Systemic risks in vietnam,s financial system and macroprudential implications

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM – & — a thesis for THE DEGREE OF MASTER IN PUBLIC POLICY SYSTEMIC RISKS IN VIETNAM’S FINANCIAL SYSTEM AND MACROPRUDENTIAL IMPLICATIONS by LE XUAN HUNG Ho Chi Minh city, 2015 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM – & — LE XUAN HUNG SYSTEMIC RISKS IN VIETNAM’S FINANCIAL SYSTEM AND MACROPRUDENTIAL IMPLICATIONS MASTER IN PUBLIC POLICY THESIS CODE: 60340402 supervisors JAMES RIEDEL DO THIEN ANH TUAN Ho Chi Minh city, 2015 i CERTIFICATION I certify that the substance of the thesis has not already been and is not being submitted for any other degree I certify that to the best of my knowledge, any source used and help involed have been acknowledged in the thesis The views stated in the thesis are of my own and not necessarily reflect the views of the Ho Chi Minh City Economics University or Fulbright Economics Teaching Program Author Lê Xuân Hùng ii ACKNOWLEDGEMENTS I would like to express my gratitude to everyone in my family, who has provided me with tremendous support and encouragement during my study and my whole life I would like to express my sincere appreciation to my supervisors - Mr Đỗ Thiên Anh Tuấn and Dr James Riedel, without whom I shall not be able to complete my thesis With rich knowledge, a lot of experiences and great compassion - my supervisors has guided and enlightened me through many hardships of completing this thesis I would like to thank all teachers and staffs in Fulbright Economics Teaching Program (FETP), who have transferred much of their knowledge and experience to me I truly appreciate FETP’s founders for creating such an inspiring program that opened up to me a whole new horizon of knowledge Last but not least, I would like to express my thanks to all of my friends and colleagues, who helped and encouraged me during my time at FETP Author Lê Xuân Hùng iii ABSTRACT Vietnam is addressing financial instabilities by strengthening its grip onto the banking sector and financial system in general It is done via improving financial safety measures, addressing cross-ownership relations and restructuring non-perform loans Meanwhile, after the global financial crisis, a new line of research related to systemic risks and macroprudential policy had taken center stage with various implications This study explores the application of these implications in reducing systemic risk of Vietnam financial system using qualitative analysis; via (1) formulating the implications of macroprudential approach with emphasis on network theory; (2) identifying the systemic risks in Vietnam financial system during 2009 – 2011 and (3) assessing recent reforms’ ability to reduce systemic risks in the financial sector The results indicate that there are four groups of systemic risks in Vietnam financial sectors: expansionary macro environment, weak currency position, sector-wide degradation of capital quality, and structural weakness at institutional and systemic level Recent reforms are positive in addressing those risks, but only from microprudential perspective Yet, the coverage of macroprudential policies is low and incomplete The study suggests that a more holistic approach is needed in improving financial stability, with specific recommendations including (1) embrace the networked and dynamic nature of financial system; (2) facilitate development of non-bank financial institutions; (3) address regulation transparency and data availability; (4) construct a dependable set of indicators that reflect phases of risks build-up and roll-out and; (5) further consolidate supervision structure iv TABLE OF CONTENT Certification i   Acknowledgements ii   Abstract iii   Table of Content iv   Table of Abbreviations vii   List of Figures ix   List of Tables x   Chapter 1:   Introduction   1.1   Instabilities of Vietnam’s financial system   1.2   Objectives and scope   1.3   Research method   1.4   Analysis framework   1.5   Thesis structure   Chapter 2:   Macroprudential regulation framework   2.1   Financial crises   2.2   Principles of financial regulation   2.3   Systemic risks and macroprudential policy   2.3.1   Externalities of systemic risks   2.3.2   Phases of instabilities 11   2.4   Network anatomy of systemic risk 13   2.5   Macroprudential regulation 16   2.5.1   Development of macroprudential approach 16   2.5.2   Macroprudential policy 17   2.5.3   Macroprudential toolkit 19   2.6   Policy implications 22   Chapter 3:   Financial instabilities and systemic risks 24   3.1   Context 24   3.2   Risks build-up 25   3.2.1   Capital inflow 25   v 3.2.2   Credit growth 27   3.2.3   Biased banking sector 29   3.2.4   Quality of capital 31   3.2.5   Exploitive cross-ownership 32   3.3   Systemic stress materialization in financial sector 33   3.3.1   Liquidity shortage 33   3.3.2   Non-performing loans 35   3.3.3   Real-economy spillovers 37   3.4   Remarks 38   Chapter 4:   Reforms in financial sector 40   4.1   Shock absorption capability of credit institutions 40   4.2   Contagions and network structure 42   4.3   Information and regulation framework 46   4.4   Remarks 46   Chapter 5:   Conclusions 48   5.1   Key findings 48   5.1.1   Systemic risks in Vietnam’s financial system 48   5.1.2   Applications of macroprudential policy 49   5.1.3   Benchmark of recent reforms 50   5.1.4   Notes on macroprudential policy implementation 51   5.2   Policy recommendations 51   5.3   Further study 53   5.4   Finale 53   List of References 55   List of Regulations 61   Appendix 62   Appendix 1: Seismic anatomy of financial crises 62   Appendix 2: Financial accelerator effects and macro-financial linkages 62   Appendix 3: BICRA (Banking Industry Country Risk Assessment) score 63   Appendix 4: Theory of financial instability 63   Appendix 5: Network model of systemic