Restructuring banking system a case study of vietnam,

Motivations to do the research

Over the past two decades, Vietnam's banking system has excelled in its role as a vital component of the national economy, serving as an essential source of capital for development The remarkable socio-economic progress and enhanced global standing of Vietnam can largely be attributed to the banking sector However, due to its significance, banking operations are highly sensitive and can profoundly impact the economy if not maintained to standard.

The opening of the financial and banking market is an inevitable trend in the context of international integration, particularly since Vietnam's accession to the WTO, which has presented both opportunities and challenges for its banking system Vietnamese commercial banks face intensified competition from foreign banks in developed financial markets, such as the US, Europe, Singapore, and Japan, and are significantly impacted by fluctuations in international financial markets The repercussions of the 2008 financial crisis and subsequent global economic downturn continue to affect many countries, highlighting the vulnerabilities within banking systems and prompting nations to reassess the operations of their commercial banks Consequently, the restructuring of banking systems has become urgent and widespread, enabling banks to adapt to new global economic demands In Vietnam, with the stock market still underdeveloped, the banking system has shouldered the primary responsibility for capital management, making it essential to maintain stability and profitability amidst these challenges.

Vietnam's economy and banking system have made progress in overcoming the financial crisis, yet several instability issues persist within the banking sector Key challenges include liquidity difficulties, rising bad debts, limited control capabilities, and inadequate services and products The sector primarily relies on credit operations, which pose risks to systemic safety Furthermore, concerns regarding cross-ownership and the rapid expansion of the banking network exacerbate these issues.

Nguyen Quynh Mai – K14 ATCD Page 2 highlights that low-quality assets can adversely impact both the banking system and the monetary market Without timely intervention, these issues could pose potential risks, ultimately leading to systemic instability.

The 11th Plenary Session III, held in October 2011, underscored the importance of economic restructuring for sustainable improvement and stability, highlighting the banking system and financial institutions as a key focus area This strategy reflects the government's commitment to economic reform and aims to mitigate the adverse impacts of the global economic crisis.

Recognizing the critical need for reform in the banking sector, this article explores effective strategies for the successful restructuring of Vietnam's banking system By examining key case studies, it aims to provide valuable insights and solutions that can enhance the overall stability and efficiency of the banking industry in Vietnam.

The author aims to provide a comprehensive analysis of the restructuring of Vietnam's banking system from 2008 to 2014, creating a solid knowledge base for future research on similar topics By detailing various restructuring methods and highlighting valuable lessons from international experiences, the thesis offers practical and insightful proposals that could significantly enhance the success of the restructuring process in Vietnam.

Scope of the study and limitations

Due to limited time as well as the writer’s restricted knowledge and experience, the study can hardly cover all specific issues involved in restructuring banking system

Recent governmental policies have been implemented, but evaluations of their impacts and effectiveness remain incomplete Furthermore, the unpredictable fluctuations in the financial market could pose challenges to the updated data collection and analysis processes.

Consequently, this thesis only discusses the restructuring of commercial bank system in Vietnam within the period from 2008 to 2014; suggests some recommendations and offers oppotunities for further studies.

Structure of the study

Apart from acknowledgements, abstract, table of content, list of abbreviations, list of charts and tables, list of references and conclusion, the chief content of graduation thesis includes

Nguyen Quynh Mai –K14 ATCD Page 3

This chapter provides an overview of the research, outlining the motivations behind the study and presenting the problem statement It also clearly addresses the challenges and limitations encountered during the research process.

Chapter 2: Theoretical framework about restructuring banking system

This article provides a comprehensive review of the key themes related to the restructuring of the banking system, particularly focusing on commercial banks Chapter 2 highlights essential information about these banks and outlines the reasons behind the need for restructuring Additionally, it draws on international experiences to extract valuable lessons applicable to Vietnam's banking context.

Chapter 3: Restructuring banking system – The case of Vietnam

By virtue of reliable and updated sources of data, the thesis analyzes operational condition of Vietnam's commercial banks as well as the restructuring banking system between 2008 and

In 2014, it is essential to assess the achievements and constraints encountered during the restructuring of Vietnam's commercial banking system Identifying the causes of these limitations will provide a solid foundation for developing effective solutions to enhance the banking system in Vietnam.

To improve the future of Vietnam's commercial banks and support the government's strategy for restructuring the banking system, this thesis presents two key solution groups aimed at ensuring the successful transformation of Vietnam's banking sector.

Research methodology

Research methods and instruments

The study is based on a variety of methods such as statistics, description, comparison, synthesis, logic, theoretical and practical combination

Bar charts, line graphs, pie charts and historical figures are used to illustrate and determine the pattern of changes in particular events.

Research participants

This study focuses on a comprehensive analysis involving the State Bank of Vietnam, six state-owned commercial banks, 35 joint-stock commercial banks (JSCBs), five foreign banks, and four joint-venture banks The author utilizes data and documents gathered from these financial institutions to support the research findings.

Nguyen Quynh Mai –K14 ATCD Page 4 they are the direct components involved in the restructuring of Vietnam banking system (until 31/12/2014).

Data collecting procedure

This study analyzes the performance of the Vietnamese banking system and evaluates its restructuring process using secondary data from previous research, banks' annual reports, and official DataStream Initially appearing as disparate figures, this data is synthesized to clarify the findings.

Due to the confidentiality in financial reports of banking sector, the author principally obtained some data from the official websites of these commercial banks

CHAPTER II – THEORETICAL FRAMEWORK ABOUT THE

2.1.1 Definition of banking system restructuring

According to Oxford Advance Learner’s Dictionary (2005), “restructuring” means

“organizing something in a new and different way” The question raised is what the economic meaning of “restructuring” really is

The World Bank (1998) emphasizes that banking system restructuring involves measures to maintain the national payment system and improve access to credit services while addressing underlying economic issues According to Dziobek and Pazarbasioglu (1998), systematic bank restructuring aims to enhance bank performance by restoring liquidity and profitability, improving operational capacity, and rebuilding public confidence This process may include financial restructuring to recover liquidity through balance sheet adjustments like capital increases and debt reduction, as well as operational restructuring focused on profit generation through active strategies, efficiency management, and robust credit assessment Additionally, monitoring and safety regulations are implemented to enhance the overall operational capacity of the banking system as financial intermediaries.

Assoc Prof Nguyen Hong Son defines the restructuring of the banking system in Vietnam as a process aimed at reallocating resources to enhance the safety and efficiency of banks, ultimately benefiting the macro-economy and improving access to banking services for individuals and enterprises This reallocation focuses on four key aspects to achieve its objectives.

 Operation: Human resource, organization, mechanism, technology, governance and so on

 Legal framework: Legal basis, regulation, supervision, monitoring and evaluation

 Structure: Ownership, administration, assets, etc

Restructuring commercial banks involves implementing strategies to address the challenges within the banking system, ensuring stability and sustainability This process is crucial for maintaining the effective financial intermediation role of banks, particularly in facilitating payments and providing credit Additionally, it aims to enhance the operational efficiency of commercial banks, ultimately contributing to a more robust economy.

The principal content of financial restructuring a commercial bank consists of dealing with non-performing loans, increasing the scale and quality of equity

- Increasing the size and quality of the equity in commercial banks

Commercial banks operate within the monetary and banking sector, where owner’s equity, despite representing a small fraction of total trading capital, plays a crucial role in their survival and growth This capital not only underpins the bank's operations and safeguards against unforeseen risks but also fosters customer trust and influences the bank's operational strategies.

- Create a platform for the operation of commercial banks

Owner’s equity represents long-term capital utilized for investing in offices, equipment, and technology It also facilitates the acquisition of shares in other companies or the establishment of subsidiaries, such as financial leasing firms, insurance companies, and securities firms.

- Ensure the safety of commercial banks

Owner's equity serves as a crucial resource for banks to mitigate losses associated with lending, investments, foreign currency trading, and operational risks Consequently, even though ineffective management cannot be entirely eliminated, owner’s equity remains vital in maintaining financial stability.

Nguyen Quynh Mai –K14 ATCD Page 7 equity is necessary as a "cushion" increasing the ability of banks to prop up the unpredictable risks

- Maintain trust and adjust the operation of commercial banks :

Equity fosters customer trust while also playing a crucial role in budget adjustment policies, including lending, investment, and the overall health of the banking sector.

