The 1988 Basel Accord Basel I, which stated a set of minimum capital requirements for banks has been successfully enforced in many countries, including Vietnam.. When assessing Basel II
OVERVIEW ABOUT THE BASEL II ACCORD
Overview about the Basel Accords and Basel II
1.1.1 History of the Basel Accords
In 1974, the Basel Committee on Banking Supervision (BCBS) was formed in Basel, Switzerland, by central banks and regulatory authorities from the Group of Ten (G10) countries to address the risk of banking crises, particularly following the chaotic liquidation of Germany's Herstatt Bank Between 1965 and 1981, the U.S experienced around eight major bank bankruptcies amid a period of extensive global lending and rising external indebtedness, heightening the risk of significant international bank failures due to inadequate security measures.
To stop the crisis, the Basel Committee on Banking supervision was founded
The committee is comprised of representatives from various countries, including Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States The Basel Committee on Banking Supervision (BCBS) operates its own governance structures and agendas, similar to other committees, with 45 members representing central banks and bank supervisors across 28 jurisdictions Members convene for regular meetings three to four times annually.
The Basel Committee on Banking Supervision (BCBS) does not have supervisory authority and its decisions do not impose legal or compliance obligations for banking oversight Instead, BCBS focuses on developing and publishing standards and guidelines for financial institutions to implement within their national banking frameworks Acting as a forum for standard development, the committee aims to enhance financial stability by improving supervisory guidelines and providing regulations that assist banks in maintaining capital adequacy and stabilizing the overall banking system.
In 1988, the Basel Committee on Banking Supervision (BCBS) introduced the 1988 Basel Accord (Basel I) to the G-10 countries, establishing minimum capital requirements for banks, which were officially enforced in 1992 Since then, BCBS has developed three series of Basel Accords—Basel I, II, and III—serving as essential guidelines for financial institutions to ensure they maintain adequate capital to meet obligations and absorb unexpected losses These accords offer comprehensive recommendations on banking regulations concerning capital risk, market risk, and operational risk.
The Basel I Accord, established in 1988, focuses on credit risk and the risk-weighting of assets, categorizing bank assets into five risk levels (0%, 10%, 20%, 50%, and 100%) It mandates that internationally active banks maintain a capital ratio of 8% against their risk-weighted assets (RWA) and requires the reporting of off-balance-sheet items, including letters of credit and derivatives Today, more than 100 countries, in addition to the G-10 members, have adopted or aligned their banking regulations with the principles of Basel I.
In June 2004, the Basel II Accord was introduced to enhance international banking standards regarding the capital banks must maintain to mitigate financial and operational risks As an upgraded version of its predecessor, Basel II focuses on three key areas: minimum capital requirements, supervisory review, and market discipline, collectively known as the "three pillars." By 2015, a survey by the Financial Stability Institute revealed that 95 national regulators planned to implement Basel II in various forms Despite its widespread adoption, Basel II faced criticism for exacerbating the global financial crisis.
In response to the shortcomings revealed by the 2008 Lehman Brothers collapse, the Basel Committee on Banking Supervision (BCBS) introduced Basel III, an enhanced version of previous regulations This updated accord builds on the foundational three pillars of Basel II while incorporating additional requirements aimed at strengthening bank resilience and stability.
7 liquidity and decreasing bank leverage New requirements also appear in the new accord for “systemically important banks”, and for financial institutions considered
“too big to fail” Basel implementation initiated in January 2013 and was scheduled until 2015 However, the process was prolonged to March 2019 and again until January 2022
Basel I, established by the Basel Committee on Banking Supervision (BCBS) in 1988, is a pivotal set of international banking regulations designed to mitigate credit risk through a structured bank asset classification system This accord outlines minimum capital requirements for banks, serving two primary objectives: enhancing stability within the international banking system and promoting a fair and consistent framework that reduces competitive disparities among globally operating banks.
