To innovate the private capital in order to create harmoniously competitive environment for the HCM city commercial banks, vietnam

MANAGEMENT REAL SITUATION OF STOCKHOLDER’S EQUITY AT JOINT STOCK COMMERCIAL BANKS AT HO CHI MINH CITY .... General real situation in management of stockholder’s equity at joint stock com

INDEX

INTRODUCTION 1

CHAPTER I PROBLEM STATEMENT AND ITS BACKGROUND 4

1.1 PURPOSE OF STUDY 5

1.2 INTRODUCTION 5

1.3 PROBLEM STATEMENT 6

1.4 IMPORTANCE OF STUDY 6

1.5 HYPOTHESES OF THE STUDY 8

1.6 SIGNIFICANCE OF THE STUDY 9

1.7 SCOPE AND DELIMITATION OF THE STUDY 9

1.8 CONCEPTUAL FRAMEWORK 10

1.9 RESEARCH INSTRUMENTS 10

1.10 TREATMENT OF DATA 11

1.11 RESEARCH PROCEDURES 12

1.12 RESEARCH APPROACH 14

CHAPTER II SURVEY OF RELATED LITERATURE AND STUDIES 15

2.1 SOME GENERAL ISSUES OF STOCKHOLDER’S EQUITY OF COMMERCIAL BANK 16

2.1.1 Overview of the equity capital of commercial bank 16

2.1.2 Constitute stockholder’s equity of commercial bank 17

2.1.3 The characteristics of the equity capital of commercial banks 19

2.1.4 Basic functions of stockholder’s equity of commercial banks 20

2.1.4.1 Stockholder’s equity performs responsibility function of asset for depositor 20

2.1.4.2 Stockholder’s equity performs investment function to meet requirements of bank business operations 21

business operation of bank 21

2.2 REQUIREMENTS TO ENSURE CAPITAL SAFETY IN BUSINESS OPERATIONS OF BANK 22

2.2.1 General provisions on capital safe regime in business operation of bank 22

2.2.1.1 Regulation of capital safe concepts 22

2.2.1.2 Regulations of determination regime of safety stockholder’s equity 24

2.2.1.3 The policies about shareholder 26

2.2.1.4 Legal regulations about adjustment these assess safety of capital standards in the country 28

2.2.2 Factors impact the safety-capital assessment Standards 32

2.3 DUTY, CONTENT, MODEL AND MANAGEMENT CONDITIONS OF OWN FUND IN TRADING OPERATIONS OF COMMERCIAL BANK 35

2.3.1 Duty of own fund management of commercial bank 35

2.3.2 Content of own fund management of the commercial bank 35

2.3.3 Models of managing the own fund of commercial bank 37

2.3.3.1 Own fund management following traditional model 38

2.3.3.2 Own fund management following the model associated with risk ratio 39

2.3.3.3 Funds management following ROIF and ROFL model 40

2.3.3.4 Capital management in internal financial growth model 45

2.3.4 Conditions on the own fund management of the commercial bank 47

2.4 ROLE OF RISK AND INCOME MANAGEMENT IN THE MANAGEMENT OF OWN FUND OF COMMERCIAL BANK 48

2.4.1 Role of risk management 48

2.4.1.1 Risk management on operations 48

2.4.1.2 Risk management in credit operations 49

2.4.1.3 Risk management in organizational structure 50

2.4.1.4 Management of risk affecting from outside 50

2.4.2.1 Management of factors affecting directly the income 51

2.4.2.2 Management of factors affecting indirectly the income 52

2.4.3 Role of general management of risk and income 52

2.4.3.1 General management of risk and income in short terms 52

2.4.3.2 General management of risk and income in long terms 54

2.5 EXPERIENCES LEARNED BY REGIONAL AND WORLD BANKS FROM THE OWN FUND 56

2.5.1 Experiences of bank own fund management at macroscopic scale 56

2.5.1.1 In the world 56

2.5.1.2 In Asian region 57

2.5.1.3 In Asian 58

CHAPTER III: RESEARCH METHODOLOGY 60

3.1 MANAGEMENT REAL SITUATION OF STOCKHOLDER’S EQUITY OF COMMERCIAL BANKS AT VIETNAM 61

3.1.1 Economic context before requirements of stockholder’s equity standardization 61

3.1.1.1 World economic context 61

3.1.1.2 Economic context of Vietnam 62

3.1.2 Specific characteristic of activities of commercial banks in Vietnam 64

3.2 MANAGEMENT REAL SITUATION OF STOCKHOLDER’S EQUITY AT JOINT STOCK COMMERCIAL BANKS AT HO CHI MINH CITY 65

3.2.1 General real situation in management of stockholder’s equity at joint stock commercial banks at Ho Chi Minh City 65

