Applying Basel II is an indispensable requirement for Vietnamese commercial banks. According to the provisions of Circular 41/2016/TT-NHNN (Circular 41), from January 1, 2020, banks would have to officially apply capital adequacy ratios (CAR) according to Basel II standards.
According to banking experts, the implementation of Basel II also helped enhance its reputation, and had the opportunity to be facilitated by the regulator to create favourable conditions for credit growth and network expansion. Therefore, not only with the pilot banks deployed, but most of the banks are making great efforts to reach the standards of Basel II.
Currently, there are nine banks recognised by the State Bank of Vietnam (SBV) to meet this standard: Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam International Commercial Joint Stock Bank (VIB), Orient Commercial Joint Stock Bank (OCB), Asia Commercial Joint Stock Bank (ACB), Military Commercial Joint Stock Bank (MB), Tien Phong Commercial Joint Stock Bank (TPBank), Vietnam Prosperity Joint-Stock Commercial Bank (VPBank), Vietnam Technological and Commercial Joint-Stock Bank (Techcombank), Vietnam Maritime JointStock Commercial Bank (MSB), in which two names were not in the list of 10 pilot banks, OCB and TPBank.
In addition to these nine banks, Viet Capital Commercial Joint Stock Bank (Viet Capital Bank) recently announced that it had submitted to SBV for permission to apply Basel II earlier than expected by the end of Q3/2019. The calculation of CAR according to Basel II standard method was completed at the project implementation level. Currently, this bank continues to carry out the internal capital adequacy assessment process (ICAAP) as required by Circular 13/2018/TT-NHNN. Earlier in July 2019, Viet Capital Bank and consulting partner KPMG assessed the acceptance according to the international inspection process and decided to put the official operation model from the beginning of August 2019.
In early July, Sai Gon Thuong Tin Commercial Joint Stock Bank (Sacombank) also signed a contract with PwC Co., Ltd (Vietnam) to launch the project ” Upgrade the pricing model and build the required capital calculation model for market risk”. The goal was to improve risk management capacity, help this bank comply with the regulations of SBV and accelerate the application of Basel II. The project is expected to be completed in February 2020. National Citizen Commercial Joint Stock Bank (NCB) in June also signed a contract with Joint Venture Blackice and Raffles Vietnam to carry out Project Circular 41 and Basel II.
However, with the current developments, banks could be fail to comply with Circular 41 by the deadline set by early 2020. According to Bui Quang Tin, banking expert, there were three key points in Basel II, in which the most difficult for Vietnamese banks was CAR. It was more difficult to raise capital in the current condition of stock market. Banks that wanted to sell capital to foreign investors was also not a simple task.
In addition, to meet CAR, banks had to adjust and restructure the credit portfolio, especially in the context when SBV increasingly raised the risk ratio in real estate business loansa source of profits for banks.
Regarding the capital increase, banks could carry out a variety of solutions to increase capital with different implementation time. But experts said that the most important thing was how to use the increased capital to achieve the best efficiency.
Accordingly, the difficulty was not only in the total capital or total assets but also how to comply with Circular 41. Market risk of total assets was a risk difficult to measure, that was a multivariate function. Considering both operational risks and market risks would also give banks the problem of how to control these two categories, especially the trading portfolio had potential market risks and partner credit risks.
Tin said that the information technology and data must be selected to ensure quality in building risk measurement models, to set up management reporting systems for risk monitoring and to make business decisions. That was a bottleneck that made it difficult for banks.
Sharing the same opinion, Nguyen Tri Hieu also noticed that in addition to the formula, the huge problem was having to collect loan data for years before giving the bankruptcy probability to customers.
If the data was inconsistent, the problem of collecting data to calculate a probability of bankruptcy was very difficult for banks, especially with small banks because their data was not complete, the debt classification was not consistent.
In fact, in many Vietnamese banks, data is still mainly in the form of paper records, not yet codified by software, or updated when stored on different systems.
In addition to Circular 41, banks also need to focus on Circular 13/2018/TT-NHNN regulating the internal control system of banks. It requires banks to build a risk management system from the board of directors to the executive board, all levels of an organisation, and build three lines of risk prevention.
In this regard, Luu Trung Thai, Chief Executive Officer (CEO) of MB, said that the application of technology was a key requirement in modern risk management. Banks’ risk appetite should be documented to guide business operations in line with business objectives and strategies, to strengthen and enhance the risk management culture to all employees.
Il Dong Kwon, deputy CEO of Consulting firm Oliver Wyman also found that in the process of evaluating internal safety capital, the supervision of the board of directors and the leadership was extremely important. They must understand the nature and extent of the critical risks to devise solutions, establish policies and procedures to harmonise profits and risks.