risks 64   Appendix 6: Group of 30’s set of macroprudential tools 65   vi Appendix 7: Motivations for macroprudential policy adoption 66   Appendix 8: Cost of prudential regulations 69   Appendix 9: Capital inflow and the potential build-up of vulnerability 71   Appendix 10: Cross shareholdings, interbank lending and investment vehicles 72   Appendix 11: Shareholding structure in Vietnam’s banking sector 73   Appendix 12: Indicators for identifying global SIFIs 74   Appendix 13: Financial soundness indicators 75   Appendix 14: Macroprudential instruments reference 76   vii TABLE OF ABBREVIATIONS BIS - Bank of International Settlement CAR - Capital Adequacy Ratio CCA - Contingent Claims Analysis CI - Credit Institution CoVaR - Conditional Value-at-Risk DSA - Debt Sustainability Analysis DTI - Debt-To-Income ratio ECB - European Central Bank EU - European Union FETP - Fulbright Economics Teaching Program FI - Financial Institution FSI - Financial Soundness Indicators FTA - Free Trade Agreement GDP - Gross Domestic Product GSO - General Statistics Office IAS - International Accounting Standards IFRS - International Financial Reporting Standards IMF - International Monetary Fund IT - Information Technology JPoD - Joint-Probabilities of Distress JSCB - Joint-Stock Commercial Bank LCI - Law on Credit Institutions LTD - Loan-to-deposit ratio viii LTI - Loan-to-income ratio LTSF - Loan-to-stable-funding ratio LTV - Loan-to-value ratio NPL - Non-Performed Loan SBV - State Bank of Vietnam SIFI - Systemic Important FIs SOBC - State-Owned Commercial Bank TPP - Trans-Pacific Partnership agreement USD - United States Dollar VAS - Vietnam Accounting Standards VCBS - Vietcombank Securities Company VELP - Vietnam Executive Leadership Program VND - Vietnamese Dong WB - World Bank WTO - World Trade Organization - 66 - b Core Funding Ratio c Capital Surcharge on Liquidity Preventing excessive credit extension; Regulating market activity that could pose a systemic risk Appendix 7: Motivations for macroprudential policy adoption In this section, the study considers international experiences from two angles: (1) failures that raised the need for macroprudential policy and (2) effectiveness of macroprudential policy application For the first viewpoint, we take a look at the last two prominent crises that shape much of Asian financial landscape: the Asian financial crisis in 1997 and the global financial crisis in 2008 For the second perspective, Cerutti, Claessens and Laeven (2015) evidenced general positive effectiveness [2.5.1] Claessens and Ghosh (2012) also argued that emerging markets have greater experiences with macroprudential policies because they have experienced more pronounced business and financial cycles43 The case of two crises The needs for macroprudential policy are demonstrated via crises and instabilities When systemic risks are not addressed and treated properly, the risk factors will accumulate and eventually roll out as cascaded failures The two large international crises (that more or less affected Vietnam) provided insights on how unnoticed systemic risks could bring harms to financial systems In the global financial crisis (2008), systemic risks were able to bypass regulators scrutiny for several reasons, including: the use of complex derivatives to distribute risk; via the unregulated shadow-banking system; excessive reliance on wholesale funding by banks; under-capitalization of banks; and lack of understanding regarding the risk profile of innovative financial product (Kawai & Morgan, 2012) It indicated that the regulators were 43 “This greater pro-cyclicality is due to their greater exposures to international capital flow volatility, commodity price shocks, and other risks, and external and internal transmission channels that operate more adversely.” Source: Claessens and Ghosh (2012) - 67 - not able to keep these risks in check by missing insights (i.e indicators and awareness) of them In the Asian financial crisis (1997), the context is different It is characterized by systemic risks associated with so-called “double-mismatches” associated with borrowing short-term in foreign currencies and lending longer-term in domestic currencies (Kawai & Morgan, 2012) The problem was getting more severe when compounding with other systemic risks: moral hazard comes from foreign banks that are insured directly by governments (or indirectly via an IMF bail-out); government subsidization and/or support of favored firms/industries in the name of economic growth and decades of account deficits, pegged exchange rate and declined export prospect (Corsetti, Pesenti and Roubini, 1999) The case of two crises shows that despite of vastly differences in size and development level, countries can face with financial difficulties if systemic risks are not treated properly The case of Korea The situation of South Korea in 199744 is not much different to Vietnam (financial system) a decade later, with specific characteristics of a credit-based financial system: (1) the pricing mechanism is influenced more by administrative guidance than market forces; (2) a major objective of monetary policy is resource allocation rather than financial system stability; (3) main tools of monetary policy are administrative guidance and regulations rather than monetary aggregates; (4) industrial adjustment is often led by government rather than by firms; (5) government, banks and firms formed close ties rather than staying at arm’s length; (6) main supplies of long-term funds are from specialized banks instead of investment institutions (Sang Yong Park, 2003) After the crisis happened, liquidity ratio regulations have been put in place Furthermore, as the housing market warmed up in the 2000s, loan-to-value and debt-to-income control ratios were also enacted However, Korea did not have specific measures aimed at the time-series