Between 1988 and 2010, the Basel Committee established the minimum capital adequacy requirements (CAR) standard four times, which has been widely adopted not only by G10 member countries but also by numerous other nations voluntarily The key provision of Basel II mandates that commercial banks maintain a minimum capital ratio of 8%, calculated against total assets adjusted for credit, market, and operational risk ratios.

Credit risk + Market risk + Operational riskx 100% (1)

+ Owner’s Equity is divided into 3 levels:

• Tier 1capital: (Core capital) includes contributions from owners (charter capital or shares) and retained earnings

Tier 2 capital includes share premium, asset revaluation differences, loss provisions, and supplemental capital from mixed debt instruments such as convertible bonds and preference shares, as well as long-term debts that meet specific criteria.

• Tier 3 capital: depends on banking supervisory authorities Commercial banks may use secondary short-term debts for the only purpose of partially meeting the capital requirements from market risk

Because of the stability and the initiative ability to take the use of above fund sources, a rule is set as : Tier 1capital > = Tier 2 capital + Tier 3 capital

+ Credit risk = Total assets risk

+ Market risk:According to the Basel Committee, the loss of transaction status when prices fluctuate erratically is market risk Normally, this risk will be associated with

Nguyen Quynh Mai – K14 ATCD highlights four fundamental types of risks in transaction journalizing: interest rate risk, capital condition risk, exchange rate risk, and commodity risk According to Basel 1, owner's equity comprises Tier 1 capital, which includes equity and retained earnings, along with Tier 2 supplemental capital Basel 2 regulations expand the evaluation of market risk, allowing commercial banks to incorporate Tier 3 capital, which consists of dependent short-term debts for reserves This Tier 3 capital is specifically used to address market risk, while credit risk and risks arising from partners are assessed solely within the framework of equity as defined by Basel 1.

Operational risk refers to potential losses stemming from inadequate internal processes, human errors, system failures, or external events To mitigate these risks, the Basel Committee mandates that banks maintain capital reserves Banks can calculate the required capital for operational risk using one of three methods: the Basic Indicator Approach (BIA), the Standardized Approach (TSA), or the Advanced Measurement Approach (AMA) As the complexity of a bank's operations increases, a more sophisticated method is necessary, and banks are not permitted to revert to simpler approaches.

Owner's equity and capital adequacy indicators are crucial as they ensure that banks maintain safety and soundness at legally prescribed minimum ratios During financial restructuring, commercial banks must implement strategies to raise capital, thereby enhancing their financial capacity and fostering greater confidence and proactivity in their operations.

To enhance their equity scale, banks can implement strategies such as increasing charter capital, pursuing mergers and acquisitions, and converting debts into equity However, these methods are largely influenced by external factors, limiting the banks' ability to make proactive decisions For example, raising charter capital for joint-stock banks is dependent on stock market trends Additionally, banks can improve both the quality and quantity of their equity by increasing their retained earnings ratio Since equity surplus derived from profits serves as an expense deduction, it incurs lower costs while maintaining higher quality Therefore, banks can take an active role in boosting their equity by focusing on increasing retained earnings.

Identifying the precise amount of outstanding debts is crucial in the financial restructuring process for banks This assessment enables the implementation of effective strategies to address bad debts Banks can utilize various methods to manage these debts, including restructuring, liquidating mortgages, selling debts to factoring companies, and converting debts into equity in other institutions.

Restructuring banking system

Types of restructuring banking system

The principal content of financial restructuring a commercial bank consists of dealing with non-performing loans, increasing the scale and quality of equity

- Increasing the size and quality of the equity in commercial banks

Commercial banks operate within the monetary and banking sector, where owner’s equity, despite being a small fraction of total trading capital, plays a crucial role in their survival and growth This capital not only underpins the bank's operations and safeguards against unforeseen risks but also fosters customer trust and influences the bank's operational adjustments.

- Create a platform for the operation of commercial banks

Owner's equity represents long-term capital utilized for investments in offices, equipment, and technology It also serves as funding for acquiring shares in other companies or establishing subsidiaries, such as financial leasing firms, insurance companies, and securities firms.

- Ensure the safety of commercial banks

Owner's equity serves as a crucial resource for banks to mitigate losses associated with lending and investment risks, including foreign currency trading and operational challenges Consequently, even though ineffective management cannot be completely eliminated, owner’s equity remains vital in maintaining financial stability.

Nguyen Quynh Mai –K14 ATCD Page 7 equity is necessary as a "cushion" increasing the ability of banks to prop up the unpredictable risks

- Maintain trust and adjust the operation of commercial banks :

Equity plays a crucial role in fostering customer trust while also serving as a key component in budget adjustment policies, including lending, investment, and banking operations.

Between 1988 and 2010, the Basel Committee implemented the minimum capital adequacy requirements (CAR) standard four times, which has been adopted not only by G10 member countries but also by many other nations voluntarily Basel II specifically mandates that commercial banks maintain a minimum capital ratio of 8%, calculated against total assets adjusted for credit, market, and operational risk.

Credit risk + Market risk + Operational riskx 100% (1)

+ Owner’s Equity is divided into 3 levels:

• Tier 1capital: (Core capital) includes contributions from owners (charter capital or shares) and retained earnings

Tier 2 capital includes share premiums, asset revaluation differences, loss provisions, and supplemental capital from mixed debt instruments such as convertible bonds and preference shares, along with long-term debts that meet specific criteria.

• Tier 3 capital: depends on banking supervisory authorities Commercial banks may use secondary short-term debts for the only purpose of partially meeting the capital requirements from market risk

Because of the stability and the initiative ability to take the use of above fund sources, a rule is set as : Tier 1capital > = Tier 2 capital + Tier 3 capital

+ Credit risk = Total assets risk

+ Market risk:According to the Basel Committee, the loss of transaction status when prices fluctuate erratically is market risk Normally, this risk will be associated with

Nguyen Quynh Mai from K14 ATCD discusses the four fundamental types of risks in journalizing transactions: interest rate risk, capital condition risk, exchange rate risk, and commodity risk According to Basel 1, owner's equity comprises Tier 1 capital, which includes equity and retained earnings, along with Tier 2 supplemental capital Basel 2 regulations expand this framework by allowing commercial banks to incorporate Tier 3 capital, which consists of dependent short-term debts for reserves, specifically for managing market risk However, credit risk and risks arising from partnerships are only evaluated within the equity scope outlined by Basel 1 regulations.

Operational risk refers to the potential loss resulting from inadequate internal processes, human errors, system failures, or external events The Basel Committee mandates that banks maintain capital reserves to mitigate these operational risks To determine the necessary capital, banks can select from three calculation methods based on their complexity and sensitivity: the Basic Indicator Approach (BIA), the Standardized Approach (TSA), and the Advanced Measurement Approach (AMA) As commercial banking activities grow more complex, a more sophisticated method is required, and banks are prohibited from reverting to simpler approaches.

Owner's equity and capital adequacy indicators are crucial for assessing the safety and soundness of banks, as they must adhere to legally prescribed minimum ratios To ensure financial stability, commercial banks should focus on raising capital during financial restructuring, which will enhance their financial capabilities and empower them to operate more confidently and proactively.

To enhance their equity scale, banks can utilize strategies such as increasing charter capital, merging with other commercial banks, and converting debts into equity However, these methods are largely influenced by external factors, limiting the banks' ability to make independent decisions For example, the ability to raise charter capital for joint-stock banks is closely linked to stock market trends Additionally, banks can improve both the quality and quantity of their equity by increasing their retained earnings ratio, as surplus equity derived from profits serves as an expense deduction, resulting in lower costs and higher quality Ultimately, banks can take an active role in boosting their equity by focusing on increasing their retained earnings.

Identifying the exact amount of outstanding debts is crucial in the financial restructuring process for banks Accurate debt assessment enables the implementation of effective measures to address bad debts To tackle these challenges, banks can utilize various strategies, including debt restructuring, liquidating mortgages, selling debts to factoring companies, or converting debts into equity in other institutions.

