Capital adequacy of securities companies in vietnam

Therefore, the research aims to clarify the theoretical basis of capital adequacy for securities companies, study the cVrent status of capital adequacy in securities companies in Vietnam

TRAN THI PHUONG LIEN

CAPITAL ADEQUACY OF SECURITIES COMPANIES

This dissertation was completed at: Academy of Finance

Scientific Supervisors:

1 Associate Professor, Dr Nguyễn Xuân Thạch

2 Dr Cao Minh Tiến

The dissertation can be accessed at:

• National Library

• Library of the Academy of Finance

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INTRODUCTION

1 The urgency of the research

Developing the stock market in a safe, sustainable, and integrated way in the global financial development strategy has always been the priority of every country Securities companies play

an essential role in the financial market, as their financial capacity and operational efficiency directly influence the development and success of the market Therefore, evaluating financial capacity and risk management skills of these organizations is crucial Ensuring secutities’capital adequacy is a key factor in deciding the survival and development of the stock market in general

In Vietnam, over the past 23 years since its inception and development, the stock market has witnessed remarkable growth in both scale and quality Since 2000, when there were only 6 securities companies, the number had risen to 43 by 2023, with 81 companies being members of the Stock Exchange The market capitalization has grown by more than 100 times since its early days However, despite such impressive growth, many securities companies in Vietnam still face challenges such as financial resource limitations, insufficient risk management capabilities, and operational inefficiencies, leading

to potential risks

Therefore, the research aims to clarify the theoretical basis of capital adequacy for securities companies, study the cVrent status of capital adequacy in securities companies in Vietnam, and propose solutions to ensure the capital adequacy of these companies over time

2 Research objectives and research questions

Based on the theoretical framework of capital adequacy in securities companies, the dissertation studies the current status of

capital adequacy of securities companies in Vietnam, analyzing and assessing the factors affecting the capital adequacy of these companies, to propose solutions that ensure the safety of capital for securities companies in Vietnam in the near future

3 Research scope and subject

3.1 Research subject

The dissertation focuses on the safety of capital in securities companies

3.2 Research scope

• Content scope: The dissertation focuses on capital adequacy

of securities companies in Vietnam

• Time scope: The research is conducted during the period from 2018 to 2023 with solutions oriented towards 2030

4 Research methodology

The dissertation applies the dialectical materialism and historical materialism methodologies to examine phenomena and events in their continuous state of development, corresponding to the related conditions and environment Based on this, the dissertation conducts scientific analyses, evaluations, and explanations using qualitative research methods such as analysis and synthesis, comparison, and in-depth survey and interview methods At the same time, the dissertation employs quantitative research methods The study utilizes SPSS software to process exploratory factor analysis (EFA) algorithms to analyze the model of factors affecting the capital adequacy of securities companies To evaluate the relationship between variables within the same group and factor, rather than examining the relationship between all observed variables across different factors, the study combines Cronbach's Alpha reliability test and Bartlett's test of sphericity

• It introduces the concept of capital adequacy for securities companies, clarifying the meaning of capital adequacy and presenting the requirements for managing and ensuring the capital adequacy of these companies

• The dissertation has systematized and further clarified the evaluation criteria for capital adequacy of securities companies according to international standards, comparing them with the capital adequacy regulations of securities companies in Vietnam

• It also explains the factors affecting the capital adequacy of securities companies

• By understanding the practical experience of ensuring capital adequacy in securities companies, the dissertation draws lessons learned for Vietnam's securities companies and recommendations for management by state authorities

In terms of practicality:

• The dissertation synthesizes and applies various research methods: comprehensive methods, comparative methods, and quantitative methods, among others, depending on the specific content of the research The methods were applied to analyze the situation of capital adequacy in Vietnam's securities companies during 2018-2023, based on both theoretical foundations and data

