group 5 and enhances employee training in credit and financial risk management through the Omega program Additionally, VIB's market risk management employs a three-tiered protection model, overseen by the Asset and Liability Committee (ALCO) Since March 2016, VIB has implemented its risk management system in alignment with Basel II standards, regularly entering data and submitting reports to the State Bank of Vietnam.
Sacombank's capital adequacy ratio (CAR) was approximately 10% prior to its merger with SouthernBank, but it has since seen significant improvement, although updated figures are not currently available As of now, Sacombank stands as the largest non-state joint stock commercial bank in terms of capital and workforce, with total assets exceeding 320 trillion dong and chartered capital nearing 18,900 billion dong, supported by over 17,000 employees Following the merger in October 2015, Sacombank has maintained a leading position in branch networks, personnel, chartered capital, and customer capital mobilization by the end of September 2016 To align with Basel II standards, the bank has established dedicated units, including a Steering Committee and a specialized Basel II department within Risk Management, and is collaborating with E&Y for comprehensive assessments of its organizational structures and risk capital processes, aiming to close the gap to Basel II compliance.
Maritime Bank currently maintains a Capital Adequacy Ratio (CAR) of approximately 13%, exceeding the State Bank of Vietnam's (SBV) requirements, and recorded a CAR of 14.6% at the end of September 2016 under Basel II standards In 2015, the bank established a Basel II Center and a Project Steering Committee, comprising senior executives, to enhance its risk management framework Maritime Bank has successfully implemented centralized credit risk management, focusing on loan origination, debt recovery, and the development of innovative solutions.
Maritime Bank has officially launched the RWA and CAR database, a significant advancement made possible through early preparation and strategic investment This innovative system of data and reporting tools is set to enhance the quality, efficiency, and internal management of the bank, while also supporting IT solutions, business staff training, and risk management initiatives.
ACB boasts a strong capital adequacy ratio (CAR) exceeding 14% The bank has recently approved a plan to issue VND 1,500 billion in bonds aimed at increasing its Tier 2 capital This strategy ensures that ACB will remain compliant with Basel II regulations without concerns regarding its CAR.
2015 was 14.7% and still remains high as Basel standards According to Techcombank's 6-month business report, its CAR reached 14.3% at the end of June
2016 Along with ACB and Techcombank, MB was not worried about the CAR when it successfully raised chartered capital in 2016
Assessment of the current situation of the application of the Basel II
Accord in Vietnamese commercial banks
A recent survey of 21 commercial banks in Vietnam revealed that 95.24% recognize the critical importance of risk management in banking, with 100% expressing significant concern about the Basel framework Furthermore, 90.48% believe that Basel plays a vital role in enhancing the financial security of Vietnam's banking system However, banks face several challenges in implementing Basel for business risk management, including a lack of qualified personnel, outdated IT infrastructure, and an inadequate legal framework Despite some initial successes, the application of Basel II in risk management within certain commercial banks in Vietnam is encountering notable limitations.
Experts believe that the Capital Adequacy Ratio (CAR) in Vietnam fails to accurately represent the banking sector's true condition, as banks often hide bad debts and do not adhere strictly to regulations Dr Bui Quang Tin emphasized that the CAR figures are inflated and do not genuinely reflect the capital adequacy levels of Vietnamese banks.
Accessing the Basel II rules presents significant challenges due to their complex content and language barriers The official documents issued by the Basel Committee on Banking Supervision (BCBS) are exclusively in English, with no Vietnamese translations available These texts, often ranging from 400 to 500 pages, contain intricate terminology that can be difficult to comprehend Furthermore, the abundance of Basel documents featuring complicated formulas that do not align with the realities of Vietnam's banking system adds to the difficulty for professionals seeking to understand and research these regulations.
The implementation of Basel II poses significant challenges for Vietnamese commercial banks, primarily due to high costs While large international banks benefit from economies of scale and have already adopted risk management techniques aligned with Basel II, smaller banks in developing countries struggle to bear the financial burden of compliance European banks have reportedly spent tens of millions of dollars to meet Basel II standards, making it feasible primarily for larger institutions in Vietnam For instance, the cost for small commercial banks to implement Basel II is estimated at around ten million dollars, which constitutes about 15% of their charter capital In contrast, larger banks may face operational costs soaring to two hundred million dollars, exceeding the legal capital requirements set by the government.