Basel I's main accomplishment was establishing a clear definition of bank capital and the capital ratio This initial framework set the foundation for implementing minimum capital adequacy standards for banks and governments worldwide, addressing the lack of a unified method to assess a bank's capital.
The 1988 Basel Accord prioritizes credit risk and mandates appropriate asset risk-weighting for banks International banks must maintain a capital ratio of 8% against their risk-weighted assets, establishing a crucial standard for capital adequacy assessment.
Capital adequacy ratio (CAR) = Capital
Banks are deemed secure when their Capital Adequacy Ratio (CAR) exceeds 10%, while a CAR above 8% indicates adequate capital levels If a bank's CAR falls below 8%, it risks lacking sufficient reserves to absorb potential losses.
Under Basel I, a bank’s capital is defined of two capital tiers:
+ Tier 1 capital, or “core capital”, includes book value of common stock, non-cumulative perpetual preferred stock, and published reserves from post-tax retained earnings;
Tier 2 capital, also known as supplementary capital, comprises lower-quality financial instruments that are subject to specific conditions, including general loan loss reserves, long-term subordinated debt, and cumulative or redeemable preferred stock Importantly, a bank can only include a maximum of 50% of its total capital as Tier 2 capital.
In terms of risk-weighted assets, Basel I only mentioned credit risk Each class of asset has an associated risk weight
Risk-weighted assets (RWA) Basel I = Asset class * Risk weight
Banks categorize their assets into five risk categories: 0%, 20%, 50%, and 100%, based on the nature of the debtor The 0% risk category includes cash, central bank and government debt, as well as debt from OECD governments The 20% risk category encompasses development bank debt, OECD bank or securities firm debt, non-OECD bank debt with a maturity of less than one year, non-OECD public sector debt, and cash in collection Assets classified under the 50% risk category consist of municipal revenue bonds and residential mortgages Finally, the 100% risk category comprises private sector debt, non-OECD bank debt with a maturity of over one year, real estate, plant and equipment, and capital instruments issued by other banks.
Between 1993 and 1996, the Basel Committee on Banking Supervision (BCBS) updated capital requirements to address market risk alongside credit risk This led to the introduction of a new tool for assessing banks' market risk: Value at Risk (VaR).
CapitalRisk-weighted exposures (credit and market risks) ≥ 8%
However, because of evident weaknesses, Basel I still received criticisms on multiple grounds The main weaknesses include the followings:
The restricted classification of credit risk leads to insufficient risk sensitivity, as there are only four primary risk weightings: 0%, 20%, 50%, and 100% This limitation means that a corporate loan to a highly leveraged small business requires the same regulatory capital as a loan to a large corporation with an AAA rating, since both are assigned a risk weighting of 100%.
New elements of Basel II compared to Basel I
Compared to Basel I, Basel II’s three reinforcing pillars show an expanded range of regulations and guidelines that provide solutions for the deficiencies from the first Basel accord
Under Pillar 1, the capital adequacy ratio remains a minimum of 8%, determined by the ratio of a bank's equity to its assets To enhance risk assessment, Basel II requires banks to weight their assets according to three key risks: credit risk, market risk, and operational risk.
Pillar 2 of the supervisory process for banks encompasses four key elements Firstly, it focuses on the internal performance assessment procedures related to the bank's equity Secondly, the supervisory authority evaluates the assessment methods employed by the banks Lastly, this pillar aims to enhance the overall effectiveness of the bank's operations and risk management practices.
16 supervisory dialogue And the fourth element is about rapid intervention to prevent the decline in capital
Pillar 3 emphasizes the importance of market discipline by mandating the Central Bank and the public to establish detailed reporting requirements This regulation necessitates that national banks publish information biannually, while internationally active banks are required to report quarterly.
The Basel II accord introduces new elements by expanding the range of risk weights and diversifying credit risk mitigation instruments, such as credit default swaps and credit linked notes It emphasizes the use of client ratings and internal models to assess expected losses, reflecting a broader risk profile While credit risk remains a significant concern due to its potential impact on banking operations, other risks, including exchange rate volatility, interest rate fluctuations, and human or technical errors, must also be adequately addressed Consequently, capital requirements should be appropriately calculated to account for these varied risks.