To enhance the efficiency of banking operations and align with international standards, banks must not only rectify and reorganize their balance sheets but also implement measures for operational restructuring This process involves consolidating and reorganizing various aspects of their operations to ensure compliance with best practices in the industry.

Banking products and services encompass various monetary, credit, and payment activities that banks offer to meet customer needs through multiple distribution channels within legal frameworks A diverse portfolio of banking products attracts more customers, leading to increased revenue and sustainable growth for banks Consequently, it is essential for banks to prioritize the diversification of their offerings.

+ Focus on chief business activities only, eliminate risky band inefficient ones: make use of non-credit services instead of depending on the credit-related categories

Enhance the quality of traditional banking services while simultaneously developing modern offerings such as electronic payment solutions, foreign exchange, and risk management to cater to the diverse needs of customers.

+ Expand to potential areas and remove branches which donot work profitably

Human resources are a crucial competitive advantage for banks, as they represent the most dynamic element in the operational process The effectiveness of a bank's human resources is evaluated based on two primary criteria.

+ The quantity of employees: is an indicator reflecting the human resources of commercial banks It must be reasonable, adequate but moderate

+ The quality of human resources: includes education, foreign language skills; computing skills, soft skills (communication, presentation, problem solving capacity), responsibility, enthusiasm, ethics, major experiences

Thus, personnel matters are considered fundamental in the development strategies of banks

Reasons for restructuring banking system

There are several catalysts for the banking system to be restructured

Central Banks, such as the State Bank, initiate restructuring of the banking system in response to significant instability and risks that threaten to trigger a socio-economic crisis, particularly when a major bank faces a crisis that could have widespread repercussions The primary goal of this restructuring is to safeguard the banking system itself Key indicators of severe instability in the banking system necessitating government intervention for restructuring include rising non-performing loans, declining bank profitability, and increased market volatility.

The prolonged economic crisis has significantly deteriorated the banking environment, leading to operational inefficiencies and a rise in bad debts, while also constraining the capital adequacy ratio of banks.

An increase in bad debts within the banking system significantly heightens the risk of capital loss As credit intermediaries, banks confront challenges such as illiquidity and insolvency due to rising bad debts This scenario can undermine the stability of the entire financial system and pose threats to both national and regional economies.

The erosion of trust in economic entities and the banking system leads to negative repercussions for the entire system This damaging cycle is likely to become more prevalent, making it essential to restructure the banking system as a viable solution.

The weaknesses in the managing and supervising framework highlight significant shortcomings in the oversight roles of both the government and the central bank, leading to incomplete supervision This inadequate monitoring, combined with fierce competition among commercial banks and internal mismanagement, has resulted in systemic instability Consequently, these issues underscore the urgent need for restructuring within the banking system.

Restructuring the banking system is essential for achieving stable development and enhancing the financial intermediary efficiency of commercial banks As the economy experiences significant growth, the banking system must evolve to support effective business operations This transformation should adhere to a spiral principle, highlighting the need for commercial banks to undergo restructuring to meet developmental objectives.

Restructuring the banking system serves not only as a remedy during crises but also as a proactive strategy for ongoing development, even when the system is functioning well By treating restructuring as a regular practice, potential negative impacts on the banking sector and the broader economy can be mitigated, ultimately leading to reduced long-term restructuring costs.

In brief, restructuring the banking system boils down to the reasons below:

(i) Revive the deteriorated banking system;

(ii) Maintain stable and efficient development of banking system

Advantages of restructuring process

Vietnam is actively restructuring its banking system to stabilize the economy, opting for this approach rather than allowing bankruptcies or the decline of non-viable banks This strategy enables the government to leverage its advantages while implementing necessary reforms.

 Enhance the economies of scale

Restructuring possibly creates a larger scale in many respects including capital, human resources, branches and so on, which would provide funds for profitably larger projects

When multiple banks with distinct services collaborate or complement each other's offerings, they enhance the usability of their products This strategic partnership not only attracts more customers but also drives significant growth in the bank's performance.

 Make full use of existing customers

Mergers and acquisitions (M&A) lead to the formation of new banks that inherit the client bases of their predecessor institutions, allowing them to offer innovative and diverse products and services This strategic advantage not only enhances customer loyalty but also drives revenue growth for the newly established banks.

 Reduce mobilizing cost caused by interest rate race

Restructuring in the banking sector is likely to lead to a decrease in the number of banks operating in the market This decline will significantly reduce competitive pressure on interest rates and funding costs, ultimately enhancing banks' performance and their ability to navigate economic challenges.

To effectively build a strong team of key staff members, banks should focus on attracting experienced personnel from established financial institutions Additionally, banks looking to expand their operations or introduce new services should consider transferring employees between banks to leverage diverse expertise and insights.

Mergers and acquisitions (M&A) present significant opportunities for commercial banks to identify and recruit skilled personnel, enabling the development of innovative business strategies and the introduction of new products and services This strategic hiring can facilitate activities such as foreign currency trading and options, which were previously hindered by a shortage of qualified staff.

The bank's enhanced performance post-restructuring significantly boosts its asset value, resulting in an increase in shareholders' equity and a rise in the bank's stock price This improvement fosters greater trust and appreciation from shareholders and investors alike.

Restructuring goes beyond merely combining the values of banks; it leverages specific advantages to significantly enhance the overall value When banks effectively utilize these benefits, the post-restructuring value can far exceed the simple arithmetic sum of their individual values.

Risks and difficulties

The restructuring of Vietnam's banking system is a national strategy that requires significant coordination between financial institutions and the central bank, often facing various challenges and potential risks.

 Affect the rights of minority shareholders negatively

Minority shareholders often find their interests overlooked during General Meetings due to the insignificance of their votes If dissatisfied with company plans, they may choose to sell their shares, but this often results in financial losses, especially during restructuring when stock prices tend to be low Furthermore, if they opt to retain their shares, their voting power diminishes as the charter capital increases, leading to a larger total number of voting rights Consequently, the benefits for minority shareholders are diminished, and their ability to voice opinions at General Meetings is significantly reduced.

 Cause conflicts among majority shareholders

The Board of Directors will now consist of more members, each with reduced rights compared to before, prompting majority shareholders to unite and strengthen their control over the bank.

Different bank executives often have distinct personalities and limited prior collaboration, leading to conflicts driven by personal interests Their inflated egos can result in actions that undermine the collective benefits of majority shareholders In large financial corporations, these disputes tend to persist until all parties achieve their desired outcomes.

Corporate culture defines the unique traits of each bank, encompassing intangible assets like employee loyalty, the working environment, and the behaviors of both staff and management It is a long-term factor rooted in the core values of the business and the dedication of its employees When these characteristics are transformed into a new context, staff may experience confusion and the need to adapt to changes in communication and trust If managers fail to effectively harmonize corporate cultures, the new bank may struggle to evolve into a cohesive and sustainable entity, leading to employee disconnection, a loss of confidence, and a fragile organizational structure.

Restructuring serves as a significant catalyst for operational changes, particularly affecting human resources This process can lead to job losses and alterations in management roles, resulting in the bank facing challenges in its business operations The departure of key personnel due to dissatisfaction hampers the organization's effectiveness, while new employees often struggle to grasp the existing workflows and operational nuances Consequently, the bank encounters difficulties in maintaining smooth business operations post-restructuring.

Restructuring carries inherent risks and challenges that cannot be avoided To mitigate these consequences and maximize the effectiveness of the restructuring process, it is crucial to assess potential losses and identify viable solutions.

International experiences

Cases of Asian countries

The Korean financial and banking crisis was primarily caused by the excessive borrowing and uncontrolled investments of economic conglomerates, alongside lax regulations, weak risk management, and a lack of transparency stemming from the 1997 Asian financial crisis To avert future crises, the Korean government has introduced a comprehensive economic plan that includes several strategic measures.

+ Leading banks group : the group of large banks;

+ Medium banks : primarily focused on retail operations;

+ Small banks : served particular local areas

The Korean Government established the Korea Asset Management Corporation (KAMCO) to acquire bad debts from credit institutions undergoing mergers and acquisitions In 1997, the government allocated ₩64 trillion, representing 15% of GDP, for banking system restructuring, with ₩31.5 trillion (49.2%) specifically designated for purchasing bad loans By the end of March 1999, KAMCO had effectively utilized these funds to stabilize the banking sector.

