Mid – term examination report the “ring fence” rule and the feasibility of applying this rule in company law in vietnam

ABSTRACT This paper identified an overview of the “ring-fence” rule and its application in corporate governance in the United Kingdom, analyzed the performance of the Vietnamese banking

ABSTRACT

This paper identified an overview of the “ring-fence” rule and its application in corporate governance in the United Kingdom, analyzed the performance of the Vietnamese banking sector and assessed the feasibility of applying ring-fencing in company law in Vietnam By using statistics of more than 20 commercial banks from

2007 to 2023 and comparing the legal system of both the UK government and Vietnamese government, the results from our research evaluation indicated that the

“ring-fence” rule that has been applied in the United Kingdom is compliant with Vietnamese law and can play a crucial role in ensuring the stability of the banking and finance sector in Vietnamese economic background by preventing risks for financial system and protecting depositors’ benefits Moreover, we also came up with a

undergo in order to officially come into effect

TABLE OF CONTENT

A Theoretical Research 2.0.0 4

IL Overview Of Ring-Fence Rule And Vietnamese LaW c~ se 4 1 Overview of Ring-Fence RuÌe - 5-5 skkS*H*H HH HH HH HH HH Hit 4 2 Applying Ring-Fence Rule in corporate governance in the UK 5

3 Regulations of Vietnamese law on banking activities ee 6 Il Overview of Vietnam's Finance 0 cece cece eee eec eee eeeeteeseeeeseeaeseseneenaeas 8 1 General comments on the development of Vietnam's finance since the reform j¡p 0 8

2 Positive signals of Vietnam's finance at the momenI -~-<- 8 3 Some existences and challenges of Vietnam's economy and finance 11

B Feasibility Of Applying Ring-Fence Rule In Company Law In Vietnam 14

L Benefits of applying Ring-Fence Rule in Vietnam -<<<<<<<<«+ 14 Il Drawbacks of applying Ring-Fence Rule in Viefnam -~-<~-<+5 14 II Suggested Roadmap to apply Ring-Fence Rule in Viefnam 15

IV Recommendations to apply Ring-Fence Rule 1n Vietnam 16

9 9) 19 D03(0) 1 18

4/00).4006 I0 01110 19

2

INTRODUCTION

Nowadays, most people use banks in their daily lives Core banking services include taking deposits, making payments, providing loans and overdrafts for retail customers and small businesses These are ‘retail’ banking services, and it is crucial that consumers can access these services whenever they need to — in both good and bad times However, besides retail banking services, many large banks also undertake other, more complex, activities Trading in financial markets is one example Such activities come

with their own risks In addition, from time to time, banks have to deal with unexpected

events (called a shock) In extreme cases this can lead to a financial crisis Banks will often react by reducing the amount of new lending they offer, which can have a big impact on the economy

In the UK, the global financial crisis that began in 2007 was the deepest recession the national economy suffered since the Second World War This crisis led to a severe impact on wages, jobs and access to credit for people across the country and revealed the need for fundamental changes to how banks are run As part of its response to the crisis, the Government developed legislation to require UK banks to separate the provision of core retail services from other activities within their groups These requirements are known as structural reform or ring-fencing Ring-fencing is a key part

of the Government’s package of banking reforms designed to increase the stability of the UK financial system and prevent the costs of failing banks falling on taxpayers

In Vietnam, along with the fast development of credit, there is a potential risk of overheating growth accompanied by increased bad debt risks and low efficiency due to increased risk provisions According to the World Bank's assessment, Vietnam's Credit/GDP ratio is among the highest in the world (124% at the end of 2021, a warning level of potential risks of macroeconomic instability)

Even though many analyses have reported the potential shocks or crises awaiting the Vietnamese banking sector, there has been very little research studying the application

of the ring-fencing to protect Vietnamese retail banking’s stability The purpose of this paper is therefore to analyze the theoretical features of the ring-fence rule and to assess its compatibility in Vietnamese corporate law by evaluating the current structure and performance of the banking sector in Vietnam, the potential benefits and costs of ring- fencing and the regulatory framework for implementation

MAIN CONTENT

A THEORETICAL RESEARCH

I Overview of Ring-Fence Rule And Vietnamese Law

1 Overview of Ring-Fence Rule

1.1 What is ring-fencing?

From 1 January 2019, the largest UK banks must separate core retail banking from investment banking This is known as ring-fencing Ring-fencing was the central recommendation of the Independent Commission on Banking chaired by Sir John Vickers and was introduced through the Financial Services (Banking Reform) Act 2013 Details of the regime are set in further legislation passed in 2014, 2015 and 2016, and through rules set by the Prudential Regulation Authority and Financial Conduct Authority