Vietnamese commercial banks face significant challenges due to the complexities of complying with both Vietnamese and international accounting standards Discrepancies arise when preparing financial reports, as evidenced by BIDV's balance sheet, which shows a variance of 3.428 billion VND between IFRS and VAS This difference stems from variations in provision funds and the recognition of held-to-maturity securities at amortized cost Additionally, the lack of guiding documents for implementing Basel II exacerbates the situation, as banks are currently unable to adopt any of the three credit risk assessment methods outlined by Basel II without proper legal frameworks.
Many banks face challenges with their credit risk analysis support systems, as internal credit ratings lack synchronization and industry analysis capabilities The absence of standardized metrics across sectors leads to a lack of warnings and guidelines for credit activities, resulting in ineffective investments Current rating methods are often subjective and based on the evaluations of credit managers, which diminishes the reliability of credit decision-making and interest rate determination Additionally, limited transparency in customer information and the credibility of credit officers contribute to cumbersome lending procedures, treating small and medium enterprises similarly to corporate clients This inefficiency ultimately wastes both human and financial resources within the banks.
Vietnamese commercial banks face significant challenges in meeting the Basel II requirements for maintaining a comprehensive borrower database due to outdated technology and low scientific capabilities Even leading banks like Vietcombank and Vietinbank rely on separate systems for different operations To effectively implement risk calculation and measurement methods as outlined in Basel II, banks need a centralized, multi-dimensional database that stores all essential information Additionally, they must invest in various software programs capable of automatically calculating critical parameters such as phase, beta, convexity, linear function constants, and standard deviation This necessitates substantial capital investment alongside skilled human resources.
The absence of independent credit rating agencies in Vietnam poses significant challenges for commercial banks, hindering their ability to effectively assess creditworthiness While some banks are beginning to develop their own credit rating systems, these efforts are often unscientific and lack professionalism due to the insufficient qualifications and experience of credit officers Consequently, standardized risk exposure measures that rely on credit ratings are not yet integrated into the risk management practices of Vietnamese banks Unlike the uniform approach of Basel I, Basel II emphasizes tailored risk assessments, which are currently underdeveloped in Vietnam Although banks are working on credit rating systems for specific target groups, these ratings are primarily used internally for loan decisions and lack transparency, leading to subjective evaluations and potentially inaccurate conclusions due to incomplete information.
Basel II empowers bank regulators to evaluate the suitability of various risk assessment systems for classifying asset risk within credit institutions If the central bank lacks the expertise to assess the appropriateness of credit rating systems, it poses significant risks to the entire banking sector For instance, internal risk assessment systems may lead commercial banks to adopt overly optimistic views of their clients' prospects, neglecting necessary precautions and increasing the likelihood of defaults Consequently, the State Bank of Vietnam (SBV) cannot permit commercial banks to select risk assessment methods at will; instead, it must enforce strict regulations on prudential ratios governing credit institutions By enhancing its supervisory capabilities and restructuring commercial banks, the SBV can effectively manage risk in the banking sector.
The implementation of Basel II in Vietnamese commercial banks faces significant challenges due to a shortage of highly qualified human resources, affecting both the banks and regulatory bodies like the SBV The Vietnamese banking sector struggles with low qualifications and a lack of experience, which is reflective of broader economic issues To effectively master and apply Basel II standards, professionals in governance, banking, and management must possess strong knowledge in foreign languages, mathematics, and management practices Additionally, the technical expertise required for banking professionals is currently high As competition intensifies among Vietnamese commercial banks to retain skilled workers through attractive salaries and bonuses, the rapid growth of the banking system highlights a critical shortage of qualified professionals, necessitating extensive training Moreover, the costs associated with training programs led by foreign finance and banking experts are substantial, demanding considerable time and effort.