The Basel II accord outlines three methods for assessing credit risk The Standardized Approach (SA) resembles the previous Basel I framework but incorporates different risk weights and allows the use of financial instruments to mitigate credit risk and lower capital requirements The Foundation Internal Ratings-Based (F-IRB) approach permits banks to utilize their internal rating systems, with loss estimates during counterparty insolvency provided by the supervisory authority Meanwhile, the Advanced Internal Ratings-Based (A-IRB) approach enables banks to calculate capital requirements based on their own models, subject to supervisory approval.
The two accords exhibit notable differences in risk-sharing arrangements, as illustrated in Table 1, and the new methodology for determining capital requirements for credit risk significantly impacts the Basel I standards.
− Consideration of the ratings provided by external credit assessment institutions;
− Diversification of eligible technique categories of mitigation of credit risk;
− Possible reduction of its own funds, offset by the reduced capital requirements (8%)
Table 1.1 Differences between Basel I and Basel II accords in terms of risk shares
Credit risk associated to the local exposures Basel I Basel II
Central governments, central banks and international financial institutions similar (for exposures denominated and funded in local currency)
Central governments, central banks and international financial institutions similar (for exposures other than the ones denominated and funded in local currency)
Credit institutions - short-term exposures financed and expressed in local currency 20% 20%
Credit institutions - long-term exposures 20% 50%
SSIF - short term exposures financed and expressed in local currency 100% 20%
Exposures towards institutions in the group 20-100% 20-100%
Entities of the public sector 100% 100%
Retail exposures (includes exposures to population) 100% 75%
Loans secured by commercial properties 100% 100%
Loans secured by real estate 50% 35%
Exposure with high risk (investment in shares in unlisted entities) 100% 150%
Source: processing after Georgescu, F., - “The preparation stage for applying the Basel II regulations in the Romanian banking system” – FINMEDIA – Risk Management in the
Basel II perspective – Third Edition, February 22, 2006
OVERVIEW ABOUT BASEL II IMPLEMENTATION IN VIETNAMESE
Overview about Basel II implementation in Vietnam
2.1.1 Regulations and guidelines on Basel II implementation by SBV
To facilitate the Basel II project, the State Bank of Vietnam (SBV) introduced Circular No 41/2016/TT-NHNN, which establishes the capital adequacy ratio for credit institutions based on the standardized approach of Basel II Additionally, Circular No 13/2018/TT-NHNN was issued to regulate the internal control systems of commercial banks, thereby providing a comprehensive legal framework for the effective implementation of all three pillars of Basel II.
Accordingly, Circular 41 stipulates that equity must be allocated to ensure safety for a bank’s risk assets Those assets are strictly calculated, with risk factors for each asset
Circular 41 has closely aligned the capital adequacy ratio with the risk management regulations outlined in Basel II, yet it is important to note that Circular 41 does not encompass the full scope of Basel II, which features more extensive and intricate regulations Nonetheless, Circular 41 establishes the capital adequacy ratio as a fundamental aspect, mirroring the primary focus of Basel II.
Over the years, legal documents from the State Bank of Vietnam (SBV) have referenced various articles of the Basel Accord, highlighting capital adequacy as a key criterion To illustrate the evolution of SBV's Capital Adequacy Ratio (CAR) requirements and to demonstrate how Circular 41 aligns closely with Basel II standards, the following table summarizes the main CAR requirements for Vietnamese commercial banks from 2005 to 2016.
Table 2.1 Key CAR requirements in Vietnamese commercial banks
− Risk weighted asset ratio in real estate increases from 150% to 200%
− CAR ≥ 8%, including credit risk, operational risk, and market risk
Source: Summarized from Decision No 457, Circular No.13, 36, 06, 41
Circulars 13, 36, and 06 outline the complete implementation of Basel I and part of Basel II, but Circular No 41/2016/TT-NHNN, issued by the State Bank of Vietnam (SBV) in 2016, aligns most closely with Basel II standards regarding capital adequacy ratios for commercial banks and foreign bank branches This circular permits qualified institutions to adopt its regulations prior to the official effective date, facilitating a smoother transition to Basel II compliance.
