The concept of contagions and the role of network structure in Vietnam financial regulations are carried out via limiting size of ownership links and of individual loans. In
the period of 2006 – 2011 they are often circumvented via the formation of proxy enterprises.
In March 2012, the Prime Minister issued Decision 254 (2012) to address the high level of NPLs. The plan is to unwind ownership structure of commercial banks and to improve banks resiliency, with guidance to enforce prudent ratios and restructure sub-standard CIs.
A noticeable point is the decision to put the SOCBs at the center stage by demanding that SOCBs expand their directive position and enforce more control on the credit market. This is a questionable approach and implies that SBV is not willing to relinquish power to embrace market principles. It is also against macroprudential principles since it encourages larger and more interconnected SOCBs with high potential of having moral hazard.
Not stopping with Decision 254, SBV issued Circular 02 (2013)36 – which came into effect in June 2013 – to improve asset classification, risk provisioning and utilization of provisioning by credit institutions and foreign bank branches. (Campbell and Pham, 2014).
It requires banks to calculate NPLs using formulas closer to international standards.
However, its implementation was delayed by a year - extended to 2015 by Circular 09 (2015) - due to the lack of readiness of commercial banks. On the bright side, Circular 09 will be more stringent than Circular 02, particularly with regards to corporate bonds and periodic collateral assessments to ensure that values are suitable with market values when calculating the specific amount of setting up provision (ADB, 2014).
Contagions and network structure are also being addressed in Circular 13 and its successor - Circular 36. In Circular 36, there are articles pointing at limiting exposures, which including: restriction on shareholders lending (addressing misaligned incentives);
prohibition of lending to board members, board members’ related entities and owning of unlisted bonds (addressing moral hazard); limitations on maximum loans to single customer and groups of customers (addressing limitation on large exposures); limitation on share purchasing and capital contribution (addressing intra-financial exposures).
In general, the reforms have done well at addressing static and easy to calculate exposures (shareholding ratios, NPLs, etc.) inside the financial system. There are good coverage and
36 Replacing Decision 493 (2005)
detailed operational guidance. On the other hand, once again there is no new insight provided. Macroprudential risk dimensions and related instruments was not mentioned throughout the new regulations, including: dynamic nature of exposures due to complementary behavior, homogeneity of banking sector, market guidance in case of heighten risk (i.e. countervail fire-sales and haircuts effects), measurement of connectedness and contagion level/risk, SIFIs externalities, etc.
The main way to increase network robustness is segmenting and diversifying. Current reforms’ separation of ownership structure between banks, securities companies and insurance companies is a standard practice. Because non-bank FIs has different risk nature than banks, they can help absorb certain type of shock from affecting the real economy.
However, the emphasis on banks and the relative weak securities and insurance sectors still indicates suboptimal market structure.
Even with the recent banking reforms with merge & acquisition activities and government takeovers, the general structure and revenue model of commercial banks have had few changes to their skewness. Banks still rely much on interest rates and consumer deposits as the main source of profit (KPMG, 2013).
The recent reforms also have the gap of identifying SIFIs inside Vietnam banking system, which can be unfavorable due to the political incentives of maintaining directional credit to SOEs sector.
Figure 4.1: Understanding network topology is key in macroprudential policy.
Source: Author’s compilation.
Due to the lack of information (e.g. market state) CI’s adjustments – when looking from the network perspectives – may not be optimal. Therefore, accurate market indicators are needed to guide CIs’ adjustments37. By providing accurate indicators, regulators can increase the robustness of the system without having to intervene much in market structure or individual CIs activities – which can be very costly. In other words, it is needed to reduce information asymmetry between market agents. There is no mention in the reforms about “beacon” indicators or the role of SBV (or another bureau) to create such one. The in-effect indicators (interest rates, reserves ratio, exchanges, NPLs ratio, CAR, etc.) are not able to reflect fully and accurately market condition and context specific condition (sectoral, bilateral) of CIs. Thus, these indicators can only guide operational activities and have little effect on strategic direction of CIs.
37Like a beacon in marine navigation. In economic term, it can be considered as a way to reduce information asymmetry.
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