risk dimension It left loopholes for banks to raise excessive leverage through funding with “non-core liabilities” leading to a round of crisis-like events in 2008 (Canuto, 44 Right before the Asian financial crisis (1997) - 68 - 2013) Beginning from 2010, Bank of Korea introduced several macroprudential tools to address the volatility of cross-border capital flows, which includes: macroprudential stability levy (levy on non-core FX liabilities), ceilings on FX derivative positions (leverage caps), taxation on foreign bond investment In 2013, Bruno and Shin (2013) did an empirical study assessing the sensitivity of capital flows to global financial conditions after macroprudential policies deployed in Korea in 2010 There is evidence from a variety of approaches that the sensitivity of capital flows to global factors reduced substantially in the case of Korea from 2010 Remarkably, the dampening of sensitivity in Korea sits side-by-side with evidence that Korea’s experience is different from group of comparable Asian countries (including Vietnam) For these Asian countries, they saw an increase in the sensitivity of their capital flows to global factors after 2010 The case of Thailand Thailand has used elements of macro-prudential toolkits since 2002 and extended their usage continuously A report from Bank of Thailand (BoT, 2012) stated that these policies helped contain foreign exchange risk in the banking sector; build up non-performed loan buffer during good time; reduce sectoral imbalance in credit-card and personal loans; impose withholding tax on foreign investment in bonds On the challenges side, the report also emphasizes on the difficulty of coordination and appropriate policy mix and the importance of putting macro-prudential policy in context (i.e it is not an all-powerful solution and/or a replacement for existing monetary policies) - 69 - [Figure] Macroprudential tools employed by Thailand Source: Bank of Thailand (2012) The case of China Wang & Sun (2013) performed an empirical study on the effectiveness of macroprudential policies in China on 171 banks It concludes that both form of systemic risks: time and & cross-sectional are presented in China Some macroprudential policy tools (e.g., the reserve requirement ratio and house-related policies) are useful but not guarantee protection Further, macroprudential policies have even greater potential to contain systemic risk if better targeted Consider the similarities between Vietnam and China; it is an interesting subject for further study Appendix 8: Cost of prudential regulations Source: Author’s compilation There is available theoretical and empirical evidence on the positive effect of finance on long-term economic growth Accordingly, concerns have been raised about the impact of macroprudential policies on the dynamism of financial markets and, in turn, on investment and economic growth Popov and Smets (2012) thus recommend that macroprudential - 70 - tools be employed more forcefully during costly booms driven by over borrowing, targeting the sources of externalities but preserving the positive contribution of financial markets to growth In analyzing the costs of higher capital requirements implied by a macroprudential approach, Hanson et al (2011) report that the long-run effects on loan rates for borrowers should be quantitatively small Some theoretical studies indicate that macroprudential policies may have a positive contribution to long-run average growth Jeanne and Korinek (2011), for instance, show that in a model with externalities of crises that occur under financial liberalization, welldesigned macroprudential regulation both reduces crisis risk and increases long-run growth as it mitigates the cycles of boom and bust Due to the wealth of tools and the associated cost of implementation, it is not always beneficial to apply macroprudential policy aggressively In fact, each country, depend on circumstances may pick different set of tools Bank of England (2011) and Blancher et al (2013) gave recommendations regarding the selection criteria The two set of recommendation are not matched precisely but reinforcing each other When combined, the overall strategy to select macroprudential tools can be summarized below: Firstly, the selection of tools should be country-specific, driven by its effectiveness and efficiency: tools are likely to differ in their effectiveness of tackling sources of systemic risk, and their effectiveness may vary over time and according to circumstances It also needs to consider the efficiency of tools by comparing the benefits against the cost of implementation, including enforcement cost and adverse consequence stems from the new policy Secondly, tools should be combined to exploit their complementarities: to cross check and confirm the materiality of sources of systemic risk stem from domestic macro-financial imbalances (e.g credit boom, asset price bubble, unsustainable public debt) and crossborder linkages, or individual institution exposures (e.g size, leverage, interconnectedness) They help practitioners to avoid overreacting to a single signal, or being lulled into a false sense of security - 71 - Thirdly, the tools should be considered based on their inherent quality, including: coverage, independence & simplicity Fourthly, tools usage should reflect the typical phases of systemic risk: see [2.3.2] Finally, in emerging countries, data gaps are posing as obstacles to building key systemic risk indicators (e.g interlinkages and common exposures), therefore, tools selection must consider of data availability within the country (to build if needed) Appendix 9: Capital inflow and the potential build-up of vulnerability Source: Claessens and Ghosh (2013) - 72 - Appendix 10: Cross shareholdings, interbank lending and investment vehicles Source: FETP (2013) - 73 - Structural Reform for Growth, Equity, and National Sovereignty A Policy Discussion for the Vietnam Executive Leadership Program Appendix 11: Shareholding structure in Paper Vietnam’s banking sector Page 21 of 44 Structural Reform for Growth, Equity, and National Sovereignty A Policy Discussion Paper for the Vietnam Executive Leadership Program Source: VELP1.