3.2.1.1 The holding structure of business financial sources 65

3.2.1.2 Business financial operations 66

3.2.1.3 To ensure the capital safety targets 70

3.2.1.4 Liquidity 72

3.2.1.5 The quality of account outstanding for loan 74

3.2.1.6 Financial status of business 76

Chi Minh City 79

3.2.2.1 The changes according to specific characteristic of development 79

3.2.2.2 The changes in the operation 81

3.2.2.3 The change in resistance capacity of risk 86

3.2.2.4 The changes in the quality of operation 89

3.2.2.5 Assessing financial capacity of the joint stock commercial banks at Ho Chi Minh City 92

3.2.3 Analysis of effective in application of assessment standards for safety stockholder’s equity in accordance with regulations of BIS in the Asian commercial banks (ACB) 95

3.3 RESULTS AND LIMITATIONS IN THE MANAGEMENT OF STOCKHOLDER’S EQUITY AT JOINT STOCK COMMERCIAL BANKS AT HO CHI MINH CITY 102

3.3.1 Achieved results 102

3.3.2 Constraints in the own fund management in HCMC stock commercial banks 103

3.3.2.1 General assessment on constraints 103

3.3.2.2 Assessment on the constraints of the own fund management aspect 104

3.3.2.3 Assessing the limitations in terms of governance, shareholder management 104

3.3.2.4 Assessing the limitations in terms of operation safety 105

3.4 THE MAJOR CAUSES OF SHORT COMING INMANAGEMENT OF STOCKHOLDER’S EQUITY AT JOINT STOCK COMMERCIAL BANKS AT HO CHI MINH CITY 106

3.4.1 The inadequacies of the business environment 106

3.4.2 Weaknesses in risk management 106

3.4.3 Weaknesses in the management and administration 107

3.4.4 Shortcomings in the financial ability 108

3.4.5 Shortcomings in the fund ownership structure 109

CONCLUSION CHAPTER 3 111

BANKS AT HO CHI MINH CITY 112

STOCKHOLDER’S EQUITY MANAGEMENT FOR JOINT STOCK COMMERCIAL BANKS AT HO CHI MINH CITY IN PHASE 2007-2020 113

4.1.1 Demand of minimum stockholder’s equity for development target in

phase from 2010 to 2020 113

4.1.1.1 The socio-economy development goals of HCMC 113 4.1.1.2 Forecast of minimum capital requirements for banking at Ho Chi

Minh City 113

4.1.2 Managing the average stockholder’s equity growth process for joint

stock commercial banks HCMC 116

4.2 MANAGEMENT INNOVATION SOLUTION OF STOCKHOLDER’S

EQUITY FOR JOINT STOCK COMMERCIAL BANKS AT HO CHI MINH CITY 123

4.2.1 Amendment of institutions, determining the model and positioning

target market 123

4.2.1.1 Modify institutions, equity ownership 123 4.2.1.2 Development of banks according to versatile financial corporation

model 124 4.2.1.3 Reposition the active target market 126

4.2.2 Renewal of risk management mechanism under modern management

technology 127

4.2.2.1 Complete overhaul of the factors affecting the risk management

mechanism 127

with international standards 129

4.2.2.3 To improve risk prevention mechanism 131

4.2.3 Renew the capital safe management mechanism in accordance with requirements of the BIS 133

4.2.3.1 Innovation of structure to determine stockholder’s equity safely 133 4.2.3.2 Restructuring of all activities in accordance with capital safe requirements 135

4.3 EXPANDING THE FRAME OF ASSESSMENT RATE OF SAFE STOCKHOLDER’S EQUITY 137

4.4 SYSTEM APPLICABLE CAPITAL TARGETS ASSESSED SAFETY SELF-DIVERSITY 141

4.5 IMPLEMENTING THE MULTI-LAYERED MECHANISM FOR MANAGEMENT AND MONITORING CAPITAL ADEQUACY 143

4.6 BUILDING THE REGIME OF SAFETY CAPITAL DISCIPLINE STRICTLY AND CLEARLY 145

4.7 PERFECTING THE MECHANISM OF INSPECTION AND MONITORING CAPITAL ADEQUACY 146

4.8 PROPOSING SOLUTIONS TO SUPPORT, INNOVATE, MANAGE EQUITY 148

4.8.1 Proposing to Vietnamese state 148

4.8.2 Recommendations for the State Bank of Vietnam 151

4.8.3 Recommendations to People’s Committee of Ho Chi Minh city 155

CONCLUSION OF CHAPTER 4 157

CHAPTER V: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 158 5.1 SUMMARY OF THE STUDY 159