• Additionally, the dissertation evaluates the impact of individual and group factors (focusing on groups from the side of

securities companies) that influence the capital adequacy of securities companies in Vietnam

• It offers perspectives on proposed solutions to enhance the capital adequacy of securities companies in Vietnam, focusing on groups of solutions from the perspective of securities companies, as well as offering comprehensive solutions to strengthen financial capacity, improve operational efficiency, and increase the ability to manage and ensure capital adequacy

6 Structure of the Dissertation

Apart from the introduction, conclusion, and references, the dissertation consists of four chapters:

Chapter 1: Overview of research on capital adequacy in securities companies and research methodology

Chapter 2: Theoretical basis of capital adequacy in securities companies

Chapter 3: Current situation of capital adequacy in Vietnam's securities companies

Chapter 4: Solutions to ensure capital adequacy in Vietnam's securities companies

CHAPTER 1: OVERVIEW OF RESEARCH ON CAPITAL ADEQUACY IN SECURITIES COMPANIES AND

RESEARCH METHODOLOGY 1.1 OVERVIEW OF RESEARCH

1.1.1 Research conducted abroad

1.1.1.1 Research on capital adequacy related to financial institutions

1.1.1.2 Research on capital adequacy in securities companies 1.1.2 Research conducted in Vietnam

1.2 Research Gaps and Research Questions

1.2.1 Achievements and research gaps

Through an overview of the research conducted on the topic of capital adequacy, the findings reveal that issues related to capital adequacy in general, especially in financial institutions, have been widely studied both abroad and domestically However, some limitations still exist:

Theoretical aspects: Most studies focus on capital adequacy in

banking systems, but there is a lack of research on capital adequacy

in securities companies

Practical aspects: No studies have analyzed and evaluated

capital adequacy and the impact of factors on the capital adequacy of securities companies in Vietnam from 2018 to 2023, nor have solutions been proposed to ensure capital adequacy for securities companies up to 2030

Therefore, the choice of capital adequacy in securities companies in Vietnam for research addresses a new direction, without overlap with previous studies

1.2.2 Research questions

The dissertation delves into theoretical issues on capital, capital adequacy, and the necessity of ensuring capital adequacy for securities companies It establishes criteria for evaluating capital adequacy, factors affecting capital adequacy, and analyzes experiences from both Vietnam and globally The dissertation also

proposes an approach to assessing the current state of capital adequacy in Vietnam's securities companies and offers solutions for ensuring their capital adequacy in the future

1.3 Research Methodology

Based on a comprehensive review of studies conducted abroad and domestically on factors affecting the capital adequacy of securities companies, the research combines practical analysis of securities companies in Vietnam Using exploratory factor analysis (EFA), the study examines eight major factors divided into two groups:

Group 1: Internal factors:

1 Business strategy and risk management (RR)

2 Scale and efficiency of capital use (NV)

3 Human resources (NS)

4 Physical assets (VC)

Group 2: External factors:

5 Legal and regulatory frameworks (PL)

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Xi,t : represents independent variables (specifically, the

independent variables presented in the table)

βi: represents the intercept coefficient

CHAPTER 2: THEORETICAL BASIS OF CAPITAL ADEQUACY IN SECURITIES COMPANIES

2.1 OVERVIEW OF SECURITIES COMPANIES AND SECURITIES COMPANIES’ CAPITAL

2.1.1 Securities companies

2.1.1.1 Definition

A securities company is a business entity established under legal regulations to operate in the financial services sector with the aim of generating profit

2.1.1.2 Characteristics of securities companies

Securities companies possess several key characteristics:

They are a type of specialized business entity providing financial services in the stock market

Their main characteristics include:

2.1.1.3 Operating principles of securities companies

2.1.1.4 Business operations of securities companies

2.1.1.4.1 Key business activities of securities companies

Securities companies engage in various business operations, such as:

o Stock brokerage

o Underwriting

o Proprietary trading

o Investment advisory and financial consultancy

o Additional activities such as securities lending, portfolio management, and other financial services