(2012) Diagram Shareholding structure  in  Vietnam’s  banking sector Page 21 of 44 Vinasiam VID Public VietnamViet-Lao Diagram Shareholding structure  in  Vietnam’s  banking sectorIndovina Bank Bank Russia Bank Bank Bank Mizuho Viettel 34% Vinasiam Bank SJC Viettel REE SJC VID Public Bank REE Military Bank VNPT 15% 12.5% 5.3% Bao Viet Group Vinalines 52% Maritime Bank HCMC 5.3%4 Party related Bao&Viet firms Group HCMC Party & related firms 52% 9.9% CMC Bao Viet Bank Vinamilk 8% 9.9% Chau Tho 8% CMC Vinamilk FPT Chau Tho 6.8% ACB 9.9% Him Lam Geleximco 6%11 Petro 9.9% Viet Nam Him Lam 3.7% Dai Duong Group 6%11 8.3% 9.3% TKV 9.3% VN TKV Rubber Group 10% Ocean Bank 5.8%12 Ocean Bank 13.2% Dai A Bank 6.9% Saigon -Binh Dinh Power Sai Gon Bank 8.4% 3.2%13 10% Vietbank 6.1%15 ANZ 5.3% ANZ BNP Paribas BNP Paribas OCBC 14.9% OCBC 15% Temasek Holdings Temasek Holdings Maybank 14.9% Nam A Bank 15% 5.3% 20% Maybank Nam A Bank Phuong Nam Bank 20% Phuong Nam 20% Bank 6.1%10 Habubank 10% Vietnam 14 International 1.5% Bank Vietnam International 10% Bank Nam Viet Bank 8.4% 5.3% Global Petro 13 3.2% 6.1%10 Bank 1.5%14Habubank 20% 20% Nam Viet Bank Global Petro Bank 20% Dragon Capital 20% United Overseas Bank 10% Deutsche Bank Deutsche Bank 20% 20% Techcombank Kien Long Bank Société Générale 20% SeABank SeABank United Overseas Bank Société Commonwealth Générale Bank of 20% Australia Commonwealth Bank of 19.6% Australia HSBC 10.8% Dai A Bank 11.9% 11.9% Gemadept Gemadept 20% Saigon-Hanoi 13.2% Bank 9.3% T&T 9.3%Group 3.7% 5.8%12 Saigon-Hanoi Bank 2.4% Dragon Capital 10.2% Mekong 10.2% Development Bank Mekong Development Bank 2.4% T&T Vinatex 6.9% Group Vinatex Gia Dinh Bank Tien Phong Bank 10% Lien Viet Post Bank IFC 8.5% IFC 16.9%10 7.1% Tien Phong Bank Lien Viet Post Bank Petro Dai Duong Viet Nam Group VN Rubber Group Geleximco Vinare Sumitomo 15% 4.7% VP Bank 16.9% Vina15% Capital Sumitomo 5.3%15 Phuong Dong3.7% 8.5% Dong A Bank Viet A Bank 4.7% Bank 5.3%15 6.8% Phuong Dong 20% Dong A Bank 12.8%5 Viet A Bank 15.3%Bank 11% 63.6%7 6.8% 20% 12.8% 15.3%6 11% VP Bank Gia Dinh Bank63.6% Sai Gon Bank9 3.7% 5.3% An Binh Bank An Binh Bank 8.3% Connaught Vina Capital Investors 5.0% Eximbank Eximbank 6.8% 7.1%10 25.4% Vinare EVN 8.2% 8.2% 9.8% 7.7% 15% Bao Viet Bank 15% 25.4% EVN FPT 15% Maritime Bank 8.9% Connaught Investors 5.0% 8.9% Vinalines VNPT Standard Chartered 9.8% 7.7% 3.5% 7.3% 15% 2.1% 7.3% 3.5% Sacombank 5%2 12.5% ACB Sacombank 5% 15% Vietcombank 2.1% Vietinbank 11% Standard Chartered Vietcombank 15%1 50% BIDV Mizuho 50% 10% 50% 11% Military Bank 15%1 50% Indovina Bank Vietinbank 10% 7.2% PNJ 50% 10% Agribank 5.7% VN 3.2% 10% Helicopter Saigon New Port 7.2% SCR, TTC, BTN, 5.7% VN NHS Helicopter SCR, PNJ TTC, BTN, NHS 50% Viet-Lao Bank VietnamRussia Bank BIDV 50% Agribank 34% 3.2% Saigon New Port 50% Vietbank Kien Long Bank HD Bank Western Bank HD Bank 9.8% Saigon Western Bank 14.4%16 5.8% -Binh Dinh Power 9.8% 14.4%16 Dong Nai40% Tin Nghia 5.8% Lottery Tin Nghia 6.1%15 10.8% Dong Nai Lottery Sovico 40% 4% Sovico HFIC 4% Petrolimex Group Bank HFIC 40% Petrolimex Petrolimex Group Bank 40% 10% Petrolimex SSI 19.6% Techcombank HSBC 9.8% 7.2%17 19.7% 9.8% 10% 17 Hoa Binh 13.6% Securities 7.2% 19.7%2.7% SSI 2.7% VN Airlines Hoa Binh Securities Masan 13.6% Group Masan VN Airlines Group Viet Phuong Group Eurowindow Viet Phuong Holding Group Eurowindow Note: Shareholding information is as of 30 June 2011 Shareholdings by individuals are not depictedHolding in the diagram Shareholdings by institutions of less than percent are not depicted except for those having representation in boards of directors or strategic partner status Mekong Housing Note: Shareholding information is as of 30 June 2011 Shareholdings by individuals are not depicted in the diagram Shareholdings by institutions Bank and five joint-stock banks are not included in the diagram of less than percent areBank notatdepicted for those having representation in boards of directors or strategic partner status Mekong Housing Shareholding by Mizuho Vietcombankexcept is not yet official by a group of related companies including Sacomreal, Thanh Thanh Cong, Bourbon Tay Ninh, Ninh Hoa Sugar Bank andShareholdings five joint-stock banks are not included in the diagram Indirect shareholding through Agribank Securities Company (Agriseco) Shareholding by Mizuho Bank at Vietcombank is not yet official Includes shareholdings by Vinalines and its subsidiaries such as Hai Phong Port and Vosco Shareholdings by a group of related companies including Sacomreal, Thanh Thanh Cong, Bourbon Tay Ninh, Ninh Hoa Sugar Includes shareholdings by HCMC Party Office, Ky Hoa Tourism and Trading, and Phu Nhuan Construction and Housing Trading Indirect shareholding through Agribank Securities Company (Agriseco) Includes shareholdings by HCMC Party Office, Sunimex and Savico Includes shareholdings by Vinalines and its subsidiaries such as Hai Phong Port and Vosco Includes shareholdings by HCMC Party Office, Ky Hoa Tourism & Trading, Saigon Petro, and Saigon Tourist Holding Includes shareholdings by HCMC Party Office, Ky Hoa Tourism and Trading, and Phu Nhuan Construction and Housing Trading Does not reflect the VND1000 billion capital increase announced in November 2011 and  Viet  Capital’s  acquisition  of  a  controlling  stake Includes shareholdings by HCMC Party Office, Sunimex and Savico Does not reflect the VND500 billion increase& announced in November 2011 by Phu NhuanHolding Construction and Housing Trading Co Ltd Includes shareholdings by HCMC Party Office, Kycapital