20 trillion won on buying an amount of ₩44 trillion of the banks’ bad debts

- Merge, consolidate and expand ownership

In July 1998, the South Korean government closed five banks due to their minimum capital adequacy ratio falling below 8%, forcing them to merge to meet regulatory standards Additionally, seven weaker banks were required to submit detailed restructuring plans, which included raising capital, adjusting their Board of Directors, and refining their operational scope, all under the oversight of the Central Bank of Korea (CBK) and the Financial Supervision Commission (FSC).

At the end of November 2001, two major Korean banks namely Kookmin Bank and Housing

In a significant move, the Commercial Bank has voluntarily merged with another institution, creating the largest bank in South Korea This merger is part of a broader restructuring effort that has seen the number of Korean banks decrease from 33 in 1997 to just 19 by late 2005.

- Improve the quality of inspection, supervision and banking security

The Korean government is prioritizing the enhancement of banking supervision quality alongside bank mergers and acquisitions (M&A), while also implementing regulations to ensure operational security in line with international standards Numerous legal documents related to banking operational safety have been revised to bolster the stability of the banking system moving forward.

- Enhance the involvement of deposit insurance institutions in the restructuring of banking system through a transparent legal basis

The Depositor Protection Law, enacted in 1995, laid the foundation for the establishment of the Korea Deposit Insurance Corporation (KDIC), which primarily focuses on managing the Deposit Insurance Fund, conducting risk assessments, handling bankruptcies, collecting debts, and performing investigations Following the 1997 financial crisis, the KDIC has played a crucial role in restructuring the banking and financial system in South Korea.

Nguyen Quynh Mai – K14 ATCD Page 17 highlights that ₩110.9 trillion was provided as financial aid to 517 illiquid financial institutions This support significantly improved the management of these institutions and contributed to the recovery of the banking and financial system, resulting in more stable and efficient operations.

China's banking system restructuring has focused on enhancing the operational quality of State-Owned Commercial Banks (SCBs), notably through the creation of Asset Management Companies (AMCs) to manage and resolve bad debts.

In 1999, four Asset Management Companies (AMCs) were established with initial capital from the Ministry of Finance and support from the People's Bank of China (PBOC) During the first bad debt transfer, these AMCs acquired non-performing loans (NPLs) from four state-owned commercial banks (SCBs) at par value The AMCs' operating capital comprised allocations from the Ministry of Finance, borrowings from the PBOC, and the issuance of AMC bonds Additionally, unconvertible bonds issued by the AMCs, fully guaranteed by the Treasury, were sold to commercial banks This process transformed the negative assets on the financial records of the SCBs into government-backed bonds, while their total assets and NPLs remained unchanged Following recapitalization efforts, both bad debts and the NPL ratio of Chinese commercial banks have significantly decreased over the years According to the China Banking Regulatory Commission (CBRC), the NPL ratio for Chinese commercial banks was reported at 5.58% in the second quarter.

Regulatory oversight of Asset Management Companies (AMCs) has been inconsistent and ineffective, with overlapping functions among agencies and some lacking the necessary legal authority A report released by the National Audit Office in June 2005 highlighted significant issues in AMC operations from 2000 to 2003, including fraud, regulatory breaches, and inappropriate activities linked to ¥71.5 trillion in non-performing loans (NPLs) These findings underscore the shortcomings and lack of coherence in the regulation and control of AMCs.

In brief , it can be seen that the voluntary restructuring of China banking system was not fierce enough, and therefore, less effective

In July 1997, the very first germ of Asia financial crisis emerged in Thailand Subsequently, Indonesia, Malaysia, Laos, the Philippines, etc also were influenced by the sudden drop of

Nguyen Quynh Mai – K14 ATCD Page 18 highlights the rapid deterioration of banking systems due to a crisis that significantly increased non-performing loans (NPLs) This escalation led to severe losses, liquidity issues, and even bankruptcies among several banks, necessitating a comprehensive restructuring of the banking sector.

NPL Management IBRA Danaharta TMAC

CDRC (Corporate Debt Restructuring Committee)

CDRAC (Corporate Debt Restructuring Advisory Committee)

Banks bought by government 12 CBs (20%)

1 CB, 1 merchant banks and 3 financial institutions were put under governmental control (12%)

4 out of 7 SBs mergered into one (54%)

6 mergers between CBs and financial institutions (2%)

Loans which were greater than 5 million ringgit or loans guaranteed by real- estate and stocks

Table 2.1 Restructuring banking system of some ASEAN nations

Several nations have formed Restructuring Committees made up of leading experts, with oversight from the International Monetary Fund (IMF) In addition to promoting mergers among commercial banks, central banks have also allowed increased foreign ownership in domestic banks over a specified period This strategy reflects a widespread consensus that restructuring the banking system is the most effective approach to addressing banking crises.

Case of America

The 2008 financial crisis in the United States was primarily triggered by prolonged low interest rates and the loosening of credit and security standards in banking Additionally, the practice of mortgage securitization jeopardized the financial system The banking sector, significantly affected by these factors, was viewed as the key area for addressing the repercussions of the crisis.

Lehman Brothers, once the fourth largest investment bank in the United States, serves as a prime example of financial collapse, culminating in its bankruptcy due to an overwhelming $613 billion in bad debts Despite having navigated multiple crises throughout its history, this significant financial burden ultimately led to the end of the institution.

Table 2.2 Lehman’s balance sheet before bankruptcy

Source: Investigation report of Valukas

A quick glance at the table reveals that Owner Equity only constituted for an insignificant part in the Total Capital Resource However, by contrast, both short-term borrowings and

Nguyen Quynh Mai –K14 ATCD Page 20 investment in financial instruments which contained high risks and illiquidity were poured considerably

The restructuring of banks in the US involved self-restructuring efforts by financial institutions, supported by government assistance Key agencies involved in this process included the Federal Reserve (Fed), the Department of the Treasury, and the Federal Deposit Insurance Corporation (FDIC).

+ Federal Reserve was primarily responsible for maintaining liquidity in the system to ensure the smooth cash-flows

+ Ministry of Finance handled troubled financial assets to help banks restructure the balance sheet through the Troubled Assets Relief Program (TARP)

+ Federal Deposit Insurance Corporation mainly tackled banks which were involved in insolvency and bankruptcy risks

The Troubled Asset Relief Program (TARP) was a crucial initiative that enabled the US government to purchase or guarantee up to $700 billion in distressed financial assets This action was taken to enhance liquidity and restore stability within the US financial system, allowing the Ministry of Finance to utilize the federal budget effectively in addressing the risks posed by troubled assets in financial institutions.

In addition to the Troubled Asset Relief Program (TARP), the U.S effectively utilized the Federal Deposit Insurance Corporation (FDIC) to manage failed banks, safeguard depositors, and mitigate the crisis's spread The FDIC's capacity to address struggling banks was notably enhanced by the Dodd-Frank Act To fulfill its responsibilities, the U.S Treasury permitted the FDIC to borrow up to $500 billion to tackle capital issues, as its funds had reached a 25-year low This arrangement also streamlined the FDIC's ability to engage with major banks in the system without requiring Congressional approval.

From the onset of the crisis until June 30, 2011, the FDIC effectively managed the resolution of 373 small-scale bank failures This demonstrates the FDIC's proactive approach in addressing failed banks swiftly and efficiently, preventing panic and avoiding a domino effect during turbulent times.

With the theoretical framework of restructuring the banking system and practical experiences of some countries, a series of lessons can be drawn for Vietnam as follows:

 Be aware of the urgency of restructuring CBs

Strong political commitment with the support of the whole society as well as sponsors are paramount factors of successful restructuring

 Incorporate self-restructuring process with governmental restructuring process

If there only is the voluntary restructuring of CBs, the result will probably be in low efficiency Thus, the restructuring program is suggested to have national effect

 Combine several measures to restructure and implement it comprehensively but flexibly

The restructuring measures should be carried out synchronously with the participation of many different authorities, especially SBV, the Deposit Insurance Agency and Restructuring Committee

 Closely link banking system with other fields of the economy

The multi-functional banking model highlights the close interconnection between banks, securities, and insurance, emphasizing that any restructuring of the banking system must consider the effects of financial market components and the broader economy, and vice versa.