Ring-fencing will support financial stability by making banking groups simpler and

easier to ‘resolve’ This means that if either the ring-fenced or non-ring-fenced part of

the bank fails, it will be easier to manage the failure in an orderly way without the need for a government bail-out As well as ensuring that UK taxpayers are not on the hook for bank failures, ring-fencing should mean fewer and less severe financial crises in the future, which will benefit the whole UK economy

1.2 How will customers be affected?

The basic rules of ring-fencing are that deposits from UK individuals and small businesses must be placed inside the ring-fence Most exposures to financial institutions and trading activities must be placed outside the ring-fence Some activities, notably banking for larger companies, may be on either side of the ring-fence

To comply with these rules, banks will need to move some customers into a new part

of the bank Different customers will be affected in different ways Some customers will experience changes to their account details For example, they may be issued with a new sort code and/or their bank account number may change Payments sent using old account details will be rerouted to their intended destination, using automatic redirection facilities Each bank will be communicating with its own customers about ring-fencing and how it will affect them

It is important that people take all the usual precautions when dealing with requests from businesses and banks to provide personal or financial information These precautions include never disclosing security details such as PINs or full banking

passwords, not automatically clicking on links contained in unsolicited emails, and not assuming an email or phone call is authentic

2 Applying Ring-Fence rule in corporate governance in the UK

Ring-fencing is intended to improve the resilience of the largest UK banks It also seeks

to ensure that if a large bank were to fail, there would be minimal disruption to banking services used by individuals and small businesses in the United Kingdom

The activities of investment banking and retail banking must be distinct for banks subject to the rule This entails dividing off the systems for managing risk, accounting, and personnel Operations in retail banking are shielded from the dangers involved with investment banking

Ring-fenced Entity which is body (RFB) not an RFB

+ Retail and small business + Trading and selling securities, deposit-taking commodities and derivatives

+ Having exposures to financial institutions other than building societies and other RFBs

* ing operations outside the EEA

+ Underwriting securities + Buying securitisations of

Activities which can be provided

by either entity:

+ Deposit-taking activities for large corporates, building societies and other RFBs + Lending to individuals and corporates + Transactions with central banks + Holding own securitisations + Trade finance + Payment services

* Hedging liquidity, interest rate, currency, commodity and credit risks + Selling simple derivatives to corporates, building societies and other RFBs

The Government concluded that ring-fencing would result in a significant net benefit to the UK economy and accepted the majority of the ICB proposals These were implemented though the Financial Services (Banking Reform) Act 2013 (‘the Act’), which has the following key features:

the accepting of deposits by UK banks from retail and small business customers in the United Kingdom or elsewhere in the European Economic Area

- The requirement that RFBs do not ‘deal in investments as principal’, that is, they

do not buy or sell financial assets on the bank’s own behalf, i.e undertake proprietary trading

fencing, and a requirement that the PRA and FCA make rules to ensure banks implement ring-fencing in accordance with the principles of the legislation The

box on page 167 describes the PRA’s ring-fencing objectives

- Powers for the PRA to require further restructuring of banking groups if they fail to

‘electrification’ powers) The PRA can exercise these powers only after consulting the FCA and with the consent of the Treasury, and the PRA’s decision can be challenged in a judicial tribunal

RFBs use the exceptions specified in the legislation to the ring-fencing requirements, and to review two years after the implementation of ring-fencing whether there is a case for further restrictions on proprietary trading Additional reviews by independent experts of the ring-fencing legislation and proprietary trading are also required

The Act was supplemented by two pieces of secondary legislation in 2014 The first sets out that banks with more than £25 billion of ‘core deposits’ (mainly those from retail and small business customers) will be required to implement ring-fencing The second sets out more detail on the restrictions imposed on the business of RFBs It defines activities which RFBs cannot undertake in addition to ‘dealing in investments

as principal’ It also lists the types of exposures the RFBs cannot have A number of exceptions to these restrictions are also specified These restrictions are designed to ensure RFBs are not exposed to risks from investment or international banking

3 Regulations of Vietnamese law on banking activities

To protect the stability and integrity of its financial system, Vietnam has a comprehensive regulatory framework overseeing banking activities These rules cover

a range of banking-related topics, including operations, risk management, and consumer protection The following are some important laws that govern banking in Vietnam:

Banking Law: The Banking Law, which has undergone numerous amendments in order to reflect shifting market conditions, serves as the main regulatory framework for banking activity in Vietnam It lays down the legal foundation for the founding, running, and oversight of banks and other financial institutions

licensed by a competent authority of the host country If the host country’s law does not cover investment licensing or approval, the investor must provide documents proving its/his/her right to carry out investment activities in that country The major regulatory body in charge of granting licenses and overseeing banks and other financial organizations is the State Bank of Vietnam (SBV), which also serves as the country's central bank The SBV oversees the soundness of the banking industry

as a whole, grants licenses, and checks that prudential requirements are being followed