Hoa Tourism Trading, Saigon Petro, and Saigon Tourist 10 14 Indirect shareholding through (Mobifone) Indirect shareholding through PV Gas Does not reflect the VND1000 billion capitalVMS increase announced in November 2011 and  Viet  Capital’s  acquisition  of  a  controlling  stake 11 15 Indirect shareholding through Vietnam Post Indirect shareholding through ACB Securities Does not reflect the VND500 billion capital increase announced in November 2011 by Phu Nhuan Construction and Housing Trading Co Ltd 12 16 10 14 Indirect shareholding FPT Fund Management Company Including shareholding Indirect shareholding through VMSthrough (Mobifone) Indirect shareholding through PV Gas by Tin Nghia Petroleum 13 17 11 15 Indirect shareholding through PVFI Including shareholding by Eurofinance Indirect shareholding through Vietnam Post Indirect shareholding through ACB Securities 12 16 Indirect shareholding through FPT Fund Management Company Including shareholding by Tin Nghia Petroleum 13 17 Indirect shareholding through PVFI Including shareholding by Eurofinance Source: Compiled by Fulbright Economics Teaching Program (FETP) from banks’  financial  reports Source: Compiled by Fulbright Economics Teaching Program (FETP) from banks’  financial  reports - 74 - 70 Appendix 12: Indicators for identifying global SIFIs I D E N T I F Y I N G G L O B A L SYS T E M I CA L LY I M P O RTA N T F I N A N C I A L I N S T I T U T I O N S R E S E RV E B A N K O F AU S T R A L I A AppendixYuksel A Source: (2014) Table A1: Indicators for Identifying Global Systemically Important Financial Institutions (continued next page) Banks (G-SIBs) Developed by: BCBS Category Indicator(a) Size Total exposures as defined for use in the Basel III leverage ratio Interconnectedness Intra-financial system assets (6.67%) Intra-financial system liabilities (6.67%) Securities outstanding (6.67%) Insurers (G-SIIs) IAIS Weight Indicator(a) % Finance companies Market intermediaries Investment funds FSB IOSCO IOSCO Indicator Indicator Weight Indicator % 20 Total assets (2.5%) Total revenues (2.5%) Total globally consolidated Total globally balance sheet assets consolidated balance Total globally sheet assets consolidated off-balance Total globally sheet exposures consolidated off-balance sheet exposures Client assets outstanding 20 Intra-financial assets (5.7%) Intra-financial liabilities (5.7%) Reinsurance (5.7%) Derivatives (5.7%) Large exposures (5.7%) Turnover (5.7%) Level assets (5.7%) 40 Intra-financial system assets Intra-financial system liabilities Borrowings, split by type Leverage ratio Substitutability/ financial institution infrastructure (banks) Assets under 20 Premiums for specific custody (6.67%) business lines Payments activity (6.67%) Underwritten Substitutability transactions in debt (b) Table A1: (insurers, NBNIs ) and Indicators equity markets for Identifying Global (6.67%) Banks (G-SIBs) Insurers (G-SIIs) Intra-financial system assets Leverage ratio Intra-financial system Counterparty liabilities exposure ratio Leverage ratio Intra-financial system Short-term debt ratio liabilities OTC derivatives assets and liabilities Amount of margin required at clearing houses or central counterparties Qualitative assessment of Qualitative assessment Turnover of the fund ‘substitutability’, which of reliance of the market related to a specific takes into account the firm’s on the services of the asset/daily volume market share in various intermediary (for a critical traded regarding the financing markets and ease function or service) same asset of substitutability by other Market share, measured by Total fund turnover vs Systemically Important Institutions (continued) provider(s) of funding Financial (i) trading as a percentage total turnover of funds of daily market volume in the same category/ Finance Market on domestic exchanges, Investment classification and (ii) if available, global funds Investment strategies companies intermediaries market transaction volume (or asset classes) with FSB IOSCO IOSCO in securities (including less than 10 market equities, bonds and players globally Weight Indicator Indicator Indicator futures) % BCBS Category Indicator(a) Complexity (banks, NBNIs(b)) Notional amount of over-the-counter (OTC) derivatives (6.67%) Level assets (6.67%) Trading and available-for-sale securities (6.67%) 20 Non-policyholder liabilities and non-insurance revenues (6.4%) Derivatives trading (6.4%) Short-term funding (6.4%) Financial guarantees (6.4%) Minimum guarantee on variable insurance products (6.4%) Intragroup commitments (6.4%) Liability liquidity (6.4%) 45 OTC derivatives notional amount Difficulty in resolving a firm Structural complexity, measured by number of legal entities that are consolidated Operational complexity, measured by Level assets OTC derivatives trade volumes at the fund/ total trade volumes at the fund Ratio (%) of collateral posted by counterparties that has been re-hypothecated by the fund Ratio (%) of NAV managed using high frequency trading strategies Weighted-average portfolio liquidity (in days)/weightedaverage investor liquidity (in days) Ratio of unencumbered cash to gross notional exposure (or gross AUM) Cross-jurisdictional claims (10%) Cross-jurisdictional liabilities (10%) 20 Revenues derived outside of home country (2.5%) Number of countries (2.5%) Size of cross-jurisdictional claims Size of cross-jurisdictional liabilities Number of jurisdictions in which the finance company conducts operations Assets or revenues in foreign jurisdictions Number of jurisdictions in which the market intermediary and/or its affiliates conduct operations Cross-jurisdictional claims and liabilities Number of jurisdictions in which a fund invests Number of jurisdictions in which the fund is sold/listed Counterparties established in different jurisdictions BULLETIN | D E C E M B E R Q UA R T E R 