 Correctly evaluate the situation, the nature and severity of weaknesses in the system

Properly identifying the causes and launching synchronous restructuring program along with conducting review and classification on banks are indispensible

A prolonged restructuring period complicates market predictions, making it challenging to accurately forecast fluctuations that may exceed control To mitigate this issue, it is essential to shorten the restructuring timeline, which necessitates decisive action and commitment from top-level executives throughout the organization.

 Minimize the cost of restructuring

In order to reduce fiscal burden, the process of restructuring should be conducted more under the "market mechanism" and less restrictive measures of administrative orders

 Stabilize the financial system and restore public’s belief in the ability to manage the economy and control macroeconomy of the Government

All financial institutions regardless ownership or operating model must be related to this process

 Connect commercial bank restructuring to enterprise system one

The weakness of the enterprise system results in bad loans, overdue loans and creates problems on liquidity or operational efficiency of the financial – banking system

Restructuring the banking system is essential for creating a more cautious and stringent framework for evaluating projects and loans, which is fundamental for fostering a successful enterprise ecosystem.

Chapter II of the thesis offers a comprehensive overview of the theoretical foundations of banking system restructuring It defines the concept of restructuring, outlines the motivations behind it, and highlights the advantages gained from such processes Additionally, the thesis emphasizes the key objectives of restructuring the banking system.

Reviving the weakened banking system is essential not only for immediate recovery but also for the ongoing stability and development of the financial sector The author highlights the challenges and risks associated with restructuring, emphasizing the central bank's pivotal role in this process Given that commercial banks significantly influence the economy, a distressed banking system can have far-reaching negative effects on the overall socio-economic landscape.

The concluding section of this chapter highlights the experiences of various countries, offering valuable insights that can inform Vietnam's banking system restructuring efforts.

The systematic rationales in Chapter II are the scientific basis to form theoretical framework which directs the implementation of targeted topic.

Reasons for the restructuring of banking system in Vietnam

Economic context

Between early 2008 and 2013, Vietnam's economy faced instability due to the global financial crisis, leading to temporary governmental policies aimed at addressing macroeconomic risks, particularly inflation Frequent shifts between tightening and loosening policies created long-term market disorientation While the adverse effects from the global market were undeniable, the root causes stemmed from structural inadequacies in the economy and the conflicting impacts of fiscal and monetary policies.

Between 2012 and 2013, measures aimed at reducing aggregate demand significantly impacted market purchasing power and overall economic growth During this period, there was a sharp increase in the number of businesses closing, going bankrupt, or facing dissolution.

In 2013, significant economic progress was made, with GDP increasing by 5.4% and inflation remaining controlled as the Consumer Price Index (CPI) rose by 6.02% compared to December 2012 Total export turnover surged by 14.4%, exceeding predictions by 4.4%, while the trade deficit was limited to approximately 0.4 billion USD Key achievements included a more stable macroeconomy, manageable inflation rates, declining interest rates, and a steady exchange rate.

Vietnam's banking sector is overcrowded, with nearly 100 banks, primarily small institutions, alongside 916 People's Credit Funds and 30 financial companies This excessive number of banks relative to the country's economic scale has led to intense competition Additionally, lax regulations contribute to unfair competition, compromising the safety and stability of both the banking system and individual banks.

Performance of banks and financial institutions

Vietnam's banking system is consistently growing in scale and diversifying its activities, playing a crucial role in fostering economic development The commercial banks in Vietnam can be categorized into two main groups based on ownership: joint-stock commercial banks (JSCBs) and state-owned commercial banks (SCBs), with the latter holding over 50% state ownership.

The proliferation of 100 small-scale commercial banks (CBs) in Vietnam has created significant challenges in resource allocation and risk management This has led to unfair competition, exacerbating issues within the banking system, such as liquidity constraints, increasing bad debts, and subpar administrative quality Moreover, the focus on profit primarily from high-risk credit operations jeopardizes systemic security The rapid expansion of these banks has resulted in a decline in service quality, with many institutions prioritizing individual gains over collective stability, ultimately triggering an interest rate war that adversely affects the banking system and monetary market.

Table 3.1 The number of banks in Vietnam from 2008 to 2014

Source: State Bank of Vietnam’s annual report

Charter capital is a fundamental aspect of commercial banking, serving as both an active component and a crucial protective factor It plays a vital role in stabilizing and adjusting the bank's operations, ensuring financial security and regulatory compliance.

Since 2008, Vietnamese commercial banks have diligently worked to increase their charter capital to meet the requirements set forth by Decree No 141/2006/ND-CP and its amendments in Decree 10/2011/ND-CP.

Data from the financial statements of commercial banks (CBs) in Vietnam, including state-owned commercial banks (SCBs) and joint-stock banks (JSBs), reveals a consistent increase in total capital over the years, as detailed in the table below.

Total 110.924 206.049 280.384 329.876 85,76 36,08 17,65 Table 3.2 Charter capital of Vietnam commercial banks from 2008 to 2014

Source: Annual financial statements of CBs and adjustments of author

Between 2008 and 2014, Vietnam's charter capital for commercial banks (CBs) experienced significant growth, with a remarkable 85.76% increase in 2010 compared to 2008, followed by a 36.08% rise in 2012 and a 17.65% increase in 2014 State-owned commercial banks (SCBs) saw a notable increase of 24.74%, reaching a total of 132.312 trillion VND, while other commercial banks rose by 13.34%, peaking at 197.564 trillion VND As of December 31, 2014, Viettinbank led the sector with a charter capital of 38.234 trillion VND, followed by Agribank at 28.722 trillion VND, and BIDV and Vietcombank with 28.112 trillion VND and 26.650 trillion VND, respectively Several banks, including ABBank, BacAbank, KienLongbank, NamAbank, National Citizen Bank, VIBbank, and Vietbank, reported charter capital below 5 trillion VND.

According to Circular 36/2014/TT-NHNN of the SBV effected from 2014, the Capital Adequacy Ratio (CAR) of CBs was 9% Overall, most of CBs in Vietnam have achieved

Nguyen Quynh Mai –K14 ATCD Page 26 the minimum CAR requirement Table 3.3 gives information about the CAR of typical commercial banks in Vietnam:

Table 3.3 CAR of typical CBs in Vietnam from 2008 to 2014

Source: Financial statements of given CBs

Despite a steady increase in the amount of capital raised over the years, the growth rate has shown instability and a tendency to decline During the global financial crisis, capital mobilization growth remained above 20%, but subsequently dropped to just over 12% Key characteristics of capital mobilization in Vietnamese commercial banks from 2008 to 2014 include these trends.

- Interest rate had complicated movements

In early 2008, the interbank market experienced a surge in overnight interest rates, prompting the State Bank of Vietnam (SBV) to raise the ceiling interest rate from 10.8% per year (0.03% daily) to 15% per year (0.0417% daily) as per Decision No 1849/QD-NHNN To address this escalating situation, the SBV issued a Circular on February 3, 2011.

In 2011, the State Bank of Vietnam set the maximum deposit interest rate (IR) in VND at 14% per year, but by 2012, this rate decreased significantly to 8% due to falling inflation, ultimately reaching 6-7% by 2014 This decline highlighted the risks of liquidity loss, which posed a serious threat to the stability and safety of the banking system.

- Practical IR exceeded the regulated one

Since September 28, 2011, under the careful oversight of the State Bank of Vietnam (SBV), commercial banks (CBs) have been required to comply with published interest rates However, smaller banks, facing liquidity challenges, have attempted to increase interest rates to compensate for their deficits, while larger banks focus on improving liquidity, generating resources for credit activities, and diversifying funds This ongoing cycle has led both banks and enterprises into a state of crisis.

Outstanding loans of CBs in Vietnam increased rapidly In general, the average growth rate was quite high at 21.2% from 2008 to 2014

Graph 3.1 The growth rate of outstanding loans in Vietnam banking system from 2008 to 2014

Source: Annual report of SBV

As seen from the graph, this rate of the entire system peaked at about 31,19% before dropping sharply for the next two years due to the tightening monetary against

Nguyen Quynh Mai – K14 ATCD Page 28 highlights that despite the rapid growth and expansion of commercial banks in Vietnam, their credit activities face several significant constraints that need to be addressed.