For Circular 41, the CAR ratio is determined by the following formula:
- KOR: Regulatory capital for operational risk;
- KMR: Regulatory capital for market risk
Circular 41/2016/TT-NHNN introduces significant changes in the calculation of risk-weighted assets compared to its predecessor, Circular 36/2014/TT-NHNN Unlike Circular 36, which primarily addressed credit risk, Circular 41 expands the scope to encompass market risk and operational risk alongside credit risk, reflecting a more comprehensive approach to risk assessment for banks.
Circular 13/2018/TT-NHNN outlines key updates for the implementation of Basel II Pillar 2, emphasizing that banks can tailor qualitative principles to align with their growth and risk appetite For quantitative factors, the State Bank of Vietnam (SBV) permits banks to select approaches that match their growth levels Additionally, commercial banks have the option to adopt a uniform method for calculating capital across various risk types as detailed in Circular 41 or to utilize their own methodologies.
In line with Pillar 3 of Basel II, the State Bank of Vietnam (SBV) has established requirements for information disclosure as outlined in Circular 41 This ensures transparency and easy access to relevant information for individuals and organizations The disclosed information encompasses both qualitative and quantitative aspects, including details on capital structure, capital adequacy, and the bank's sensitivity to credit, market, and operational risks, as well as the assessment processes for each risk category.
The issuance of these circulars reflects the State Bank of Vietnam's commitment to enhancing risk management and banking operational safety standards in line with international practices This initiative paves the way for Vietnamese banks to access the international capital market at lower costs, thereby boosting Vietnam's credibility with global financial institutions, investors, and international organizations.
2.1.2 Overall implementation of Basel II in Vietnamese commericial banks
In early 2016, the State Bank of Vietnam (SBV) approved the implementation of Basel II in two phases The first phase, set to be completed by 2018, involves 10 pilot banks: BIDV, VietinBank, Vietcombank, Techcombank, ACB, VPBank, MB, Maritime Bank, Sacombank, and VIB The second phase will extend Basel II implementation to all remaining credit institutions in Vietnam.
On December 30, 2016, the State Bank of Vietnam (SBV) issued Circular No 41/2016/TT-NHNN, which established the capital adequacy ratio requirements for banks and branches in Vietnam This circular mandates that all banks must adhere to Basel II regulations by 2020 However, many banks are accelerating their compliance efforts to take advantage of SBV's incentives for early adoption of Basel II standards Notably, banks that meet these standards ahead of schedule will benefit from exemptions from the general credit limits imposed on the banking system, allowing them greater autonomy in determining their credit growth.
At the close of 2018, VCB and VIB became the first banks officially authorized by the SBV to implement Circular 41 They announced their commitment to continue with the plans for Circular 13 and intended to apply for early implementation in 2019 Additionally, OCB, despite not being among the 10 pilot banks, received SBV's permission to adopt Circular 41.
As of April 2019, a total of seven Vietnamese banks, including TPBank, MB, VPBank, and ACB, have received approval to implement Basel II standards ahead of the official effective date outlined in Circular 41 Additionally, other banks are in the process of finalizing their compliance with Basel II requirements Notably, HDBank has submitted its application for Basel II standards prior to January 2019, and it is expected to receive approval to apply Circular 41 by the end of the second quarter of 2019.
In September 2014, BIDV's Chairman of the Board of Directors, Mr Tran Bac Ha, approved the establishment of a Project Management Office (PMO) to effectively implement Basel II regulations.