2014 Cross-jurisdictional activity (banks) Global activity (insurers) Cross-jurisdictional presence (NBNIs(b)) 71 (a) Individual weighting in brackets (b) Non-bank non-insurer (NBNI) entities Sources: BCBS; FSB; IAIS; IOSCO Weight Indicator(a) % IDENTIFYING GLOBAL SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS Developed by: Non-traditional insurance and non-insurance activities (insurers) IAIS Net assets under management (AUM) or net asset value (NAV) for the fund For hedge funds, gross notional exposures (GNE) as an alternative indicator - 75 - Appendix 13: Financial soundness indicators Source: IMF (2006) - 76 - Appendix 14: Macroprudential instruments reference Source: ESRB (2015a) Instruments to address excessive credit growth and leverage The countercyclical capital buffer (CCB) This instrument is designed to counter procyclicality in the financial system It is aimed at building up a capital buffer during periods of excessive credit growth that is released when systemic risks materialise or abate By increasing resilience during the upturn, the CCB supports the sustainable provision of credit to the economy in the downturn The CCB can also help dampen the credit cycle during the upturn The buffer will be between 0% and 2.5% of risk-weighted assets, but can be set higher when justified by the underlying risk Loan-to-value (LTV), loan-to-income (LTI) and debt service-to-income (DSTI) caps These instruments are exclusively based on national law They include caps that restrict credit in relation to the value of the underlying real estate (LTV cap) or the income of the borrower (LTI/DSTI cap) In contrast to capital-based instruments, they target the borrowers who take credit, rather than the banks that provide the credit Macro-prudential authorities should be able to assess LTV and LTI/DSTI ratios Sectoral requirements Sectoral requirements enable stricter regulatory requirements to be imposed, for example by increasing risk weights for specific exposures or minimum loss given default (LGD) values Sectoral requirements improve the resilience of banks to risk in the sectors concerned They can also have a dampening effect on credit growth The systemic risk buffer (SRB) The SRB is designed to prevent and mitigate structural systemic risks, including excessive leverage It is a flexible instrument that can be applied to all or to a subset of banks, and is subject to a notification requirement for buffer rates up to 3% Additional own funds requirements and capital conservation buffer When the abovementioned instruments are not adequate to address excessive credit growth, macroprudential authorities can use national flexibility measures to apply add-ons to own funds requirements and the capital conservation buffer, subject to specific procedures and authorization - 77 - A leverage ratio The leverage ratio hinders excessive on-balance sheet and off-balance sheet leverage by limiting a bank’s total assets (including off-balance sheet) in relation to its equity Since it is not based on risk-adjusted assets, it also provides a simple and transparent backstop to safeguard against model and measurement error in the risk based capital requirements Instruments to address excessive maturity mismatch and market illiquidity Net stable funding ratio (NSFR) The NSFR is a micro-prudential measure, which will enter into force in 2018 Developing a sound NSFR that is aimed at limiting banks’ one year maturity and liquidity mismatches will go a long way towards increasing the stability of banks’ funding bases to sudden outflows A macro-prudential use of the NSFR could impose an (fixed or time-varying) add-on over the prudential minimum requirement Liquidity buffer ratios Liquidity ratios, such as the liquidity coverage ratio (LCR), are micro-prudential measures They may also increase resilience to liquidity shocks by increasing the stock of liquid assets available to cover sudden outflows A macroprudential use of the LCR could impose a (fixed or time-varying) add-on over the prudential minimum requirement Liquidity charges Liquidity charges could complement the above quantity-based ratios They could be a Pigouvian levy reflecting banks’ contributions to systemic liquidity risk (e.g the duration of their funding profile or their reliance on wholesale funding) Other stable funding requirements These can be introduced at a national level, for instance through loan-to-deposit (LTD) limits Instruments to address direct and indirect exposure concentration Large exposures restrictions These restrictions are micro-prudential measures which can be further restricted for a macro-prudential purpose They can be applied via Pillar on a sectoral basis to reduce banks’ exposures to a particular sector and/or asset class (restrictions on intra-financial exposures can be imposed through Article 458 of the CRR) They may target both direct exposures and excessive (indirect) interconnectedness among financial institutions, thereby reducing contagion risk - 78 - Capital-based instruments (e.g sectoral capital requirements, SRB, own funds requirements and capital conservation buffer) In the context of exposure concentration, the main focus of capital-based instruments is to address contagion risks arising from banks’ common exposures and interconnectedness These instruments are aimed at enhancing bank resilience to shocks, by raising capital buffers and by reducing banks exposures When applied on a sectoral basis, they may also affect the asset composition of banks Instruments to address misaligned incentives and moral hazard The globally systemically important institutions (G-SII) buffer is a macro-prudential instrument It imposes a mandatory capital buffer on banks identified as globally systemically important The surcharge will be between 1% and 3.5% and will be gradually phased in from January 2016 and will reach its full