The importance of stock market and capital market information is crucial for banks to comply with Basel II standards; however, the Vietnam stock market, established just over a decade ago, poses challenges in providing adequate data for effective risk management Regulatory frameworks stipulate that risk assessments for various stocks can only be conducted when the market reflects all economic sectors Although information disclosure has improved through various media channels and official government websites, reports are primarily released annually, resulting in significant delays that hinder banks' ability to forecast prices and manage risks effectively Additionally, the lack of specialized statistical data, with the exception of the CIC credit information center, exacerbates the information deficit faced by commercial banks in Vietnam as they strive to meet Basel's new standards.
SOLUTIONS AND RECOMMENDATIONS TO IMPROVE
Perfecting system of legal documents
Successful implementation of risk monitoring and management processes in line with Basel II standards is crucial, placing the responsibility on the State Bank of Vietnam (SBV) to establish comprehensive legal frameworks These frameworks must clearly define organizational authority and terminology for effective risk analysis However, Vietnam's legal system for credit institutions, established in 1997 and amended in 2014, has not kept pace with Basel's new regulations Existing regulations, such as Decision 457/2005 and Decree 03/2007 regarding credit institution safety rates and minimum charter capital, are fragmented Therefore, a cohesive law governing credit institution operations, with a clear focus on all activities and performance indicators, is essential Additionally, developing a Law on Banking Supervision that enhances the independence, accountability, and transparency of banking supervisors is vital for implementing a risk-based monitoring mechanism Improving the regulatory framework in the banking sector to align with market principles will foster fair competition while ensuring the safety of the monetary and banking system.
The banking accounting system requires urgent reform to align with international accounting standards, particularly in risk classification and provisioning for debt quality The State Bank of Vietnam (SBV) must collaborate with relevant ministries to enhance the accounting framework, improve internal controls, and modernize audit methods in banks, thereby preventing fraud and abuse Implementing both incentives and regulatory measures will strengthen the governance of commercial banks, ensuring compliance with international monetary standards Furthermore, policies governing banking activities are essential for fostering a healthy business environment The SBV should promptly issue guidelines for Basel standards, focusing on tailored regulations for each bank's internal rating, while advising the Government and the Ministry of Finance on establishing specific guidelines for independent credit rating agencies based on Basel II methodologies.
Improving human resource’s quality
To effectively implement Basel II, mobilizing and preparing human resources is crucial, as qualified personnel are essential for the optimal use of modern database management systems and complex models Without skilled human resources, the success of the project is jeopardized.
Implementing an II project typically requires a minimum commitment of five years, necessitating banks to prioritize the recruitment of high-quality personnel It is essential for these financial institutions to establish a long-term strategy that aligns with the project's extensive timeline.
To effectively address the immediate demands in Vietnam's banking sector, it is crucial to provide timely training for managers, supervisors, and credit officers at the State Bank of Vietnam (SBV) and commercial banks The SBV should collaborate with commercial banks to offer training courses aimed at enhancing the skills of managers in assessing and managing credit risk, potentially involving experts from international banks that have successfully implemented Basel II For medium to long-term development, it is essential to cultivate a qualified workforce capable of anticipating industry trends while limiting the number of universities that prioritize quantity over quality in professional training This approach will optimize resources for developing high-quality human capital on an international scale Additionally, it is vital to establish supervisory teams with both adequate numbers and advanced banking skills, while encouraging banking inspectors to enhance their learning through international cooperation Sending staff abroad for practical experience and creating long-term training plans will ensure they possess the knowledge to operate and master efficient new technical systems Vietnamese commercial banks should actively engage in forums and organizations, such as the Bank Administration Institute and BankTech, to stay updated on industry knowledge and experiences Regular seminars and workshops focused on Basel II applications will further facilitate the timely resolution of inquiries and challenges.
3.3 Investing in risk management system with high technology infrastructure
In today's market economy, the continuous advancement of science and technology plays a crucial role in the complex operations of banks To modernize their operations and successfully integrate into the global market, Vietnamese commercial banks must invest significantly in technology infrastructure A centralized data system is essential for establishing effective risk management frameworks Additionally, banks should develop comprehensive documentation, including the Credit Manual and Risk Management Regulations, to guide their operations This database must encompass all banking activities and relevant external information, such as market interest rates and customer credit ratings Utilizing this data, banks can implement algorithms for calculating risk levels, minimum Capital Adequacy Ratio (CAR), and other critical parameters in risk quantification models.