5.2 CONCLUSION 159

5.3 RECOMMENDATIONS 161

5.4 OPPORTUNITIES FOR FURTHER RESEARCH 161

A ROPOSED INTERVIEW AND SURVEY QUESTIONNAIRE 162

B PROPOSED BIOGRAPHY 165

LIST OF TABLES

Table (1.1): The profitability ROIF and ROFL 42 Table (1.2): Debt balance and profitability of ROFL 43 Table (1.3): Analys debt balance and profitability of ROFL 44 Table (1.4): The rate share holder in commercial foreigner banks in Asean countries 58 Table (1.5): The rate keep asset foreign bank in Asean countries from 90 – 01 59 Table (1.6): Amount of foreign banks and commercial banks in Asean countries from 90 – 01 59 Table (2.1): The holding structure of business financial sources of Commercial banks HCM City 12/31/2010 65 Table (2.2): Operating commercial banks at Ho Chi Minh City in 10/09 66 Table (2.3): Structure of business financial capitals of Commercial banks HCM City to 31/12/2010 68 Table (2.4): Safe equity of Joint stock commercial banks 12/31/2010 71 Table (2.5): Liquidity of commercial banks at Ho Chi Minh City in 31/12/2010 73 Table (2.6): The structure of financial collection sources commercial banks

at Ho Chi Minh City in 2010 76 Table (2.7): Business financial result of Commercial banks HCM City in

2010 77 Table (2.8): The development situation according to level of capital of commercial banks at Ho Chi Minh city from 2004-2009 80 Table (2.9): Classification of quality market of commercial banks at Ho Chi Minh City from 2006 – 2009 81 Table (2.10): Situation in Merger, Acquisition of commercial banks at Ho Chi Minh City from 97 – 06 83 Table (2.11): Situation buy share for foreign partner of joint stock commercial banks in HCM City to 12/31/2010 85

commercial banks in HCM City in 2010 87 Table (2.13): Evolution of profitable asset mechanism on the total assets of the joint stock commercial banks at HCMC from 2005 – 2009 89 Table (2.14): Situation of transferring profitable assets structure of joint stock commercial banks in HCM city from 04 – 09 91 Table (2.15): Financial capacity of the joint stock commercial banks at Ho Chi Minh City in 10/09 92 Table (2.16): Change in financial capacity of the joint stock commercial banks in HCM city from 06-10 94 Table (2.17): Analyzing the method of own fund determination so as to calculate the minimum safe rate following the old and new calculation 96 Table (2.18): Analyzing the method of internal risk determination following the old and new methods 97 Table (2.19): Analyzing the method of external risk determination following the old and new methods 99 Table (2.20): Analyzing the method of determining the interest and foreign currency dealing contracts following old and new calculation methods 100 Table (2.21): Analyzing the method of determining the small equity and risk asset contracts following old and new calculation methods 101 Table (3.1): The minimum capital requirements for banking operations in the period 2009 – 2018 114 Table (3.2): Evaluation of environmental conditions and economic development goals bank from 2010 – 2015 116 Table (3.3): The thesis proposed overall financial plan from year 2010 -

2014 for the City as commercial banks 119 Table (3.4): Additional average equity capital from internal resources for the commercial banks in Ho Chi Minh City 2010 – 2014 121 Table (3.5): Expected additional demand of average equity from external sources of capital for commercial banks in Ho Chi Minh City from 2010 to

2014 122 Table (3.6): Swapping the risk of loss (SWAP) 136

commercial banks 138

FIGURES LIST

Figure (1.1): The profitability ROIF and ROFL 42 Figure (1.2): Debt balance and profitability of ROFL 43 Figure (1.3): Analys debt balance and profitability of ROFL 44 Figure (2.1): The holding structure of business financial sources of

Commercial banks HCM City 12/31/2010 65 Figure (2.2): Operating commercial banks at Ho Chi Minh City in 10/09 67 Figure (2.3): Structure of business financial capitals of Commercial banks