effect on January 2019 The other systemically important institutions (O-SII) buffer is another macro-prudential instrument It enables authorities to impose capital charges on domestically important institutions A notification procedure and a 2% upper limit are imposed The O-SII buffer will become applicable on January 2016 The systemic risk buffer (SRB) can be targeted at the risks stemming from SIIs or the size of the banking sector when considered excessive The SRB can be applied to a subset of institutions as early as January 2014 For this reason, some countries may apply the SRB to overcome the deferred application of and/or the legal cap on the O-SII buffer Additional own funds or conservation buffer requirements can be implemented either under Pillar (when the SREP shows that a specific bank or group of banks are contributing to systemic risks) or under the national flexibility measures (provided other instruments cannot adequately address the identified risks) Additional liquidity requirements The resilience of SIIs may also be increased through additional liquidity requirements or charges These requirements may also be applied under Pillar (when the SREP shows that a specific b qank or groups of banks contribute to systemic risks) or under the national flexibility measures (provided other instruments cannot adequately address the identified risks) OVERVIEW A: MACROPRUDENTIAL REGULATION FRAMEWORK Source: Author’s compilation Others’ credit in Notes & References Externalities Phases of instabilities Risk factors Models & Methodology Indicators/Data Frequency: All Capital inflow Excessive credit growth Build up phases (i.e general circumstances) Market indexes Quality of capital + Financial prudent ratios (CAR, LTV, LTI, …) Restrictions on distributions Market-Based Probability of Default Time-varying liquidity buffers CoVaR model Governance reports Loan-to-value and loanto-income restrictions CoVaR CCA D-SIB frameworks SIBs (SIFIs) Market risk related to Fire sales and Credit Crunches International shock soft separation Balance sheets Sectoral requirements Systemic liquidity analysis Regime/policy switching Liquidity buffer ratios Returns spillovers Balance Sheet Simulation Methods Real economy shock + Fiscal policy Frequency: Medium & High Idiosyncratic shock Shock materialization Supplemented by Stress test results Stress tests Distress spillovers Net stable funding ratio (NSFR)10 Systemic liquidity risk indicator Supplemented by Monetary policy soft separation Contagions (due to interconnectedness) related to Interconnectedness Frequency: High Amplification and propagation Decree 02 (2013): On classification of assets, levels and method of setting up of risk provisions, and use of provisions against credit risks in the banking activity of credit institutions, foreign banks’ branches Decree 36 (2014): Stipulating minimum safety limits and ratios for transactions performed by credit institutions and branches of foreign banks Liquidity Risk Charges Liquidity risk Bilateral exposures Decree 13 (2010): Stipulating prudential ratios in operations of credit institutions Maximum leverage ratios Credit-to-GDP gap Systemic CCA Interconnectedness Credit risk JPoD/CoPoD model Balance sheets + Accumulation of Credit to GDP-Based Crisis Prediction Model (2011) Countercyclical capital buffers Aggregation of microprudential indicators MFRAF - MacroFinancial Risk Assessment Framework Assets prices, interest rates, exchange rates, etc fluctuations Vietnam’s implementations Basel III related to Strategic Complementary + DSA - Debt Sustainability Analysis Credit growth rate Policy implications (i.e instruments) Law on Credit Institutions Cross-border Interconectedness Balance of payment (BoP, deficit) + Macroprudential (Systemic) Indicators Market indexes Network model & complex system theories Governance data Macro-financial linkages Herd-behaviors Large exposures restrictions Centrality Analysis Data SIFIs targeted restrictions Cluster Analysis Data Bilateral exposures JPoD/CoPoD model Panic/cascading failures JPoD/CoPoD Supplemented by 11 Sectoral policy Frequency: Low Motivation Responsibility structure Transparency (Lack thereof) Market/regulation structure Management & Independent review Effectiveness (Low policy disciplines) Legends Use of central counterparties Design and use of trading venues (including ‘circuit breakers’) information theory Supervision model Distress channel Execution Disclosure requirements (incl accounting standards) Uses/Originates-from Soft separation Notes and References Note: Balance sheet data is a major source of information to determine financial soundness Reference: Claessens (2014), An Overview of Macroprudential Policy Tools by Stijn Claessens Reference: Bank of England (2011), Instruments of macroprudential policy: A discussion paper by Note: systemic liquidity risk arises from weaknesses in market risk management practices and market infrastructure, and regulatory gaps Reference: Systemic liquidity risk: improving the resilience off Financial Institutions and markets, IMF 10 Reference: ESRB (2015a), The ESRB Handbook on Operationalising Macroprudential Policy in the Banking Sector models and macroprudential indicators This table hilight the most important ones CoVaR: Conditional Value-at-Risk Reference: Arregui et al (2013), Addressing Interconnectedness: Concepts and Prudential Tools D-SIB: Domestic Systemic Important Banks Reference: Yuksel (2014), Identifying Global Systemically Important Financial Institutions by Mustafa Yuksel 11 JPoD/CoPod: Joint-Propabilities of Default/Conditional Propabilities of Default Note: gap between the credit-to-GDP ratio and its long-term trend Firm Firm 12 Note: The same indicators/data can be useful for different phases It is similar for Households PART 2: NETWORK VIEW OF FINANCIAL SYSTEM Complexity3Aspects Factor Exposures3 (connections) Static 1.