In March 2015, BIDV established a PMO to review GAP analysis and develop a
In March 2015, BIDV initiated the implementation of its Master Plan for Basel II, known as GAP & MP Basel II, marking a significant step in its Basel II project series, which is expected to unfold over the next 5-7 years To support this critical initiative, BIDV has partnered with PricewaterhouseCoopers Vietnam Co., Ltd (PwC), leveraging their expertise to ensure a successful transition to Basel II standards.
Several banks, such as Techcombank, have set up the Basel PMO to ensure direct reporting to the Head of Risk Management regarding the implementation of Basel II Meanwhile, Sacombank is progressively fulfilling the requirements for developing a comprehensive risk management system and has formed a committee along with project teams to facilitate the execution of Basel II.
THE STATUS OF BASEL II IMPLEMENTATION IN
Overview about Vietcombank
The Joint Stock Commercial Bank for Foreign Trade of Vietnam, formerly known as the Bank for Foreign Trade of Vietnam, was established in 1963, originating from the Foreign Exchange Bureau of the State Bank of Vietnam On June 2, 2008, Vietcombank officially commenced operations following a successful initial public offering (IPO), becoming the first state commercial bank to undergo pilot privatization.
Ho Chi Minh Stock Exchange (HOSE) on June 30 th , 2009
With over fifty years of development, Vietcombank has emerged as one of Vietnam's largest banks and the most capitalized institution in the Vietnamese securities market The bank is essential for maintaining the stability and growth of the domestic economy while also providing significant support to the regional and global financial community.
The bank employs over 15,000 staff across more than 500 branches, transaction offices, representative offices, and member units both domestically and internationally Its operations are anchored by a central Head Office located in Hanoi and include 101 branches.
395 transaction offices nationwide, 03 subsidiaries in Vietnam, 01 representative office in Ho Chi Minh city, 02 subsidiaries and 01 representative office overseas, and 04 joint venture and affiliated companies
Vietcombank has established an extensive Autobank system featuring over 2,300 ATMs and 43,000 points of sale (POS) across the country Additionally, the bank's operations are supported by a robust network of more than 1,726 correspondent banks located in 158 countries and territories worldwide.
Vietnam had encouraged economic integration with the international economy since
Since 1995, the Vietnamese banking industry has experienced expanded operational opportunities for commercial banks However, global integration has posed challenges, compelling Vietnamese banks to enhance their capabilities and adapt to a more competitive market Vietcombank (VCB) is actively participating in this integration process With over 50 years of dedication, VCB has focused on sustainable development, significantly contributing to the overall growth of the Vietnamese economy.
VCB aims to be the leading bank in Vietnam and rank among the top 100 banks in Asia and the top 300 financial banking groups globally, adhering to the highest international management standards To achieve this vision, VCB has adopted the action motto of Transformation, Efficiency, and Sustainability, while emphasizing Innovation, Discipline, and Responsibility in its corporate governance practices.
3.1.2 Current operation status (Achievements + Remaining problems)
Source: Vietcombank’s Annual report 2017 During the last three years, the growth of VCB has been relatively sustainable The two main activities: receiving deposits and making loans increased gradually
Throughout the year, the bank maintained a healthy Return on Equity (ROE) ratio, with gross loans representing over half of its total assets, highlighting the significance of credit activities in its operations However, concerns arise regarding its net profit after tax, as compared to similarly-sized banks like BIDV and Vietinbank, VCB recorded the lowest profit and the slowest net income growth, despite achieving the highest credit expansion This decline is attributed to an increasing bad debt rate, substantial expenses related to the write-off of non-performing loans (NPLs), and provisions made to mitigate defaults from doubtful accounts.
Vietcombank’s practice of Basel II implementation
As one of the ten banks selected for the Basel II pilot program, VCB demonstrates a strong commitment to implementing the accord's regulations in risk management and banking governance By collaborating with consultancy firms to assess the current market landscape and identify governance and database gaps, VCB has developed a comprehensive roadmap and guidelines for Basel II compliance.
The implementation of II involves several ongoing projects aimed at enhancing banking operations These include developing an IT system for risk management and assessment, as well as capital calculation Additionally, there are efforts to amend and supplement banking governance policies and procedures, standardize and organize data, and restructure asset portfolios to improve capitalization measures.