Ownership Restrictions: To preserve domestic governance, the Banking Law places restrictions on foreign ownership of Vietnamese banks and credit institutions These ownership limitations must be respected by foreign investors that buy or invest in Vietnamese banks

Bank Secrecy and Confidentiality: Protect the confidentiality of information provided by the company in accordance with the company’s charter and the law; only use the provided information to perform and protect their lawful rights and interests; do not spread or share information provided by the company to any other organization or individual

Capital Adequacy: Investment projects in the banking, insurance, securities, press, radio, television and telecommunications fields with outward investment capital of VND 400 billion or more

II Overview of Vietnam's Finance

1 General comments on the development of Vietnam's finance since the reform in

1986

Overall, Vietnam's finance has made important strides in the process of renovation and international economic integration after 37 years (1986 - 2023)

Specifically, the banking system has separated the state management and business

functions of the State Bank from credit institutions The stock, bond and insurance

markets also developed rapidly, contributing to capital mobilization and diversification

of resources for the economy In addition, Vietnam has also applied many new technologies in the field of finance and banking, such as electronic payment, fintech, blockchain

Vietnam's financial market is assessed as medium-risk

At the national scientific conference "Reshaping the global financial system and Vietnam's strategy for the second time” (2022), Dr Can Van Luc said that Vietnam's financial market risk level is at "medium high" and resilient at "fairly average” This statement coincides with studies using the Z-score index, with the results showing that the risk level of Vietnam's financial market is 24.27, approximately with the calculated average value of more than 1,000 banks in 29 emerging countries around the world (24.61)

Bảng 1 Giá trị phân phối của các chỉ tiêu đánh giá sự ổn định của

hệ thống ngân hàng Việt Nam giai đoạn 2007-2018

Trung bình | Độ lệch chuân | Giá trị nhỏ nhất | Giá trị lớn nhất Lợi nhuận ROA (%) 0,82 0,77 -5,51 5,95

2 Positive signals of Vietnam's finance at the moment

In 2022, the global economic and financial environment in general and Vietnam in particular faces many fluctuations such as the COVID-19 pandemic, the Russia-Ukraine conflict, rising inflation in the world, a series of fierce economic sanctions and potential risks

However, GDP in the third quarter of 2023 is still estimated to increase by 5.33% over the same period last year Earlier, the Finance and Banking industry group recorded a profit after tax growth of nearly 40% in 2022

Lợi nhuận ngành ngân hàng (tỷ đồng) Lợi nhuận các ngân hàng (tỷ đồng)

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The growth despite these difficulties is explained by the following strengths:

a The State has many practical policies

The State Bank of Vietnam has had many operating policies to meet the credit capital demand for the economy, exchange rate stability During the COVID-19 epidemic, the State has had many policies to support businesses (such as tax reduction, postponement

of tax payment deadlines, ) as well as credit support, electricity and water discounts for employees to encourage increased production and overcome difficulties of the pandemic This shows the flexibility and resilience of Vietnam's banking and finance

b Increasingly strong capital creates a solid buffer, compliant with Base | IT Capital Adequacy Ratio (CAR) is the ratio of a bank's capital to its risk-weighted assets and short-term liabilities Vietnam's top 7 banks according to Forbes (Vietcombank,

BIDV, VietinBank, VIB, MBBank, ACB, TPBank) have all applied Basel II standards

with a safety ratio higher than the minimum level set by the State Bank of Vietnam at 8% The high CAR ratio helps banks create a solid buffer, ensuring sustainable development momentum in the future

Vietcombank BIDV“ VeunBonk©

c Ability to apply technology to financial activities:

The application of information technology and digital transformation in the field of finance and banking not only improves service quality but also ensures security, thereby reducing the risk of asset misappropriation fraud, increasing the efficiency of monitoring transactions and controlling fluctuations in the financial market

"Fintech Viét Nam

dang phat trién thần tốc theo cGp sé nhan "

40 44 124 200

2016 2017 2019 2022 Ông Bryan Patrick Carroll

Téng gidm déc Diéu hanh TNEX

Số công ty hoạt động hoặc tham gia cung ứng

dịch vụ/giỏi phóp Fintech tợi Việt Nam

The number of companies involved in the field of Fintech has increased 5 times in the past 6 years (Image source: Advertising Vietnam)

d International cooperation and integration:

Vietnam has expanded cooperation with many countries and territories, signed many free trade agreements (FTAs) such as AFTA (ASEAN Free Trade Area), ACFTA (ASEAN-China Free Trade Agreement), attracting many large investors and partners from abroad, thereby increasing competitiveness, promoting domestic enterprises to promote innovation and meet the capital of the market

Bang 1: Top 5 nhà đầu tư nước ngoài lớn nhất tại Việt Nam năm 2022