- The ratio of lending over mobilized capital far surpassed the permitted level of SBV which put liquidity in danger

- Too high growth rate led to lower credit quality

- Lending terms and deposit terms were not matched

Vietnamese commercial banks (CBs) are highly regarded in the domestic market and possess extensive international experience in advising and underwriting both local and foreign products Their underwriting services are diverse and flexible, effectively catering to the varied needs of businesses.

Vietnam's commercial banks are currently enhancing domestic payment services, particularly for recurring payments like electricity, water bills, and internet fees These services are becoming more accurate, faster, and safer However, traditional payment methods, including standing orders, direct debits, and payments by check or card, remain prevalent in the domestic payment landscape.

Vietnamese commercial banks provide a comprehensive array of international payment services, including Telegraphic Transfer Remittance (TTR), Mail Transfer Remittance (MTR), and collection services They facilitate money transfers both domestically and internationally, offering options like bank drafts, Western Union, and MoneyGram.

Foreign Exchange Service plays a crucial role in supporting international transfer services, despite not yielding higher margins than payment or underwriting services The primary risk associated with this service is foreign exchange rate risk, which can impact overall profitability.

- E-banking service: Some domestic CBs have orientation to implant E-banking service widely thanks to its convenience, simplicity and rapidity

The restructuring of banking system in Vietnam

Purposes

Restructuring Vietnam banking system in the period 2008 - 2014 was implemented towards the following objectives:

To enhance the financial stability and operational efficiency of commercial banks, it is essential to improve security measures, strengthen regulations, and uphold market principles The primary objective of restructuring the banking system is to revitalize it, support struggling banks, and restore the inherent trust in the banking sector.

To achieve a comprehensive transformation of Vietnam's commercial banking system, the focus must be on developing a versatile, modernized banking framework that prioritizes operational safety and sustainable efficiency The ultimate aim is to establish a contemporary commercial banking system that meets the demands of today's financial landscape.

To enhance the diversity of Vietnam's commercial banking system in ownership, size, and type, it is essential to achieve competitiveness on par with other ASEAN nations and global standards Focusing on an internationally-based technological platform will be crucial in this endeavor.

Net profit from service activities

Net profit from credit operation

Nguyen Quynh Mai –K14 ATCD Page 31 administration which matches international pratitice standards on banking activities in order to further meet customers’ demand for financial services.

Process

The State Bank of Vietnam (SBV) has mandated that credit institutions adhere to legal lending regulations, including capital adequacy ratios (CAR) and credit limits Additionally, the SBV is actively monitoring commercial banks to ensure they work closely with borrowers in assessing debt quality and collection capabilities To alleviate temporary financial difficulties for businesses, banks are encouraged to implement remedial measures such as restructuring debts, as outlined in Decision 780/QD-NHNN from April 23, 2012, which allows for the rescheduling of repayment periods Other strategies include building risk provisions and selling debts to factoring companies.

The State Bank of Vietnam (SBV) has instructed financial institutions to reduce costs and alleviate challenges for businesses by lowering lending rates across the board Furthermore, the SBV is collaborating with various ministries and agencies to implement supportive measures aimed at helping banks recover debts and manage bad debts effectively.

Commercial banks are actively collaborating with borrowers to restructure debts, extend repayment periods, and justifiably reduce interest rates for those facing temporary financial challenges yet showing potential for business improvement Additionally, these banks have increased their risk provisions to manage bad debts in compliance with legal requirements, promoted debt sales, and addressed mortgages to facilitate debt recovery.

From October 2013 to December 23, 2014, the Vietnam Asset Management Corporation (VAMC) successfully purchased nearly 123 trillion VND in bad debts, recovering 4 trillion VND in the process and generating profits By the end of September 2014, credit institutions reported a decline in the non-performing loan (NPL) ratio to 3.8%.

From 2008 to 2014, the equity of State-Owned Commercial Banks (SCBs) and Joint Stock Banks (JSBs) in Vietnam increased due to share issuance, retained earnings, and financial support from the government budget This growth in owner’s equity was prominently demonstrated through the restructuring of charter capital, as banks sought to expand their capital base through various methods, including additional funding for SCBs.

Nguyen Quynh Mai –K14 ATCD Page 32 whereas JSBs merged together or sold shares to domestic shareholders and foreign investors to make them become strategic shareholders

Between 2008 and 2012, the Government consistently increased the charter capital of State-Owned Commercial Banks (SCBs) Notably, Agribank received an additional 19.311 billion VND, raising its total charter capital to 29.605 billion VND in 2010 Additionally, MHB was allocated 2.190 billion VND, boosting its charter capital from 817 billion VND to 3.007 billion VND in the same year.

Since Vietnam joined the WTO in 2007, the banking sector has experienced significant dynamism in mergers and acquisitions (M&A), as foreign banks gained the opportunity to establish branches and subsidiaries with 100% foreign capital This influx of foreign investment has effectively streamlined the banking system A notable milestone occurred in 2012, when Bank of Tokyo-Mitsubishi UFJ acquired 20% of VietinBank's stocks for a record $743 million.

Table 3.4 Foreign strategic shareholders participated in Vietnam banking system from

Source: Financial statements of given CBs

As of now, SCB, Ficombank, and TinNghiaBank have successfully merged, achieving satisfactory operating results in 2014 Navibank has undergone self-restructuring and rebranded as National Citizen Bank (NCB) Similarly, TienPhongBank and TrustBank are enhancing their operations by increasing charter capital through shareholder contributions Additionally, Habubank has merged with SHB, and Western Bank has combined with PetroVietnam Financial Corporation (PVFC).

STT Original institutions Established institutions Year Forms of

5 Thien Thanh Corporation and individuals TrustBank

BIDV Chuong Duong and Ben Nghe branches received all assets

Table 3.5 Some prominent M&A deals from 2008 to 2013

Source: Synthesis of Deposit Insurance of Vietnam

In the restructuring phase 1 plan by the State Bank of Vietnam (SBV), Global Petro Bank (GP Bank) remains the only credit institution that has not clarified its decision Additionally, the market has observed a voluntary merger between DaiABank, headquartered in Dong Nai, and another financial entity.

HDBank has undergone a consolidation process to enhance operational quality, merging into a single entity Following its acquisition by DOJI, TienPhongBank, previously considered weak, has successfully restructured and experienced a significant revival, achieving a credit growth rate of 15% and 28%, while maintaining bad debt levels below 5%.

Vietnamese commercial banks are actively innovating and developing new products to better serve the evolving needs of the economy While their primary functions once focused on lending and deposit-taking, the banking system has now expanded to include a diverse range of services such as wholesale and retail banking, commercial financing, underwriting, foreign exchange trading, payments, money transfers, credit card issuance, traveler's checks, securities, insurance, and financial leasing.

Vietnamese banks are increasingly prioritizing the development of non-credit banking services, leveraging advanced technology to achieve significant results This shift is evident in the rising profit share from non-credit services among major banks like Vietcombank, BIDV, Sacombank, and Techcombank Key services driving this growth include card services, internet banking, home banking, and SMS banking Additionally, banks are engaging in foreign currency transactions, gold, and securities to diversify their investments and acquire shares in various sectors.

To enhance staff quality, banks prioritize transparency and consistency in their recruitment processes by setting specific standards Employee policies regarding wages, bonuses, professional development, and promotions are linked to individual performance, encouraging employees to take initiative in their growth Currently, commercial banks are increasingly employing qualified personnel with university degrees or higher.

Most organizational model of commercial banks in Vietnam have been classified and allocated into operating, supportive and managing departments Typically, the organizational model generally is depicted as follows:

Figure 3.1 Organizational model of Vietnam commercial banks

During the recession and global financial crisis, Vietnam's banking system faced challenges in selecting and managing administrative personnel and executives, leading to increased pressure on staff responsible for strategic planning and business operations Rising bad debts compelled banks to dedicate significant resources to debt collection and management, with some institutions, like Habubank, experiencing severe losses due to poor administration and subsequently parting ways with senior employees In instances of regulatory violations for personal gain, legal repercussions were necessary Acquired banks, such as Sacombank and VietCapitalBank, had to overhaul their Boards of Directors, while mergers and acquisitions prompted many banks to refine their administrative human resources In many joint-stock banks, founding shareholders often dominate decision-making, maintaining control over strategic directions and significant Board decisions.