(5) other measures following the internal audit methods
In order to actualize the objective of being the best bank in risk management, since
In 2014, the Board of Directors at VCB initiated a project to conduct a differential analysis between Basel II requirements and the bank's existing status This led to the proposal of a comprehensive roadmap for Basel II implementation, which includes a total of 82 initiatives aimed at ensuring compliance with Basel standards.
II requirements with the standardized approach in 2018; and (ii) meet requirements for the advanced approach in 2019
On July 15, 2015, Vietcombank launched the Basel II Kick-off Ceremony, marking the beginning of its prioritized projects for Basel II implementation This initiative involves extensive collaboration among offices and branches, encompassing all aspects of Vietcombank's risk management activities.
To ensure the successful implementation of Basel II, VCB's Board of Directors has established a comprehensive deployment framework that includes the Board, an implementation board, and various project teams assigned specific functions and responsibilities Monthly meetings are held to assess project progress and tackle any challenges that arise.
Achievements and limitations in Vietcombank’s Basel II implementation
3.3.1 Achievements in Basel II implementation a Maintained the minimum capital requirement
Table 3.2 VCB's CAR ratios from 2014-2018
Source: Summarized from VCB’s annual reports
As of December 31, 2018, the Capital Adequacy Ratio (CAR) of Vietnam Joint Stock Commercial Bank for Industry and Trade (VCB) was 8.30%, in compliance with State Bank of Vietnam (SBV) regulations To achieve the necessary capital adequacy, VCB has implemented plans for capital increase and effectively managed its risk assets.
First , increased Tier-1 capital through charter capital increase plan
During this period, VCB maintained its status as the largest capitalized financial institution in the market, while ensuring a robust capital adequacy ratio As a result, VCB's stock emerged as the highest-priced in the market, positioning the bank among the top three largest capitalized enterprises.
To meet the minimum capital adequacy requirements set by Basel II, VCB has been actively implementing its projects, including a significant charter capital increase plan This initiative was highlighted by a notable share issuance between VCB and its shareholders.
In January 2019, VCB successfully issued shares equivalent to about 3% of its charter capital to existing shareholders, Japan's Mizuho Bank and GIC Private Limited, leading to a significant capital surplus.
Mizuho has acquired over 16 million shares of VCB, raising its ownership stake to 15%, while GIC previously purchased 94 million shares, holding a 2.55% stake Following these transactions, VCB's charter capital has increased by 3%, reaching over VND 37,000 billion.
In early 2019, VCB aimed to achieve a capital adequacy ratio (CAR) exceeding the minimum requirement of 8% by year-end, supported by its capital increase from share issuance and future asset development plans The bank anticipates maintaining a CAR of at least 8% from 2020 in compliance with Basel II regulations However, VCB aspires to surpass this minimum, targeting a CAR of approximately 9-10% to establish itself as a leader in risk management and asset quality Consequently, the successful implementation of its charter capital increase plan is essential for VCB's strategic objectives.
As reported in VCB's Annual General Meeting 2018, the bank has only achieved one-third of its capital increase plan through private placements for foreign investors, as approved by the SBV Currently, VCB's charter capital falls short of the planned levels of VND 11,900 billion for 2019 and VND 20,200 billion for 2020.
Charter capital plays a crucial role in evaluating a bank's capital structure during international credit ratings Increasing capital will enable VCB to expand its business operations, meet capital requirements, and invest in management enhancement and operational transformation plans Therefore, VCB must continue to raise its charter capital and owner’s equity from 2019 to 2020 to ensure its financial stability and management capabilities, ultimately aiding in the achievement of its strategic objectives.
To successfully increase its charter capital from 2019 to 2020, VCB has proposed a share issuance plan aimed at boosting its charter capital The anticipated increase in charter capital following this issuance is detailed in the table below.
