The process of building a healthy banking industry of Vietnam, promoting sustainable national economic development is marked by significant steps in restructuring the banking industry, reducing the number of weak banks, improving capacity of commercial banks especially in terms of asset quality, profitability, capital adequacy ratio (CAR) and governance capacity. In that framework, in 2017, the government issued Resolution 51/NQ-CP, which emphasized that by 2020, commercial banks will apply the CAR under Basel II standards.
The State Bank of Vietnam (SBV) has proactively developed a roadmap on implementing and applying Basel II for the banking system since 2014, including the selection of 10 banks to pilot the Basel II implementation.
Applying Basel II is an indispensable requirement for commercial banks in Vietnam. According to the provisions of Circular 41/2016/TT-NHNN, from January 1st 2020, banks will have to officially apply the CAR according to Basel II standards. The implementation of Basel II is considered a breakthrough restructuring solution which creates a foundation for safety, healthy development and raising the competitiveness of Vietnam’s banking system in the increasing integration trend.
After Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank) and Vietnam International Commercial Joint Stock Bank (VIB) have received approval from the SBV’s Governor to apply Basle II one year ahead of time, the banking system has witnessed significant changes of private joint stock banks and some foreign banks in the race to apply Basel II.
The deadline stipulated in Circular 41 will come in 20 days. Up to now, 17 banks have applied the first pillar of the Basel II international risk management standards.
It is easy to see that many banks, including large banks such as Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank), Commercial Joint Stock Bank for Agriculture and Rural Development of Vietnam (Agribank), Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank), etc. are not ready to apply Basel II. At the same time, so far, no bank has announced the completion of all three pillars of Basel II, other than just completed either pillar 1 (minimum CAR) or pillar 1 and pillar 3 (transparency and market discipline).
With the issuance of Circular 41 in 2016 and Circular 13 in 2018, the SBV has completed the legal framework to carry out Basel II by a standard method with all three pillars, at the same time make an appropriate roadmap to achieve the objectives of applying standards and international practices set by the government and National Assembly.
The Basel II capital standards prescribed in Circular 41/2016-NHNN and Circular 13/2018/TT-NHNN including Tier 1 which focuses on measuring and ensuring the minimum CAR. The second pillar of Basel II is an Internal Capital Adequacy Assessment Process (ICAAP). In which, the steps to carry out pillar 2 includes ICAAP governance structure, critical risk assessment, endurance test, capital planning, capital adequacy monitoring and process review. Applying ICAAP in business operation includes capital allocation according to business strategy, risk-adjusted return on capital (RAROC) and risk-based valuation. With pillar three focusing in information transparency and disclosure, commercial banks need to publish information periodically and transparently. The content of information should meet the minimum requirements of the SBV, and refer to the best standards in the world.
The main items of information disclosure include Overview: (introduction about Basel II and content of information disclosure; CAR: qualitative and quantitative factors, governance and calculation method; equity: structure and status; credit risks: credit risk management, credit risk-bearing assets, information on the use of credit rating, risk-bearing assets by industry, credit risk minimisation; operational risks; market risks; general information: introduction of the organisation, its safety ratios, method of information disclosure and commitments of the board of leaders.
Difficulties and challenges for banks when promoting Basel II
To successfully carry out Basel II, the Vietnam’s banking system if facing numerous difficulties and challenges.
From the perspective of commercial banks, it is necessary to have the absolute consensus of shareholders, the Board of directors, Board of Supervisors, and the Executive Board in compliance with Basel II towards a modern, advanced and transparent corporate and risk governance.
The investment in Basel II and Basel II needs to be done seriously and methodically. It is expected that this roadmap is implemented in no less than eight years, with a significant amount of costs; but in return, it will bring about sustainable business efficiency.
Banks also need to ensure sufficient capital; ensure a clean and reliable database; ensure strong technology systems with good integration, and qualified and reliable CAR measurement tools. In addition, banks also need to have qualified human resources with professional knowledge, risk knowledge and technology to meet the integration requirements.
From the perspective of a regulatory, there is a need for legal corridors for new management regulations in integration process, such as mandatory regulation on credit rating, derivatives product regulation, and International financial reporting standard (IFRS), etc. In addition, there should be mechanism to encourage and gradually remove administration on credit growth room, network development conditions, etc. for banks that comply with all three pillars of Basel II and early apply Basel III.
According to information, some banks have started investing in the implementation of pillar 2 and pillar 3 of Basel II and the first bank in the system to announce the completion of three pillars of Basel II is expected to be seen before December 31st 2019.
If there is a bank to complete all three pillars of Basel II in 2019, one year earlier than the deadline set by the SBV, that will be an encouraging effort which contributes to setting new development milestones in accordance with international standards, ensuring the transparent, safe and sustainable of the Vietnam’s banking system.