From 2008 to now, ownership structure in Vietnam banking system has shifted dramatically First, four out of the five SCBs (including Vietcombank, Vietinbank, BIDV and MHB)

Nguyen Quynh Mai from K14 ATCD Page 37 has led the equitization process, transitioning to a multi-ownership model The State Bank of Vietnam (SBV) currently holds significant stakes in these banks, with ownership percentages of approximately 77.11%, 80.30%, 95.76%, and 68.1%, maintaining its dominance across all operational aspects.

Achievements

The restructuring of the banking system has significantly enhanced monetary policy effectiveness, evidenced by a rapid decline in interest rates, a stable foreign exchange market, increased reserve requirements, and a manageable gold market Moreover, many solutions to existing challenges were implemented in tandem with coordinated tax and fee measures, leading to a positive outlook for commercial banking.

In early 2012, the banking system narrowly avoided collapse, with small-scale commercial banks significantly improving their liquidity and capital balance These banks effectively managed bad debts through their inherent capabilities, leading to a stable increase in capital availability for the economy Additionally, enhanced management and financial capacity, along with more transparent information dissemination, contributed to this positive trend.

The economy is interconnected through four key sectors: manufacturing, government, foreign trade, and finance Public investment, state-owned enterprises, and banks play crucial roles in this economic ecosystem, reflecting a dialectical relationship that influences their performance throughout economic cycles The restructuring of the banking system has facilitated broader restructuring efforts, leading to enhanced consistency across these sectors Positive outcomes from these changes have become evident, demonstrating the importance of collaboration among these entities for economic stability and growth.

Banks are focusing on offering medium-term funding for critical projects to protect against fragmented and ineffective investments, while simultaneously increasing their social investment efforts significantly.

- Banks were also sources of financial support for the processing and manufacturing industries, facilitated these businesses develop sustainably and more rapidly

- Specialized education in banking and finance major must be more serious and quality-oriented to better the outcome human resoures and reduce unemployment.

Evaluation

Limitations

Four years of restructuring has noticed irrefutable achievements; nevertheless, there were numerous constraints which should vitally be take into account

Following restructuring, the equity of Vietnamese commercial banks, while significantly improved and meeting the minimum legal Capital Adequacy Ratio (CAR), remains relatively modest This limited equity restricts banks' ability to manage risks associated with financial market uncertainties and diminishes their competitiveness against other Southeast Asian banks.

Asian nations and over the world Moreover, higher bad debts were unsolved rootedlydue to chronic difficulties from the habits of traditional customers and the economy itself

The organizational and operational structure of the institution faced slow progress due to cumbersome processes and an unreasonable distribution of branches, transaction offices, and employees This inefficiency hindered the establishment of an effective operating model, leading to diminished administrative capacity Consequently, the Board of Directors in Commercial Banks struggled to manage the chaotic departments, making it even more challenging for the general oversight of the State Bank of Vietnam (SBV).

Third, the untreated cross-ownership between CBs obscured bad debts It was believed that

NPLs would keep climbing exponently unless the cross-ownership was totally eliminated

The cost implications of the restructuring process are significant, as the sources and total funds allocated remain unclear Furthermore, implicit expenses, including customer compensation, asset revaluation fees, and staff retraining costs, have not been transparently accounted for.

Despite advancements, the technological infrastructure for international banking remains inadequate, particularly in terms of ATM services, which suffer from a lack of coordination and compatibility among banks Additionally, challenges such as hacking, online fraud, and breaches of confidentiality continue to pose significant risks.

The restructuring of Vietnam's banking system faces several significant limitations, highlighting the crucial need for collaboration between the government and banks to effectively address these challenges.

Reasons leading to constraints

Prior to making suggestions , it had better to dig deeper into causes of the listed limitations above Two groups of reasons are established as below:

Government regulations remain ambiguous and lack specific guidelines, highlighting significant gaps in the legal and macroeconomic framework Paradoxically, the long-term implementation of loose monetary policy has resulted in negative side effects Although there have been some prosperous developments, the real estate market remains stagnant, and the manufacturing sector continues to struggle Additionally, the instability of domestic and international financial markets has created unfavorable conditions for mobilizing funds and attracting high-profile investors for restructuring efforts.

The underestimation of discipline, regulations, and safety in banking has led to significant issues, including the intent of some senior employees to embezzle funds by exploiting legal loopholes Additionally, the State Bank of Vietnam's supervision primarily focused on monitoring individual banks rather than the entire financial system, allowing systemic risks to persist and increasing the likelihood of a liquidity crisis at any moment.

Vietnamese commercial banks (CBs) have not taken proactive steps towards self-restructuring and development, relying heavily on government interventions Additionally, the issue of non-performing loans (NPLs) within these banks remains inadequately identified, calculated, and analyzed Compliance with lending regulations and credit security practices is often lacking among these financial institutions.

The qualifications and competencies of leaders and employees in Vietnam's commercial banks are limited, especially in embracing innovation Incentives, compensation, and financial investments are below average, hindering the ability to attract talented individuals Furthermore, these banks have shown little initiative in developing new products and services or establishing their unique business strategies To remain competitive, it is crucial for Vietnam's commercial banks to adapt to modern banking trends by focusing on the growth of non-credit services and reducing reliance on credit-based offerings.

Chapter III of the thesis utilizes the theoretical framework established earlier to summarize the operational status of Vietnamese commercial banks, focusing on charter capital and capital adequacy ratios, as well as the conditions and outcomes of their business activities from 2008 to 2014.

This article focuses on evaluating the current performance of Vietnam's banking system restructuring, highlighting four key areas: financial restructuring, operational restructuring, administrative restructuring, and ownership restructuring.

The restructuring process of the banking system has led to significant improvements across all aspects of commercial bank operations This long-term initiative aims to enhance the overall efficiency and effectiveness of the country's financial institutions.

Nguyen Quynh Mai from K14 ATCD Page 41 highlights ongoing limitations in the restructuring of Vietnam's banking system The thesis identifies five key constraints and categorizes their causes into two distinct groups.

The achieved results in Chapter III are the practical scientific basis for the recommendations which will be discussed in Chapter IV

Based on an analysis of the current challenges in the restructuring process of Vietnam's banking system, along with insights from international experiences, the author suggests two primary groups of measures: (i) solutions related to the State Bank of Vietnam (SBV) and (ii) additional strategic recommendations.

To State Bank of Vietnam

Enhancing managing role

The State Bank of Vietnam (SBV) should mandate all banks to conduct thorough assessments of their current situations and develop comprehensive restructuring plans aimed at enhancing financial capacity, ensuring adequate equity to mitigate risks, and meeting capital adequacy ratios Additionally, promoting the resolution of non-performing loans (NPLs) and closely monitoring the sale and management of bad debts by banks and asset management companies are crucial components of the NPLs solvency strategy approved by the Prime Minister.

The equitization of state-owned commercial banks (SCBs) should persist by systematically decreasing the government's ownership stake in banks like Vietcombank, BIDV, Vietinbank, and MHB This reduction in state ownership will enable these banks to achieve greater independence and accountability Furthermore, the capital freed up from this process can be redirected towards investments in other sectors, fostering overall economic growth.

The government's complete ownership of Agribank could foster dependency and perpetuate budget subsidies, leading to inefficiencies in bank performance This situation has been linked to various instances of embezzlement and misappropriation of public assets, which ironically contribute to a growing distrust within society.

Increasing the foreign ownership stake in domestic commercial banks can attract more investment from reputable international financial institutions, leveraging their extensive experience and expertise.

Adjusting foreign ownership restriction

Increasing the foreign stake in domestic commercial banks can attract more investment from reputable international financial institutions, leveraging their expertise and experience in the market.