To align with Basel II standards, commercial banks should swiftly invest in specialized software developed for risk management, as numerous companies offer such solutions suitable for banks of various sizes However, Vietnam currently lacks a domestic provider of Basel II risk management software Additionally, banks must establish a robust internal information network by upgrading their technology infrastructure to meet both national and international standards Enhancing the security of information, data, and networks is crucial, necessitating projects to upgrade network security solutions and ensure the safety of bank operations Furthermore, creating data transmission lines connected to the national information network will empower banks to operate more effectively.
3.4 Improving the efficiency of banking inspection, control and supervision
Under Basel II, the State Bank of Vietnam (SBV) serves as a crucial banking regulator, essential for maintaining the stability of the banking system The SBV possesses the authority to take significant actions against commercial banks upon identifying any violations To enhance its oversight, the SBV must improve the efficiency of its banking inspection and supervision activities promptly Basel II necessitates a shift in regulatory focus from mere compliance checks to comprehensive risk assessments The SBV should proactively guide commercial banks in establishing regulations for minimum capital requirements and risk management standards, which are vital for regulatory approval of their risk management systems Additionally, the SBV needs to modernize its inspection processes and methodologies, leveraging advancements in information and banking technology while adhering to the effective banking supervision principles set by the Basel Committee on Banking Supervision (BCBS) and international standards Ultimately, the SBV must act as the licensing authority for all banking operations and ensure compliance with monetary policies and regulations within Vietnam.
To enhance the effectiveness of the banking inspectorate, it is essential to refine its organizational structure This improvement should align with the Basel Committee's principles, which emphasize the importance of effective monitoring of bank performance and strict compliance with prudential regulations.
Continue to promote international cooperation and join international treaties and agreements on banking supervision and financial system safety Strengthen the exchange of information with foreign bank supervisors
Develop and implement an integrated and risk based inspection and supervision framework and methodology which is capable of early warning for banks
Undertake an overall assessment through the inspection and supervision of the bank in accordance with the 25 basic principles of the Basel Committee
To enhance the effectiveness of inspection and supervision, commercial banks must adapt their inspection processes to not only ensure operational compliance but also assess risk levels in each business unit It is essential for banks to regularly monitor the execution of strategic objectives and clearly define departmental responsibilities to identify key risk control points This clarity enables senior and responsible staff to effectively carry out inspection and supervision tasks Internal control departments play a crucial role in monitoring risks and ensuring compliance within the organization Ultimately, the effectiveness of inspection and supervision hinges on the optimal functioning of internal controls; if these controls are inadequate, the bank's overall supervision will falter, hindering timely risk detection and prevention.
3.5 Improving quality of credit rating information
To enhance the information management system, banks must develop a comprehensive plan that improves their databases, ensuring the risk model generates the most accurate results A robust database is essential for successful Basel II implementation, influencing the overall effectiveness across all banks According to Basel II requirements, customer and collateral data, including risk mitigation measures, must be retained for 3 to 5 years, while bad debt information should be stored for 5 to 7 years Consequently, banks need to review and standardize their data to facilitate effective implementation.
To effectively meet short-term credit rating demands and enhance risk management, commercial banks must develop a professional internal credit rating system Consistency in rating criteria among banks is essential, along with the sharing of customer information for accurate assessments The State Bank of Vietnam (SBV) should facilitate the exchange of customer data among banks Additionally, banks should evaluate potential customer assessments to improve the forecasting capabilities of their rating systems, while also considering market risk and collateral assets associated with each customer.
To establish a robust financial system, it is essential to create independent credit rating agencies that prioritize credit evaluation over mere information dissemination Drawing from global best practices and the Vietnamese economic context, the government should promptly issue a decree to facilitate the establishment of these agencies under the supervision of the State Bank of Vietnam (SBV) This initiative will enable commercial banks to access advanced techniques while ensuring professionalism, independence, and objectivity in customer evaluations The credit ratings provided by these agencies will serve as valuable resources for banks, enhancing their decision-making processes Furthermore, to bolster international credibility and demonstrate the reliability of their ratings, credit rating agencies must disclose solvency liabilities associated with each bank rating level This requires the collection of data over several years, necessitating the provision of free ranking services during the initial phase Additionally, it is crucial to focus on professional training and ethical standards for ranking officials to ensure integrity in the evaluation process.
