RATIO (FRB)
Primary capital to total asset ratio has been established in 1981 by three federal bank supervisory agencies- the FDIC, the
Comptroller of the Currency and the FRS. The new standards have been expressed some notable features than previous
standards and obtained approval from bankers. Firstly, they uniformed across bank size. Before this time, small banks were requested higher capital ratio than large banks because banking regulators thought that small banks were hardly diversified their portfolio that created more riskier in banking operation. But this argument has been terminated by the progressing integration of banking market. Secondly, the similarity across three supervisory agencies has enforced in banking management and reduced banks’ incentive to minimize regulation by changing supervisory agencies. Finally, the new standards proposed an increase in capital requirement in large banks and decrease in small bank.
In ABBank, when applying new approach to calculating two ratio which are higher than requirement level (5.5% for primary capital to total asset ratio and 6% for minimum total capital to total asset ratio). Based on the regulation, ABBank is arranged in Zone 1 and meet capital adequacy requirement.
Table 5.4: Calculating CAR in accordance with different ways
CAR according to SVB's regulation Primary capital to asset ratio
Minimum total
capital to asset ratio
2006 2007 2008 2009 Requiremen t
149.80
% 2
9.07% 38.75
%
25.4
% 8%
36.42
% 13.47
% 28.94
% 5.5%
36.42
% 13.48
% 29.12
% 6%
1 0
CAR calculated by SBV's rules compared to primary capital to asset ratio
16.93%
16.93%
2009 25.40%
28.94%
28.94%
2008 38.75%
13.47%
13.47%
2007 29.07%
36.42%
36.42%
2006 149.80%
0% 50% 100% 150% 200%
CAR according to SVB's regulation
Minimum total capial to asset ratio Primary capital to asset ratio
Figure 5.5: Chart of CAR according to different calculation However, the proposed standards has disclosed some bad points. Firstly, capital requirements were independent of the quality of bank’s assets and risks encountered by banks such as liquidity risk, interest rate risk, market risk. In addition, quality of asset was not weighted corresponding to its potential risks This is very important because banking operation usually faced with many uncertainty and bankers have to forecast all risks to set up an amount of capital so adequacy enough that can be absorbed losses caused by them. Thirdly, primary capital to total asset ratios did not required any capital for portfolios of off- balance sheet which are created losses to bankers. Finally, banking capital is not used efficiently because the ratio of capital adequacy is not measured comfortably with real banking activities. This has only been solved absolutely in Basel I and Basel II. ABBank has been
applying SBV’s regulation according to Basel I which just found out an answer to credit risk.
Chapter Six: Recommendations
6.1 1 QUALITY OF ASSET
The diversification and quality of assets are significant elements which impact on capital adequacy. Assets and liabilities are weighted by risk ratio that adjust capital of commercial banks.
Losses in such assets would reduce the amount of capital.
Improvement in quality of banking assets will help to reduce slightly the capital ratio necessary for a given level of protection.
6.2 INCREASING THE CURRENT CAR
CAR is an important factor which is exposed financial power of commercial banks. This ratio also one of five crucial standards which Vietnamese commercial joint stock banks have to meet to ensure the safety and soundness in risk management according to SBV’s rules. Currently, CAR must be obtained over 8% by SBV.
In the moment, CAR of banker in regional countries has been get from 10 to 12% and this interval can be totally met by Vietnamese commercial joint stock banks and the results from the case study also reflect this capacity. In next years, the growth of capital allows Vietnamese commercial joint stock banks to improve their CAR to make sure the safety in banking operation. Therefore, SBV can increase CAR requirement from 10% to 12% to be align with international standards which also would disclose truly the financial capacity of Vietnamese banking system.
6.3 APPLYING STANDARDS OF BASEL II IN VIETNAMESE COMERCIAL JOINT STOCK BANKS Currently, SBV has been applying the Basel I’s
standards in banking management. However, in the context of global economy having much more fluctuation, on
Chapter Six: Recommendations and Conclusions
purpose to guarantee safety and stability of Vietnamese banking system, SBV should establish and grant comfortable procedure to implement the Basel II’s standards in banking executive and management. Issued in January, 2001 and
become effectively at the end of 2006 to replace the Basel Accord 1988, the Basel
Chapter Six: Recommendations and Conclusions
II’s standards have been disclosed the flexibility in solving different case to measure CAR of commercial bank, in addition, they have been exposed more sensible measurement by solving statistical variables and expected variable. Basel II agreement creates a more perfect step in calculation of CAR to obstacle bad points of Basel I and pilots bankers to approach banking management methodology better.