HCM City to 31/12/2010 68 Figure (2.4): Safe equity of Joint stock commercial City banks and Top 5

bank 71 Figure (2.5): Liquidity of Joint Stock commercial Top 5 banks and

Commercial banks in City 73 Figure (2.6): The structure of financial collection sources commercial

banks at Ho Chi Minh City in 2010 76 Figure (2.7): Business financial result of Commercial banks HCM City in

2010 78 Figure (2.8): The development situation according to level of capital of

commercial banks at Ho Chi Minh City from 2004-2009 80 Figure (2.9): Classification of quality market of commercial banks at Ho Chi

Minh City from 2006 -2009 82 Figure (2.10): Situation in Merger, Acquisition of Phương Nam banks at Ho

Chi Minh City from 1997–2001 83 Figure (2.11): Situation buying share of ACB bank 85 Figure (2.12): Equity and fund percent on risk Assets of five joint stock

commercial banks in HCM City in 2010 87 Figure (2.13): Evolution of profitable asset mechanism on the total assets

of the joint stock commercial banks at HCMC from 2005-2009 90 Figure (2.14): Situation of transferring profitable assets structure of joint

stock commercial banks in HCM city from 04 – 09 91

Chi Minh City in 10/09 93 Figure (2.16): Change in financial capacity of the joint stock commercial banks in HCM City from 06-10 94 Figure (2.17): Analyzing the method of own fund determination so as to calculate the minimum safe rate following the old and new calculation 97 Figure (2.18): Analyzing the method of internal risk determination following the old and new methods 98 Figure (2.19): Analyzing the method of external risk determination following the old and new methods 100 Figure (2.20): Analyzing the method of determining the interest and foreign currency dealing contracts following old and new calculation methods 101 Figure (3.1)_A: The minimum capital requirements for banking operations

in the period 2009-2018 114 Figure (3.1)_B: The equity requirements for banking operations in the period 2009-2018 114 Figure (3.2): Evaluation of environmental conditions and economic development goals bank from 2010 – 2015 117 Figure (3.3): The thesis proposed overall financial plan from year 2010 -

2014 for the City as commercial banks 119 Figure (3.4): Additional average equity capital from internal resources for the commercial banks in Ho Chi Minh City 2010 – 2014 121 Figure (3.5): Expected additional demand of average equity from external sources of capital for commercial banks in Ho Chi Minh City from 2010 to

2014 122 Figure (3.6): Build the frame rate of assessment equity and safety for the commercial banks 138

LIST OF EQUATION AND PICTURE

Equation (1.1): The principal targets for Self-determination of the full Basel

Committee 28

Picture (1.1): Models of managing the own fund of commercial bank 37

Equation (1.2) 38

Picture (1.2): Own fund management following traditional model 38

Equation (1.3): Model of ROIF and ROFL 41

Equation (1.4): Model of ROIF and ROFL 41

Equation (1.5): Sunainasu Growth models 46

Equation (1.6): General pattern ROA and ROE 47

Picture (1.3): Model of incresed operation commercial Bank 56

Picture (2.1): Vietnam Map for research locale of the study 63

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Proposed Study

“TO INNOVATE THE PRIVATE CAPITAL IN ORDER TO

CREATE THE HARMONIOUSLY COMPETITIVE

ENVIRONMENT FOR THE HCM CITY COMMERCIAL BANKS,

VIETNAM ”

INTRODUCTION:

To manage private capital or to manage capital safely is actually a harmonious management between risks and incomes, in order to create a wholesome financial environment for the banks to develop stably The effective capital management is also a condition for the banks to approach quickly the safe, modern technology of measurement, evaluation of capital safety having the high accuracy According to process of globalization, the requires used for evaluating capital safety will be more strict as well as the ties of Law on the Bank will increase

1 PROPOSED STUDY

In the short term, the BIS’s standard system of evaluating Base I and II capital safety is one of the top challenges for Commercial Banks in Vietnam, specially the small, weak and shortcoming Commercial Banks in developing countries In the current conditions of Vietnam, the early and full awareness of the role, importance of innovation in private capital management in order to standardize the private capital management step by step which is stable with the general rules of the world and local is a significant activity for effective and sustainable development of Commercial Banks

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2 METHODS AND TECHNIQUES OF THE STUDY

The study will be a combination of descriptive and explorative methods of research Descriptive method is used to describe characteristics of objects, people, groups, organizations, banks, environments of a given situation by addressing who, what, when, where and how questions (Zikmund et al, 2008) Explorative method is used to increase the understanding of a concept by clarifying ambiguous situations or discovering ideas that may be potential business opportunities (Zikmund et al, 2008)