2.1.1.4.2 Risks in the Business Operations of Securities Companies

Risk refers to uncertain events that may occur in business operations, adversely affecting the achievement of business objectives for a securities company Risks in the business operations

of securities companies can be classified based on various criteria Based on the nature of the risk, the main types of risks in securities companies' operations include market risk, liquidity risk, credit risk,

and operational risk

2.1.2 Capital in securities companies

2.1.2.1 Definition of capital in securities companies

Capital in securities companies refers to the total resources available for business operations, aimed at profit generation

Capital is critical for the survival and growth of these companies It plays a central role in ensuring effective decision-making in securities company management and development

2.1.2.2 Sources of capital for securities companies

Based on specific criteria, the capital of enterprises in general, and securities companies in particular, can be classified into different types Based on ownership relations, the capital of a securities company includes: equity capital and liabilities The structure between liabilities and equity capital reflects the company's capital financing policy According to VanHoose (2007), financial leverage

is closely related to the capital adequacy of securities companies

2.2 CAPITAL ADEQUACY IN SECURITIES COMPANIES 2.2.1 Definition and content of capital adequacy in securities Companies

adequacy specifically refers to ensuring the safety of capital in securities companies

From a micro-management perspective, international regulatory authorities have provided several capital-related requirements for securities companies, such as minimum capital requirements, capital adequacy ratios, and risk management standards The commonly used risk measurement method is Value at Risk (VaR)

For securities companies, ensuring capital adequacy is not only about following legal guidelines but also about developing strategies

to mitigate risks, ensure profitability, and manage potential risks Securities companies must balance profit and risk, ensuring that as the market grows, they can maintain sufficient capital to avoid becoming overly "leveraged" and posing systemic risks

According to the viewpoint of the author: "Capital adequacy

in securities companies refers to the state where the company maintains sufficient liquidity and quality assets, complying with legal regulations while preventing and minimizing operational risks."

2.2.1.2 Content of capital adequacy in securities companies

Based on the previously mentioned perspective on the capital adequacy of securities companies, capital adequacy is reflected in the

following aspects:

Firstly, capital adequacy is demonstrated by the level of capital adequacy

Secondly, capital adequacy is reflected in asset safety

Thirdly, capital adequacy is shown through liquidity safety

2.2.2 Indicators for Evaluating Capital adequacy in Securities Companies

2.2.2.1 Indicators reflecting capital adequacy

The following indicators are used to evaluate capital adequacy

in securities companies:

• Equity/Total assets ratio (C1)

• Equity/Liabilities ratio (C2)

• Capital adequacy ratio (C3)

In Vietnam, the capital adequacy ratio of securities companies

is referred to as the available capital ratio, which is regulated under Circular 91/2020/TT-BTC, effective from January 1, 2021 This circular stipulates the financial safety of securities companies through the available capital ratio The available capital ratio is calculated as available capital/Total risk value (including market risk, credit risk and operation risk)

2.2.2.2 Indicators reflecting asset quality

• Asset growth rate

• Ratio of risk-adjusted asset value/Total assets

• Ratio of provisions for securities devaluation/Investments and receivables

• Ratio of receivables/Total assets

• Margin loan balance/Equity ratio

• Investment activities/Equity ratio

• Financial leverage ratio

2.2.3 The importance of capital adequacy in securities companies

Ensuring and maintaining capital adequacy for securities companies is extremely necessary and has special significance not only for the companies themselves but also for the financial market and their customers and partners

2.2.4 Factors affecting capital adequacy in securities Companies

2.2.4.1 Internal factors

• Business strategy of the securities company

• Risk management capabilities

• Industry-wide capital adequacy and regulatory oversight

• Business environment: GDP growth rate, inflation, interest rates, exchange rates

• Competition between securities companies

• Information environment

• Customer and partner credibility