To enhance credit information quality, it is essential to establish official guidelines for credit rating systems in banks and the operation of independent credit rating agencies The State Bank of Vietnam (SBV) should define prerequisites for banks to develop independent credit rating systems, with those failing to meet these standards required to rely on ratings from reputable organizations approved by the SBV Independent credit rating agencies can adopt various ownership structures but must be closely monitored to maintain rating quality, ensuring no collusion with rated organizations Additionally, the criteria for these agencies should align with Basel standards to strengthen disclosure regulations and improve the reliability of information.
3.6 Implementing transparency policy and disclosure of information
Commercial banks must update their internal procedures related to credit activities, currency trading, foreign exchange, payment, money transfer, and information technology to comply with relevant laws It is essential to assess risks in each business process to implement preventative measures effectively Additionally, banks are required to report any challenges or issues in their operations to the State Bank of Vietnam (SBV) and ensure timely and accurate reporting of monetary, credit, and banking activities as per SBV regulations.
Transparency and information disclosure are essential for the State Bank of Vietnam (SBV) and senior bank officials to gain a comprehensive understanding of commercial banks' operations This clarity also benefits shareholders, stakeholders, and the market by providing insights into the bank's financial health and management capabilities To enhance this transparency, the SBV should mandate that commercial banks adhere to principles of detail, accuracy, and timeliness in their reporting Additionally, the SBV must implement specific penalties and disciplinary measures for banks that fail to comply with reporting regulations regarding formats, content, and deadlines Strict sanctions should be imposed for repeated violations to deter future offenses, and banks should be encouraged to recognize the advantages of transparent information disclosure to prevent perfunctory behaviors.
The Basel Accord marks a significant milestone in global risk management reform, establishing standardized practices that have been widely adopted beyond its initial focus on G-10 multinational banks Basel II, in particular, has emerged as a global benchmark for risk management in the banking sector As reported by the Basel Committee on Banking Supervision, approximately 100 countries, in addition to the G-10, have expressed their commitment to integrating Basel standards into their domestic banking frameworks, highlighting the growing interest among macroeconomic managers in developing nations to align with Basel principles.
Improving quality of credit rating
To enhance the information management system, banks must develop a comprehensive plan that improves their databases, ensuring that risk models yield accurate results A robust database is essential for the successful implementation of Basel II, significantly influencing its outcomes across all banks Basel II mandates that customer and collateral data, including risk mitigation measures, be retained for 3 to 5 years, while bad debt information should be stored for 5 to 7 years Consequently, banks are required to review and standardize their data to facilitate effective implementation.
To effectively meet short-term credit rating demands and enhance risk management, commercial banks must establish a professional internal credit rating system Consistency in rating criteria among banks is essential, along with the sharing of customer information for accurate assessments The State Bank of Vietnam (SBV) should facilitate this information exchange Additionally, banks should incorporate evaluations of potential customers to refine the forecasting capabilities of their rating systems, while also considering market risk and collateral assets in their assessments.
To establish independent credit rating agencies in Vietnam, it is crucial to focus on their primary function of credit evaluation rather than merely presenting information Drawing from the experiences of developed nations, the Vietnamese Government should promptly issue a Decree to facilitate the creation of professional credit rating agencies under the supervision of the State Bank of Vietnam (SBV) This initiative will enable commercial banks to access advanced techniques, ensuring professionalism, independence, and objectivity in customer evaluations The credit ratings provided by these agencies will serve as valuable reference materials for banks Furthermore, to enhance credibility and international standing, credit rating agencies must disclose solvency liabilities associated with each rating level This requires the collection of extensive data over several years, necessitating the provision of free ranking services initially It is also essential to focus on professional and ethical training for ranking officials to maintain integrity in the evaluation process.