Nguyen Quynh Mai from K14 ATCD emphasizes that key resources such as human capital, risk management, product development, and access to international capital markets will be crucial in advancing Vietnam's banking system However, due to existing weaknesses, any expansion of the investment "Room" for foreign investors should be approached cautiously, allowing for a maximum increase of 5% at a time It is essential to closely monitor these changes and evaluate the outcomes of previous expansions over a period of approximately five years.

Supplementing financial laws

Current regulations on mergers and acquisitions (M&A) lack a unified definition, leading to inconsistencies across various laws The Enterprise Law categorizes M&A as a method of business reorganization, while the Investment Law views it as direct investment, and the Securities Law defines it as indirect investment Therefore, a revised Enterprise Law is essential to provide a clear and comprehensive legal framework for M&A activities, establishing more precise rules than those currently in place.

Encouraging the inclusion of "cross-ownership" promotes transparency and aligns with international practices Additionally, the clarification of personal income tax remains a contentious issue, especially regarding tax declarations and the penalties associated with personal income tax evasion.

To commercial banks

Solving liquidity risk

The rising levels of bad debt pose a significant risk to the financial stability and operations of commercial banks in Vietnam Therefore, a crucial priority for the Vietnamese banking system is to accurately assess the current state of overdue and bad debts within the banks themselves.

To effectively manage the risks associated with banking activities, commercial banks (CBs) must adopt a proactive approach in compliance with government regulations Future strategies for addressing non-performing loans (NPLs) and ensuring the solvency of CBs include implementing appropriate remedies.

- Initially heighten the provisions for bad debts despite reduced profits or losses Doing this will help banks have the sufficient resources to handle bad debts

- Have reasonable policies with regards to salaries, bonuses and incentives

- Minimize unnecessary costs to support the increase in the provision for credit risk

Collecting debt with a discount is an effective strategy to lower receivables from customers Typically, the discount rate is negotiated between the bank and the customer, often favoring the customer to incentivize timely debt repayment.

- Convert overdue debt, bad debt into stake associated with corporate restructuring (only used for customers who have the viability and potential development in the bank’s perspective)

- Sell bad debts to professional factory companies as the fastest solution.

Recapitalizing equity

To facilitate the successful recapitalization of Vietnam's commercial banks, each institution must implement tailored strategies suited to their unique circumstances The writer proposes several specific measures to achieve this goal.

State-owned banks that are not undergoing equitization should proactively discuss plans to increase their charter capital with the State Bank of Vietnam (SBV) Additionally, state-owned banks that maintain dominant shareholding positions, as well as joint-stock banks (JSBs), should consider issuing shares as part of their capital enhancement strategy.

- Vietnam CBs need to change their thinking as well as awareness of M&A; volunteer to implement M&A to improve competitiveness and extend the scale of their own equity.

Focusing on technology and human resources

To ensure efficient baking operations, all data related to baking activities must be centralized in a database that updates in real-time It's crucial to enhance the connection speed and quality among branches within the same system and across the CBs network to prevent issues like overload and network congestion during peak transaction hours.

To enhance customer satisfaction, banks must streamline their service processes and improve transaction facilities by increasing the number of ATMs in residential areas Regular maintenance of machines is essential to ensure they are functioning properly, addressing issues like cash shortages, malfunctions, and service interruptions promptly.

The rapid advancement of telecommunications has led to a remarkable growth in online banking services, including home banking, mobile banking, and internet banking These services are designed to meet the rising demands of customers, enabling banks to generate significant profits.

Central banks (CBs) are encouraged to accurately forecast the human resource needs for each branch Additionally, it is essential to develop a comprehensive recruitment policy and procedure to effectively identify, select, and attract qualified talent.

To enhance staff capabilities, organizations should implement comprehensive training programs that incorporate advanced technological applications Regularly designed short-term courses and advanced training sessions, led by industry experts, will equip employees with essential skills and up-to-date knowledge, including proficiency in foreign languages, particularly English.

In Chapter IV, the author offers some recommendations to accelerate the process of restructuring commercial banking system in Vietnam

The restructuring of Vietnam's banking system necessitates significant human resources and collaboration among authorities, alongside proactive measures from commercial banks A key recommendation for the State Bank of Vietnam (SBV) is the comprehensive equitization of state-owned commercial banks (SCBs), particularly Agribank Additionally, for commercial banks, prioritizing recapitalization through mergers and acquisitions (M&A) is essential for enhancing their financial stability and operational efficiency.

From 2008 to 2014, the Vietnamese banking system faced significant challenges characterized by instability and inefficiency This instability was largely due to rising non-performing loans (NPLs) and a low capital adequacy ratio (CAR), while inefficiency resulted from capital imbalances, lax regulations, and weak management practices In response to these pressing issues, the government recognized the need to implement a reform program to prevent severe consequences for the financial sector.

Systematic restructuring of the banking system is a long-term process fraught with challenges, necessitating significant government intervention and financial support International experiences highlight that a thorough evaluation of non-performing loans (NPLs) and the implementation of stricter regulations are crucial for success The State Bank of Vietnam (SBV) must enhance its management and assessment roles to regain customer trust and revitalize banks Additionally, commercial banks should leverage both external and internal resources for effective restructuring For instance, employing high-profile staff or consultants with extensive financial expertise can provide valuable insights and projections regarding economic fluctuations, aiding in the successful transformation of banks.

Restructuring Vietnam's banking system is challenging due to the unpredictable nature of domestic and global markets To effectively pursue this restructuring, the banking sector must establish clear objectives and demonstrate strong commitment The key challenge is to develop flexible and pragmatic policies that are grounded in real-world conditions rather than relying on theoretical concepts.

Nguyen Quynh Mai – ATCD K14 Page 1

1 M.A Tran Dinh Cung and M.A Luu Minh Duc (2007), M&A interms of corporating administration, theories, international experiences and realistic condition in Vietnam

Retrieved fromhttp://www.vjol.info/index.php/QLK/article/viewFile/5448/5168

2 Vietnam M&A activity review 2009(19 th Jan,2010) Published by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP (PwC) Retrieved from http://www.hkbav.org/pdf/2010_01_19_PwC_Vietnamese_MA_2009_activity_report_EN.p df

3 Patrick A Gaughan (2007), Mergers, acquisitions, and corporate restructurings 4th Edition, published by John Wiley & Sons, Inc

Retrieved from http://www.books.mec.biz/tmp/books/GBLT467T1OVL1V5PIM22.pdf

4 Banking Survey of KPMG (2013) Retrieved from https://www.kpmg.com/VN/en/IssuesAndInsights/ArticlesPublications/Documents/Advisory /Vietnam%20Banking%20Survey%202013%20-%20VN.pdf

5 Assoc.Prof.Dr Nguyen Hong Son, Rector of VNU University of Economics and Business (21 st Dec, 2011) International Symposium: "Restructuring banking system: international experience and implications for Vietnam

6 Banking Industry Report of VPBS (September 2014) Retrieved from https://www.vpbs.com.vn/ViewReports.aspx?CategoryID=2

7 Investment and Securities Newspaper (5 th May, 2014) An overview of Vietnam

8 Sameer Goyal (December 2011) Banking sector restructuring - lessons from international experiences” World Bank;

9 Dr Can Van Luc (2011) Banking restructuring experiences from South East Asia countries, Bank for Investment and Development;

10 https://www.techcombank.com.vn/khach-hang-uu-tien/tin-tuc/tin-tuc-thi- truong/buc-tranh-sat-nhap-va-tai-co-cau-ngan-hang-tai-viet-nam

11 Hoan Tran & Thuan Nguyen (2011) Which direction used for restructuring

Vietnam banking system?, Working Paper, Stox Plus, 2011 Retrieved from https://www.stoxplus.com/download.asp?id(14

Nguyen Quynh Mai – ATCD K14 Page 2

Graph 1 Profit After Tax and Charter capital of Sacombank, Techcombank and

VPBank over the last decade

Graph2 Total assets of BIDV and MHB before M&A

Tiêu đề	Restructuring Banking System – A Case Study Of Vietnam
Tác giả	Nguyen Quynh Mai
Người hướng dẫn	Tran Thi Hai Ly (M.A)
Trường học	Banking Academy
Chuyên ngành	Banking
Thể loại	Graduation Thesis
Năm xuất bản	2015
Thành phố	Hanoi

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Số trang	56
Dung lượng	1,58 MB