Conclusions
Through this research study, CAR can be seen as an important ratio to measure capital adequacy of banking system This ratio is used to protect depositors from banking risks and to increase the safety and soundness of global financial system. The ratio is disclosed the payment capacity of commercial banks to debts which have fixed terms and encounters with uncertainty in banking activities such as credit risk, market risk, environment risk. In other way, when commercial banks maintain CAR that mean they create a cushion to sustain losses and protect depositors. Because of these reasons, bank regulators in almost countries has always determined and examined bankers which have to meet CAR at a fixed rate.
Through studying a real model in ABBank, it can be seen that the CAR of Vietnamese commercial banks is calculated on the basis of two decision including 457/2005/QD-NHNN dated 15, April, 2005 and 03/2007/QD-NHNN of January 19th, 2007 granted by the SBV.
Two decisions generally are aligned with the Basel I in risk management, especially credit risk but they are not concerned with operational risk, market risk and credit rating as well.
The dissertation compares the current calculation of CAR in ABBank according the Basel I and other way named primary capital to asset ratio proposed by the FDIC in order to find the significant differences of two methodologies.
Vietnam is one of the development countries which has its banking system has been renovating, reforming and contributing on the economic growth. In order to integrate and align with regulations of the international playing field, the Government has made more
affords to issue guidelines adopting with international standards, specifically in financial services, SBV has required commercial joint stock banks to meet the regulations of capital adequacy according to current rules and CAR should be at least 8%.
However, such efforts seem to be not enough to an interesting environment for development and ensure the safety and soundness for Vietnamese banking system. Vietnamese commercial banks should implement the
Basel II in risk management to measure the operational risk and the market risk in banking operation, and credit rating institution should be established independently to rank credit rating of credit institutions which help the bank to calculate adequate capital to absorb losses in banking activities.
Finally, this thesis can not cover and solve all problems concerning capital adequacy in banking operation. All recommendations and suggestions are put forth on purpose to contribute to improvement banking management in Vietnamese commercial joint stock banks.
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Website
http://en.wikipedia.org/wiki/Risk.
h
tt p :// w w w . w i s e g ee k .c o m / w h a t - i s - a - b u s i n ess - r i s k . h t m . http://en.wikipedia.org/wiki/Liquidity_risk.
http://www.investorwords.com/1808/exchange_rate_risk.html http://www.investorwords.com/401/bank.html
http://www.advfn.com/money-words_term_401_bank.html h
tt p :// w w w .s li d es h a r e. n e t/ R C h e n g e t a / i m p or t a n c e - o f - b a n k s - i n - a
n - e c o n o m y h
tt p :// w w w .s li d es h a r e. n e t/ R C h e n g e t a / i m p or t a n c e - o f - b a n k s - i n - a
n - e c o n o m y
http://www.faa.gov/library/manuals/aviation/risk_management/ss_ha ndbook/media/ chap15_1200.pdf
http://en.wikipedia.org/wiki/Basel_Committee_on_Banking_Supervisi on http://en.wikipedia.org/wiki/Basel_I
http://en.wikipedia.org/wiki/Basel_II_Accord http://www.fdic.gov/regulations/laws/rules/6000- 2000.html#fdic6000appendixb.
List of appendices
Appendx
1: Tier 2 capital according to SBV’s regulation
59 Appendx
2: Risk weight ratio of on balance sheet assets 60 Appendx
3: Risk converted ratio off balance assets 62 Appendix 4: ABBank's CAR calculation in 2008 according to SBV's
63 regulation
Appendix 5: Seminar “ABBANK - Top Business VNR500:
Financial 67
Solutions for gold class”.
Appendix 6: Profit and loss report 68
Appendix 7: The awards achieved
69
List of appendices
Appendix 1: Tier 2 capital according to SBV’s regulation a/ 50% of the increased value of fixed asset which are revalued according to the provisions of law.
b/ 40% of the increased value of investment securities (including investment shares, contributed capital) which are revalued according to the provisions of law.
c/ Convertible bonds and preferred stocks issued by credit institution are issued by credit institution and meeting the following conditions
(i)Having an original maturity, the residual maturity of at least 5 years before conversion into ordinary shares;
(ii) Not being secured with assets of credit institutions concerned;
(iii)Credit institutions are not allowed to redeem them at owners’
request or on secondary market or may redeem them only when it is so approved in writing by State Bank;
(iv)Credit institutions may stop paying interests thereon and carrying forward cumulative interests to the subsequent year if the payment of interest thereon results in business losses in the year;
(v) In case of liquidation of credit institutions, owners of convertible bonds may receive payments only after credit institutions may make payments to all other owners of secured or unsecured debts;
(vi)Interest rate may be increased only after 5 years as from the date of insurance and only once throughout the period before d/ Other debt instruments meet the following terms
(i)Being debts whose creditors are second to other creditors; in all circumstances, these creditors may receive payments only after credit institutions may make payments to all other owners of secured or unsecured debts;
(ii)Having an original maturity of at least over 10 years;
(iii)Not being secured with assets of credit institutions concerned;
(iv)Credit institutions may stop paying interests thereon and
in business losses in the year;
(v)Creditors may be paid their immature debts by credit institutions after it is so approved in writing by State Bank;
(vi)Interest rate may be increased only after 5 years as from the date of insurance and only once throughout the term of debts.