Table 3.3 The expected charter capital increase after share issuance
Issuance of share for charter capital increase through shareholder equity (share premium and accumulated retained earnings) at maximum 40% for existing shareholders
Charter capital pre-issuance VND 37,088,774,480,000
Expected charter capital increase post-issuance maximum
Expected charter capital post issuance maximum
VCB is set to issue new shares through a public offering and private placement, representing 6.5% of its charter capital at the time of the offering This follows a charter capital increase of 40% for existing shareholders through shareholder equity.
Charter capital pre-issuance (depends on the result of the share issuance through shareholder equity)
Expected charter capital increase post-issuance maximum
Expected charter capital post issuance maximum
Souce: VCB’s Capital increase plan 2019-2020
Second , increased Tier-2 capital through bond issuance
To enhance Tier-2 capital, banks may issue bonds or certificates of deposits and engage in loan facility agreements with foreign financial institutions In this context, State-owned Commercial Banks (SoCBs) such as VCB are issuing long-term bonds with maturities of 5 to 10 years to bolster their capital and uphold the capital adequacy ratio.
In 2018, VCB successfully issued bonds totaling VND 288.3 billion between October 31 and November 16, with each bond having a par value of VND 100,000.
Table 3.4 VCB bond issuance for the year 2018
No Issuance No Buyers Issuance date
TOTAL VOLUME OF BONDS ISSUED 2,883,000
All of the bonds issued mature in 06 years, with interest rate of 7.475% per year Whereby, corporates bought 1,085,000 bonds (VND 108.5 billion), and individuals investors bought 1,789,000 bonds (VND 179,8 billion)
Previously, VCB also successfully issued VND 329.3 billion worth of bonds within the period 23 rd Oct – 31 st Oct 2018
Borrowing long-term can increase funding costs, and according to Basel II regulations, Tier-2 capital must not exceed 50% of Tier-1 capital Consequently, it is advisable for banks to focus on increasing Tier-1 capital rather than relying on Tier-2 capital for a more sustainable financial strategy.
Third, controlled credit growth, credit quality and boosted bad debt recovery
Experts caution that the implementation of Basel II norms may lead to a significant decline in Capital Adequacy Ratios (CAR) due to an increase in risk assets A 2017 report from the National Financial Supervisory Commission (NFSC) revealed that the CAR ratios of four major State-owned Commercial Banks (SoBCs)—Vietcombank, BIDV, Vietinbank, and Agribank—dropped from 9% to below 8% under Basel II standards Analysts attribute this decline to the fact that these banks' credit growth outpaced their equity increases.
In the first half of 2017, VCB's legal capital held steady at VND 35,977 billion, while its equity experienced a modest increase to VND 52,109 billion However, the bank's outstanding loans rose by 13.1%, reaching VND 534,108 billion, which led to a decrease in its CAR ratio from 11.13%.
ORIENTATIONS AND RECOMMENDATIONS ON VCB’S BASEL II
Orientations of VCB in Basel II implementation for the year 2019-2010
In 2017, Vietcombank successfully developed credit risk ranking models based on Probability of Default (PD) Building on this achievement, the bank has now completed the development of models to quantify Loss Given Default (LGD) and Exposure at Default (EAD) specifically for its retail customer portfolio.
The successful implementation of the three key models—Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD)—has established a crucial foundation for Vietcombank's transition to the Advanced Internal Rating-Based (Advanced IRB) approach, the most sophisticated risk measurement method under the Basel II framework.
Discussions and recommendations
VCB's compliance with the stringent Basel II standards demonstrates its strong capability for safe operations, employing advanced practices akin to those used in developed countries This adherence effectively mitigates potential credit, market, and operational risks in banking operations.
Vietcombank (VCB) is one of only two banks in Vietnam that have successfully met the Basel II standard approach, positioning itself well for future development under the advanced approach However, the bank faces significant challenges in effectively managing capital growth, enhancing risk management practices, and ensuring transparency in information to remain compliant with Basel II regulations.