To enhance the quality of credit information, it is essential to officially establish guidelines for the creation of credit rating systems within banks and for independent credit rating agencies The State Bank of Vietnam (SBV) should specify the prerequisites for banks to develop their own independent credit rating systems; those that fail to meet these requirements will be required to rely on ratings from reputable organizations designated by the SBV Independent credit rating agencies may adopt various ownership structures but must be closely monitored to ensure the integrity of their ratings, preventing any collusion with the entities being rated Furthermore, the quality criteria for these agencies should align with Basel standards to bolster disclosure regulations and improve the overall reliability of credit information.
3.6 Implementing transparency policy and disclosure of information
Commercial banks must update and enhance their internal procedures related to credit activities, currency trading, foreign exchange, payment, money transfer, and information technology applications to comply with relevant laws It's essential to assess potential risks in each business process to implement preventive measures and effectively manage any arising issues Banks are required to promptly report any challenges in their operations to the State Bank of Vietnam (SBV) and ensure that they provide accurate and timely information regarding monetary, credit, and banking activities in line with SBV regulations.
Transparency and information disclosure are essential for the State Bank of Vietnam (SBV) and senior bank officials to fully comprehend the operations of commercial banks, while also enabling shareholders and the market to accurately assess the bank's financial health and management capabilities To promote this transparency, the SBV must establish clear guidelines mandating that commercial banks provide detailed, accurate, and timely information Additionally, the SBV should implement a regulatory framework that includes specific penalties for banks that fail to comply with reporting standards, formats, and deadlines Strict sanctions must be enforced for repeated violations to deter future non-compliance Furthermore, banks should be educated on the benefits of information disclosure to eliminate superficial compliance behaviors.
The Basel Accord marks a significant milestone in global risk management reform, establishing standardized risk management practices Initially aimed at G-10 multinational banks, Basel II has evolved into a global benchmark for the banking industry The Basel Committee on Banking Supervision reports that around 100 countries beyond the G-10 are expressing interest in adopting Basel standards within their domestic banking systems, highlighting the commitment of macroeconomic managers in developing nations to align with Basel principles.
The Vietnamese banking system aims for safety, effectiveness, and sustainability; however, the risk level in credit activities, particularly among State-owned commercial banks, is high and poses unpredictable consequences To enhance operational safety in Vietnam's commercial banks and the broader economy amid integration, the analysis and implementation of Basel standards are essential The Basel Accord, especially Basel II, presents challenges for deployment even among large global banks, making the application of these standards particularly difficult for developing countries like Vietnam This necessitates coordination and consensus among various involved departments.
The thesis "Basel II and the Risk Management of Banks in Vietnam" effectively integrates analytical and synthesized approaches, grounded in the core principles of the Basel Committee on Banking Supervision and the operational practices of Vietnamese commercial banks.
1 Systematize theoretical background of risk management standards under the Basel II Accord; Outline the basic contents of Basel I and Basel II with conditions to apply the Basel standards;
2 Analyze the current status of Vietnamese commercial banks in accordance with Basel II standards evidenced by verified data from 10 commercial banks the SBV nominates to pilot Basel II; Thereby, expose limitations of the application in these banks and leading causes;
3 Propose solutions and recommendations for Vietnamese commercial banks to approach and improve risk management operation in banking activities under the Basel II Accord However, the successful application of Basel II is a long- term complex issue, therefore, the solutions and recommendations in the thesis are only an initial contribution to the process
This thesis serves as a preliminary study on the comprehensive scope of the Basel II Accord and its accompanying guidance documents The author seeks valuable feedback from lecturers to enhance the research quality and complete the thesis at a more advanced level.
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The official websites of major banks in Vietnam, including Vietcombank, VietinBank, BIDV, MB, Sacombank, Techcombank, ACB, VPBank, VIB, and Maritime Bank, serve as essential resources for banking services and information For comprehensive insights into the banking technology sector, visit [Bank Systems & Technology](https://www.banktech.com) Additional valuable resources include [Báo Chính Phủ](https://www.baochinhphu.vn), the [Bank for International Settlements](https://www.bis.org), [Fitch Ratings](https://www.fitchratings.com), and the [International Monetary Fund](https://www.imf.org).