General reserve, at most equal 1.25% of total risk credit assets.
Total
Limit when determining tier 2 capital
Total value of amounts stated at items c and d shall be at most equal to 50% of the value of tier 1 capital.
During the last 5 years before their maturity, to convert into ordinary shares the values of other debt instruments, and convertible bonds which are accounted as tier 2 capital must have their original value deducted by 20% each year.
Total value of tier 2 capital shall be at most equal to 100% of the value of tier 1 capital.(Source: Decree 457/2005/QD-NHNN.)
Appendix 2: Risk weight ratio of on balance sheet assets ON BALANCE SHEET ASSETS (Risk-adjusted assets = Book value x risk weight) Components
The group of assets which have risk weight of 0%
- Cash.
- Gold.
- Vietnam dong deposits maintained by State owned credit institutions at the Social Policy Bank under the Government’s Decree No. 78/2002/ NĐ-CP dated 4, Oct, 2002 on credits for the poor and other policy beneficiaries.
- Loans being financed capital, trust investments under trust contracts under which credit institutions enjoy only trust commission and bear no risks.
1 1
Discounts and rediscounts of valuable papers issued by credit institutions themselves.
Vietnam dong receivables secured with valuable papers issued by credit institutions themselves; receivables dully secured with cash items, savings books, escrow deposits or valuable papers issued by the Vietnamese Government or State Bank of Vietnam.
Receivables from central governments or central banks of OECD member states.
Receivables secured with securities of central government of OECD member states or guaranteed by central governments of OECD The group of assets which have risk weight of 20%
- Receivables from other credit institutions at home and abroad in each currency
- Receivables from provincial/municipal People's committees, foreign-currency receivables from the Vietnamese Government or Sate Bank of Vietnam
- Receivables secured with valuable papers issued by other credit institutions established in Vietnam
- Receivables from State Owned financial institutions; receivables secured with valuable papers issued by State Owned financial institutions.
- Precious metals (excluding gold), gems - Cash item in the process of collection.
- Receivables from IBRD, IADB, ADB, AfDB, EIB and EBRD and receivables guaranteed by these banks or secured with securities issued by these banks.
- Receivables from banks established in OECD member states receivables guaranteed by these banks.
- Receivables from securities companies established in OECD member states and comply with agreements on risk- basis capital The group of assets which have risk weight of 50%
- Investment in projects under contracts, stipulated in the Government's Decree No.79/2002/ND-CP of October 25,2002 on organization and operation of financial companies
- Receivables secured by real estate of borrowers.
The group of assets which have risk weight of 100%
- Charter capital allocations to subsidiary companies other than credit institutions, having the legal person status and practicing independent cost-accounting.
- Receivables from banks established in states other than OECD member states, with a residual maturity of under 1 year or more claims guaranteed by these banks, with the remaining term of 1 year and more.
- Receivables from central governments of states other than OECD member states, except for cases where loans as well as loan sources are in the national currencies of such states.
The group of assets which have risk weight of 150%
- Loan for securities investment
- Loans to security companies for securities trading
- Loans to enterprises which are governed by credit institution themselves
(Source: Decree 457/2005/QD-NHNN, Decision No. 03/2007/QD- NHNN.)
Appendix 3: Risk converted ratio off balance assets
Components Conversi
on factor Commitments to guarantee, finance clients
Irrevocable commitments in replacement of the form of direct provision of credits but carrying a risk level like direct provision of credits: loan guarantees, payment guarantees, standby L/C.
Irrevocable commitments toward the credit institutions'
100%
50%
make payment on others' behalf: contract performance guarantees, bidding guarantees Other commitments with an original term of 1 year or more
Trade-related commitments: irrevocable letters of credit, goods delivery guarantee Revocable L/C, Other unconditional revocable commitments 50%
20%
0%
(Source: Decree 457/2005/QD-NHNN, Decision No. 03/2007/QD- NHNN.)