#Type 2.#Size 3.#Direction 4.#Terms Insurance 5.#(Capital)#size 6.#(Capital)#composition Securities Agents3(nodes) Bank Bank 27 28 29 Networks 30 13.#Network#distortions 14.#Composition 15.#External#linkages Bank 11 7.#Type 8.#Network#metric#(centrality,# connectness) 9.#Regional#(geography)#boundary 10.#Sectional#(industry)#boundary 11.#Regulation#boundary 12.#Network#locality#(sub#groups) Shocks 14 system boundary Securities Insurance 15 10 Bank Source: Author’s compilation Dynamic 16.#Creation/destruction 17.#Transform#(incl.#resize) 18.#Allocation#(regional/capital# expansion/contract) 19.#Transactions 20.#Transform#(i.e.#sectional# expansion/contract) 21.#Capital#injection/widthdrawal 22.#Sectional#reallocation 23.#MacroQenvironment 24.#Merger#and#accquisition 25.#Government# direction/regulation 26.#GlobalQenvironment 27.#Time 28.#Types 29.#Magnitude 30.#Locality Overview B: Vietnam financial environment during 2006 - 11 Source: Author’s compilation Figures’ credit in titles Expansionary phase Materialization transitioning Sep 15th, 2008 Lehman Brothers files for bankruptcy protection and Merrill Lynch is taken over by the Bank of America Jan 11th, 2007 Vietnam became WTO member 2006 Contractionary phase 2007 2008 Propagation May 12th, 2009 $9 bil easing package Dec, 2010 Vinashin defaulted on a $600 million loan 2009 2010 2011 2012 30% 0% Inflation rate (Data: SBV) Indicators 1200 25% 1000 20% 800 15% 600 10% 400 5% 200 0% VNIndex (Data: HSX) 1"Feb"08( 1"May"08( 1"Aug"08( 1"Nov"08( 1"Feb"09( 1"May"09( 1"Aug"09( 1"Nov"09( 1"Feb"10( 1"May"10( 1"Aug"10( 1"Nov"10( 1"Feb"11( 1"May"11( 1"Aug"11( 1"Nov"11( NPL ratios (Source: FETP, 2013) Avg lending rates (Data: SBV) Policies Nov 22th, 2006 Decree 141/2006/ND-CP Promulgating the list of legal capital levels of credit institutions Requires the commercial banks to have legal capital of at least VND3,000 billion by the end of 2010 (VND1,100 billion for the SOCBs and VND70 billion for CM before) Minimum capital level for branches of foreign banks remains at USD15 million Jan 26th, 2011 Decree No 10/2011/ND-CP Amending Decree No 141/2006/ ND-CP Extension of the deadline of applying the minimum chartered capital of credit institutions to 31/12/2011 Apr 17th 2009 Circular No 07/2009/TT-NHNN Regulations on prudential ratios in operations of small finance institutions Jan 23th, 2009 Decision No 131/QD-TTg Interest-rate subsidies Short-term loan contracts with maximum duration of eight months and signed and disbursed from Feb 1st, 2009 to Dec 31st, 2009 will get interest rate assistance of four percent per annum January 01st, 2011 The 2010 Law on the State Bank of Vietnam (SBV) and the 2010 Law on the Credit Institutions came into effect August 30th, 2011 Circular No 22/2011/TT-NHNN Amending Circular 13 Removing the ratio of loans/deposits from raised capital regulated in the Circular 13 (19) and adjusting the risk factor of some assets in foreign currency when calculating CAR May 20th, 2010 Circular 13/2010/TT-NHNN Stipulating Prudential Ratios In Operations Of Credit Institutions (CAR: 9%, loans / mobilization: maximum 80%) Legends Sept 27th, 2010 Circular No 19/2010/TT-NHNN On amendment, supplement of several articles of the circular no 13/2010/TT-NHNN Aug 10th, 2009 No 15/2009/TT-NHNN Maximum ratio of short term capital source to be used for medium, long term loans: Commercial bank: 30%; Finance companies: 30%; Central People’s Credit Fund: 20% Effective period Effective period extension Updates/supersedes to Less important regulations Mar 1st, 2012 Decision 254/QD-TTg Government formally adopted a comprehensive credit institutions restructuring plan and direction on related policy actions including enhancing role of foreign participation in domestic commercial banks, incentives for consolidation of banks and a plan to deal with NPL March 16th, 2012 Directive No 03/CT-NHNN Inspection, supervision; anticorruption, violations in monetary sector and banking activity Risk factors 8/9/2014 SUPERVISION WEAKNESS Spotty regulation Weak regulation discipline Ineffective structure Tỷ  lệ  an  toàn  vốn  tối  thiểu  của  ngân  hàng   Unreliable CAR ratio (Source: FETP, 2013) 35% 0.000065 (CAR) 5% 0.000045 0% 01jan2007 FDI inflow in the same period (Data: IMF) 01jul2008 01jan2010 Date Official ER 01jul2011 01jan2013 Unofficial ER Nguồn:  Tác  giả  tổng  hợp  từ  các  báo  cáo  tài  chính  ngân  hàng  2011 Excessive credit growth Non performed loans 3000000 4000000 Average apartment price Credit 2000000 Tỷ  trọng  cho  vay  bất  động  sản  trong  tổng  dư  nợ   cho vay vào tháng 12/2008 1000000 0% 10% 20% Pacific Exim Nam Viet 01jan2000 01jan2005 01jan2010 Unit: billion VND Credit growth in the same period (Data: SBV) 01jan2015 Saigon Hanoi Average apartment price (Source: CBRE 2014) VP NPL ratios (Source: FETP, 2013) An Binh Techcombank EXPLOITIVE OWNERSHIP STRUCTURES HDB Viet A ACB 30% 40% 50% 60% 70% 561.3 138.5 281.0 405.8 65.5 10% 0.000050 460.6 366.7 Tổng tài  sản (1000  tỷ VNĐ) 114.4 180.5 62.6 70.0 82.8 141.5 183.6 41.5 71.0 96.9 45.0 15% 47.3 22.6 41.9 10.2 13.2 22.3 25.4 20% 17.6 0.000055 25% 15.4 Tỷ  lệ  vốn  tối  thiểu 30% 0.000060 USD per VND 17.0 Asset prices, interest and exchange rates (Data: SBV, Vinacapital) 17.8 Capital inflow ... systemic risk and financial instabilities; (2) motivations, tools and indicators of macroprudential approach in financial system -3- supervision; (3) systemic risks of Vietnam’s economy and financial. .. to the evolving financial system as a whole; (2) aiming to enhance the resilience of financial network and to dampen systemic risks contagions inside the financial system by reducing the tendency... of financial systems Thus, it becomes misleading if regulators rely on ordinary sum of indicators as a mean for policymaking -5- by diving into the details of systemic risks in Vietnam financial