Chapter 3: Financial instabilities and systemic risks
3.3. Systemic stress materialization in financial sector
Later in this period, the aforementioned risks has manifested into real difficulties in the banking sector. As noted, there were not cascading failures in the case of Vietnam, which can be accounted to SBV intervention of providing liquidity for those banks in troubles via refinancing and OMO channel (Nguyễn Hoài, 2011).
3.3.1. Liquidity shortage
Early 2008, many commercial banks have faced with unprecedented liquidity shortage (Nguyễn An Nguyên, 2008) that stemmed from the preceding rapid credit expansion period. This liquidity shortage was resolved quickly with money supply from SBV via OMO.
In December 2008, the Vietnam government issued a fiscal stimulus package, valued roughly at VND 100 trillion (USD 6 billion); accounted for 6.8% of the GDP. The announced motivation was to compensate for the effects of the global economic recession, however, it is more likely that banks are put into support mode due to credit contraction that arise from domestic issues. In January 2009, the government decided27 to use VND 17
26A configuration in which all liabilities of a bank are held by a single counterparty (Acemoglu et.
al, 2013)
27 by Decision No. 131/QD-TTg
trillion (USD 1 billion) to subsidies loans interest rates28. The VND 17 trillion subsidy can help inject VND 600 trillion (USD 35 billion) into the economy within a year (Le Thi Thuy Van, 2010).
The relative large stimulus package and the prior action arguably strengthen the belief of domestic FIs that the government is willing to intervene to rescue the financial sector.
Figure 3.5: Net credit between CIs. Showing large SOCBs acted as credit providers to JSCBs.
Source: VELP (2012), author’s adaptation.
28 “Under the Decision, short-term loan contracts with maximum duration of eight months and signed and disbursed from 1 February 2009 to 31 December 2009 will get interest rate assistance of four percent per annum. The interest-rate assistance is offered to firms in business and manufacturing sectors and not for companies in services, education, social, health, and cultural and financial sectors. The package focuses on investment stimulus, is to ease the firms’ difficulties, create new jobs and then increase domestic consumption”. Source: Le Thi Thuy Van (2010)
SOCBs
At the end of 2009, most of JSCBs once again suffered shortage of liquidity – this time on a larger scale. SBV was not able to quickly suppress the shortage anymore. Interest rate of interbank lending spiked up to 30% and every bank was competing for liquidity without regarding maximum interest rate limit issued by SBV.
In the face of mounting distress, adaptive policies (e.g. time-varying buffers and time- varying provisioning practices) as mentioned in [Appendix 14] could be valuable tools. At these moments, regulators also need tools to analyze the amplification mechanisms of distress in order to act in a prudent manner. Besides, assets prices also need to be monitored closely due to potential fire sales.
3.3.2. Non-performing loans
Besides liquidity shortage – which can be considered as the materialization of liquidity risk, NPLs can be considered as the materialization of credit risk in the financial sector.
For the loans that adhered to bank policies, the high level of NPLs comes from the collapse in the value of collateral asset related to securities and real estate. For the other part, NPLs comes from directed credit (SOEs), cross-ownership exploitation, and ordinary non- payments. The large amount of SOEs’ NPLs – which composes 53% of the total (ADB, 2014) – highlights the severity of directed loans. In the two main compositions of NPLs, the former of NPLs indicates the materialization of fire-sales externalities – when market dysfunction (low rate of transaction, reduced prices) may cause credit risk. The latter indicates the credit crunch due to deterioration of balance sheet indicators (due to non- payment of debtors). Note that these two factors reinforce each other during the period of instabilities.
Reported level of Vietnam’s non-performing loans reported by SBV and commercial banks consistently appears to be under control. However, their true volume is likely to be much higher than reported figures. Fitch Ratings NPL ratio recalculation based on IAS/IFRS in 2011 was 13% (VCBS, 2011). Furthermore, NPLs contributed to credit risk not only by its magnitude but also by its persistence. In February 2014 Moody’s estimated that non- performing loans in the country’s banking system still consisted of at least 15% of its total assets. It is more than three times the central bank’s official ratio of 4.7%. “Capital
remains inadequate to absorb the extent of potential losses stemming from pervasive weaknesses in asset quality,” said Gene Fang, Moody’s vice-president.
Figure 3.6: NPLs ratio of commercial banks. Showing adjustments after Circular 13 in effect.
Source: FETP (2013)
NPL is a component in the core set of Financial Soundness Indicators for deposit-taking institutions (IMF, 2006). It is used to devise capital adequacy/asset quality29 of FIs and to measure contagions in the case of distress.
The prompt identification of impairment via NPLs is crucial for the identification of vulnerabilities. Due to its importance, macroprudential guides took efforts to standardize the calculation of non-performing loans (NPLs) and other impaired assets (Agresti, Baudino and Poloni, 2013). The general consensus for such calculation standard is IFRS.
In Vietnam, differences between VAS and IAS/IFRS are posing as a major obstacle for reliable macroprudential analysis.
29Respectively: NPLs net of provisions to capital/NPLs to total gross loans Source: IMF (2006)
3.3.3. Real-economy spillovers
Since 2008, Vietnam GDP growth rate went over 6% only briefly and constantly dipped in the range of 5%. When compared to prior periods and the trajectories of Asia countries at the same development phase (e.g. China, Taiwan, Korea, Malaysia, etc.) it is arguable that Vietnam economy is under-performing.
According to VCCI, the number of private companies stopped operating or went bankrupt during the period of 2011-2012 is 107.000 companies, equal to the total of previous 12 years.
A survey by GSO/IRD-DIAL30 (2010) concludes that informal sector suffered significantly from the difficult economic situation in 2008 and 2009. In HCMC, clear recessive patterns are observed, with adverse consequences on household well being and poverty.
In September 2012, Standard & Poor’s revised Vietnam’s BICRA score [Appendix 3] from
“Group 10” (highest risk) to “Group 9”. Showing improved banking system outlook, but it was (and still be) in the group of highest risk level in terms of both economic and industry risk.
The real economy’s hardships can be explained partially by the propagation of credit contraction in the financial network that makes access to capital harder.
It is also noticeable that the instabilities in Vietnam has been controlled successfully by the government in the sense that it did not create a wide spread chain of default in financial institutions. Thanks to that, the propagation of shock in the financial system was less visibly demonstrated. However, we can see that certain kinds of exposures between financial institutions do exist (FETP, 2013); in consequences, there are arguably interconnectedness externalities in the financial system. This situation implies that to prepare for the growing of the financial market, exposures relations between CIs must be understood.
30GSO: General Statisic Office. IRD-DIAL: Institut de recherche pour le développement – a French research organisation, original and unique on the European development research scene.