Appendix 4: ABBank's CAR calculation in 2008 according to SBV's regulation
@ million VND Tier 1
Compone Boo
k value
a- Chartered capital 2,705,88
b- The chartered capital addition 1,164,16 c- The financial reserve fund 23,08 d- The operation development
investment fund 12,04
e- Undivided profit 617
Total 3,905,7
Tier 2: 95
Compone nts
Boo k value
Risk weigh
t categ
Risk- adjust
ed assets a- The increased value of fixed
asset which are revalued
according to the provisions of law. 50% 0
b- The increased value of
investment securities (including investment shares, contributed
capital) which are revalued 40% 0
c- Convertible bonds and preferred stocks issued by credit institution are issued by credit institution have
residual maturity within 6 years 100% 0
d- Convertible bonds have residual 40% 0
within 36 months
ủ- Other debts have residual
maturity within 6 years 100% 0
e- General reserve 24,35 100% 24,35
Total 24,35
On
balance sheet assets
Compone nts
Boo k value
Risk weigh
t categ
Risk- adjust
ed assets 1- Group of assets have RW ratio
of 0 % 1,361,1
50 0%
a- Cash 173,94 0%
Vietnam Dong deposits in SBV 714,62 0%
b- Gold 0%
c- Vietnam dong deposits
maintained by State owned credit institutions at the Social Policy Bank
under the Government’s Decree No. 0%
d- Loans being financed capital, trust investments under trust contracts under which credit institutions enjoy
only trust commission and bear no 1,05 0%
ủ- Vietnam dong receivables invested in bonds and valuable
papers issued by Vietnamese 412,29 0%
e-Discounts and rediscounts of valuable papers issued by credit
institutions themselves. 59,22 0%
h- Receivables from central
governments or central banks of 0%
I-Receivables secured with
securities of central government of OECD member states or
guaranteed by central governments 0%
2- The group of assets which
have risk weight of 20% 2,267,2
71 20% 453,4
a- Receivables from other credit 54
institutions at home and abroad in 2,267,27 20% 453,45
b- Receivables from
provincial/municipal People's committees, foreign-currency
receivables from the Vietnamese 20%
c- Receivables secured with valuable papers issued by other
credit institutions established in 20%
d- Receivables from State Owned financial institutions; receivables secured with valuable papers issued
by State Owned financial institutions. 20% 0
ủ- Precious metals (excluding gold), 20%
e- Cash item in the process of 20%
g- Receivables from IBRD, IADB, ADB, AfDB, EIB and EBRD and receivables guaranteed by these
banks or secured with securities 20%
h- Receivables from banks
established in OECD member states
receivables guaranteed by these 20%
j- Receivables from securities companies established in OECD member states and comply with agreements on risk- basis capital
management and supervision and 20%
k- Receivables from banks
established outside OECD member states with a residual maturity of under 1 year and receivables with a
residual maturity of under 1 year and 20%
3- The group of assets which
have risk weight of 50% 6,291,3
75 50% 3,145,6
88 a- Investment in projects under
contracts, stipulated in the Government's Decree
No.79/2002/ND-CP of October
25,2002 on organization and 50%
b- Receivables secured by real
estate of borrowers. 6,291,37 50% 3,145,68
4- The group of assets which
have risk weight of 100% 3,002,4 100 3,002,4 a- Charter capital allocations to
subsidiary companies which are not
credit institutions, have the legal 100
accounting.
b- Receivables from banks
established which are not OECD member states, have a residual maturity of under 1 year or more
claims guaranteed by these banks, 100 c- Receivables from central
governments of states which are not OECD member states, except for cases where loans as well as
loan sources are in the national 100
d- Real estates and other fixed assets 677,35 100 677,35
ủ- Other receivables 2,325,10 100 2,325,10
5- The group of assets which have risk weight of 150% and
250% 1,155,6 2,116,9
a- Loan for securities investment 188,38 250 470,95 b- Loans to security companies for
securities trading 195,00 250 487,50
c- Loans to enterprises which are
governed by credit institution 150
d- The contributed capital portion, joint- venture capital amount, shares purchased of investment funds, and/or other enterprises which
exceeds 15% of owned capital of 772,31 150 1,158,46
Total 14,077,9 8,718,5
Of
balance sheet assets
Components Boo
k valu
Conversi on factors
Risk weigh
t categ
Risk- adjust
ed assets a- Capital loan guarantees
nominated by government 95,85 100 0% 0
b- Import payment 126,43 100 100 126,43
c- Standby letters of credit issued
173,35 2
100 100 0
as capital loan guarantees d- Contract performance guarantees nominated by
government 50% 0% 0
đ- Bidding participation 97,84 50% 100 48,92