Hence, the study will propose several recommendations for Basel II implementation in Vietnamese banking sector and most importantly in VCB The suggestions are as the following:
To enhance the implementation of Basel II regulations, it is essential to improve coordination between the State Bank of Vietnam (SBV) and commercial banks, particularly with state-owned commercial banks (SoCBs) such as Vietcombank (VCB) This collaboration will ensure a unified understanding and consistent actions throughout the Basel II implementation process Additionally, the SBV should provide comprehensive guidelines and documentation to support this initiative.
To ensure effective implementation of plans and projects, banks must establish clear requirements and agree on a suitable implementation schedule that aligns with current conditions This approach will enhance the overall efficiency of the implementation process.
VCB must increase investment in risk management as the banking landscape shifts from a focus on credit and profit growth to prioritizing credit quality and efficiency in handling bad debts To implement Basel II effectively, VCB needs to adjust its risk appetite and prioritize risk management in its operations, thereby reducing the gap between actual risk factors and the goals of Basel II.
To successfully implement Basel II, the bank must prioritize the planning and completion of its information management system, which is essential for finalizing an accurate database that supports risk models A well-structured database is not only a prerequisite for Basel II compliance but also a key determinant of overall success in its implementation across all banks Consequently, VCB should undertake a thorough review and standardization of its data, ensuring that customer information and security asset data, including risk mitigation measures, are maintained for a duration of 3-5 years, while bad debt data should be retained for 5-7 years.
To ensure the successful implementation of Basel II, it is crucial for VCB to recruit and train high-quality staff who are committed to long-term employment Human resources are the most significant asset in utilizing advanced database systems and models effectively Without skilled personnel, even the most sophisticated tools will not yield efficient results Given that projects like Basel II require a long-term commitment, typically spanning at least five years, VCB must establish policies that attract and retain talented experts dedicated to the bank's sustainable growth.
The careful consideration of expense allocation for Basel II projects is crucial, as the implementation will incur significant costs VCB must create detailed cost-use plans for projects that will span multiple years to ensure effective financial management.
The bank should uphold its policies by regularly organizing seminars or working sessions to address and resolve challenges and obstacles encountered during projects.
To ensure successful implementation of Basel II, VCB should partner with a reputable auditing firm, such as EY, which is favored by many banks in Vietnam Additionally, VCB can leverage the insights and experiences of its strategic partners—carefully chosen banks with proven expertise in Basel II implementation.
Since the implementation of Basel II in Vietnam, the State Bank of Vietnam (SBV) has issued various legal documents outlining guidelines and requirements in line with Basel II standards Currently, 10 selected Vietnamese banks are piloting the initial phase of this roadmap In the upcoming second phase, it is anticipated that most banks will achieve regulatory capital that meets Basel II requirements, with at least 12 to 15 banks fully adopting these standards.
Vietcombank (VCB) has made significant strides in the implementation of Basel II capital adequacy requirements, having received approval from the State Bank of Vietnam (SBV) at the end of 2018 The bank aims to adopt the advanced approach under Basel II in 2019, positioning itself as a leader in this initiative and one of Vietnam's premier banks This progress underscores Vietcombank's strong commitment to becoming one of Asia's top 100 banks and one of the world's 300 largest financial institutions, all while adhering to the highest international standards.
Vietcombank has successfully implemented 82 initiatives involving over 160 members from both Head Office and Branches, enabling the bank to meet Basel II conditions under the standardized approach Additionally, the bank has largely fulfilled the essential requirements for applying Basel II under the advanced method as planned.
VCB has enhanced its organizational structure and risk management framework to align with international standards, adhering to the "three lines of defense" principles as outlined in the SBV's Circular 13/2018/TT-NHNN.
Numerous regulations and policies have been reviewed and updated to ensure compliance with Basel II management requirements and align with the strategic direction of the State Bank of Vietnam (SBV).
- In terms of risk measurement tools according to international practice: VCB has developed a full system of risk quantification models covering almost all of the bank's portfolios