As the purpose of the study is to provide an in-dept analysis and a full scenario of the current activities of commercial banks from which an application of BIS model is proposed to enhance the control capacity of those enterprises, the study used different methods of data collection including in-dept interview, survey questionnaires, and secondary data study

3 POPULATION AND SAMPLE OF THE STUDY

The samples will be conducted from about 15 commercial banks Those commercial banks build to operate in HCMC The commercial banks can operate under different types of other types of bank financial institutions, and non banks System of commercial banks in Vietnam has the presence of four types of ownership: state commercial bank, joint stock commercial bank, joint-venture commercial banks and foreign commercial banks

4 RESEARCH LOCALE

Economic context of Vietnam

 The impact of reform policies in 1986 to transition from subsidized economy to market economy and international integration of Vietnam's economy

on the banking financial institutions and international trade organizations, such

as ASEAN, AFTA, ASEM, BTA, WTO, are changing a series of standards related to bank management issues such as accounting, statistics, laws, ; The increase in foreign investment and joining the increasing competition of foreign banks are forcing domestic commercial banks to quickly raise equity capital in

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various ways, have promoted the appearance of more and more of the new ownership forms in the financial structure of banks

 The rise and serial development of SMEs in the recent time have created new target markets, created pressure for domestic commercial banks must prepare yourself for a strategy to position market, development of capital steadily more to attract good customers, obtaining feasible the project

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CHAPTER I

PROBLEM STATEMENT AND IT’S BACKGROUNDS

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1.1 PURPOSE OF STUDY

The purpose of this thesis bring out the meaning the scientific foundation not only about theory but also about reality of private capital management of Commercial Banks in the market economy To survey the reality of private capital management and put forward the innovatory solution systems of private capital management which is stable with safe standard required in the activity of international bank, to create favorable conditions for HCM City Joint – stock Commercial Banks to develop effectively, stably and durably

1.2 INTRODUCTION

To manage private capital or to manage capital safely is actually a harmonious management between risks and incomes, in order to create a wholesome financial environment for the banks to develop stably The effective capital management is also a condition for the banks to approach quickly the safe, modern technology of measurement, evaluation of capital safety having the high accuracy According to process of globalization, the requires used for evaluating capital safety will be more strict as well as the ties of Law on the Bank will increase

In the short term, the BIS’s standard system of evaluating Base I and II capital safety is one of the top challenges for Commercial Banks in Vietnam, specially the small, weak and shortcoming Commercial Banks in developing countries In the current conditions of Vietnam, the early and full awareness of the role, importance of innovation in private capital management in order to standardize the private capital management step by step which is stable with the general rules of the world and local is a significant activity for effective and sustainable development of Commercial Banks

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1.3 PROBLEM STATEMENT

The general research question of the study is “How can the BIS’s standard system of evaluating Base I and II capital safety help HCM City Commercial Banks to enhance capacity.”

Specifically, the study needs to answer the following sub-research questions:

1 What are the benefits that HCM City Joint stock commercial Banks can have through the application of the BIS’s standard system of evaluating Base I and II?

2 How should HCM City Joint stock commercial Banks prepare for BIS’s standard system of evaluating Base I and II application in terms of organizational readiness, perceived ease of use and external pressure (customer demand)?

3 How can BIS’s standard system help HCM City Joint stock commercial Banks enhance capacity through its marketing tools?

1.4 IMPORTANCE OF STUDY

The thesis has contributed some important contents following:

1 To analyze preliminary in order to define the role and importance of the innovation of private capital management in the bank’s business activity in the fact of the requirements of safe and durable development; international economic competition and integration

2 To analyze depth the methods of private capital, the relationship between private capital management and the requirement of capital safety standards, as well as between the importance of effective private capital management and requirements of capital safety improvement, as the same time, has summed up some experiences from researching the private capital management of the banking activities in our country Based

on surveying reality of private capital management at HCM City Joint – stock Commercial Banks, analyzing the achievements, the limit, the thesis has shown the reasons of the shortcomings which need to be solved

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3 In reference to the methods and reality have been analyzed, to spring from the requirements of developing economic, social and banking goals; based on the scientific foundations, the thesis have forecast the demands and drawn up the average growth processing of private capital; defined goals, principles and oriented the innovation of private capital for HCM City Joint – stock Commercial Banks

4 For HCM City Joint – stock Commercial Banks, the thesis have put forward the innovative solutions of private capital according to International Capital Safety Standards (BIS’s standard system) which are stable with the real conditions of each bank, in order to create favorable conditions for safe, effective, firm, durable development, including:

- To innovate the regulations of proprietary rights in stock capital in order to be stable with the innovation of the Law on Business, orient the developing model and determine the goal markets

- To innovate comprehensively the regulations of risk management according to modern technology

- To innovate the regulations of private capital management by technological solutions

- To build the strategy of restructuralizing the own of stock capital durably; the important goal is specialized labor and foreign strategic partner

5 The management offices supervise the bank in order to improve the effect

of management; supervise, speed up the HCM City Joint – stock Commercial Banks to innovate quickly the Standards of Capital safety management The thesis have put forward the solution to improve the role

of macroeconomic management which is stable with developing requirements of economy and the implement processing of international engagements, detailing is:

- To orient the program, content, structure, policy of management, supervise the capital safety according to Basel Standard

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- To innovate the rate, target, method systems for determining private capital safety

- To innovate the structure of capital safety management, supervision, evaluation

6 The thesis has petitioned to The State of Vietnam, the State Bank of Vietnam, the People‘s Committee of HCM City some of support solutions

in order to create the favorable conditions for implementing the innovation

of manager in HCM City Joint – stock Commercial Banks to be successful early, such as:

- To strengthen the Law system which is relative to implementing the International Capital Safety

- To streng then the structure of State’s management about supervision, consultancy, support

- To establish the organizations of vocation, socialist and to establish the Board of Capital Safety Direction, Consultancy, Supervision

1.5 HYPOTHESES OF THE STUDY

In order to answer the research questions, the following hypothesis will be tested in the study:

H1 The relationship between organizational benefit and BIS’s standard system application is positive

H2 The relationship between external pressure and BIS’s standard system application is positive

H3 The relationship between perceived ease of use and BIS’s standard system application is positive

H4 The relationship between organizational readiness and BIS’s standard system application is positive

H5 The relationship between BIS’s standard system application and its risk tools is positive

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1.6 SIGNIFICANCE OF THE STUDY

In the absence of complete researches for BIS, which are applicable in the reality of Vietnam economy, the study is an effort to realize the master plans on BIS development of the Vietnamese Government and enhance the competitive and exporting capacity for Commercial Banks

In the market economy, the private capital is a foundation of legal business for the business, at the same time, it is also the important financial factor which ensure the debts for the customers In the currency business area, the private capital is a vital factor for the bank’s creation and long-term development To maintain the scale of private capital stably, ensure the strongly developing ability of private capital which is stable with developing strategy has the great effect to the bank’s financial ability

In other words, when the private capital of the bank is managed effectively with modern technology by advanced and safe standards, the bank’s capital ability will be improved many times The high and harmonious financial ability is basis condition for the bank to improve competitive ability, defendable faculty from the risks

In order to help the HCM City Commercial Banks to modernize quickly, to

be stable with the development of international standards about capital safety and the reality of Vietnam, whereby to improve the development, increase the profitable ability, establish the durably competitive position in the market step by step, the author have chosen topic: “To innovate the private capital in order to create the harmoniously competitive environment for the HCM City Commercial Banks, Vietnam” for own PhD thesis

1.7 SCOPE AND DELIMITATION OF THE STUDY

The subject of study of the topic is to seek for the most realistic solutions, closely attached to the actual situation of Vietnam to bring the course of Vietnam banking system to success Therefore, the thesis will study scientific theorical points and analyze the reality of the financial liberalization and integration of the banking system

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The scope of topic only focuses in studying the question of financial liberalization in banking domain and only limiting the time of study from the stage

of the country stepped into its door-opening phase to present and set forth the solutions for subsequent years

Next to, study innovate the private capital in order to create the harmoniously competitive environment for the HCM City Commercial Banks, Vietnam and control private capital of BIS… in the HCM City Commercial Banks

1.8 CONCEPTUAL FRAMEWORK

It is important to place the conceptual framework of this current study in the context of Vietnam economy As the framework is the key factor in building a model for improving the risk control for HCM City joint stock commercial Banks, it will come up with (i) the recognition of businesses of the benefits brought by BIS model in cost-efficiency, (ii) the external pressure or customer demand toward businesses for BIS’s standard system application in doing business, (iii) the ease

of use that businesses perceive in adopting the model, (iv) the readiness or preparation of businesses in adopting the model; and (v) the marketing tools that support businesses using BIS’s standard system to enhance export capacity

Among the five components of the conceptual framework, the first four ones test the success possibility of businesses in applying BIS’s standard system while the last component (marketing tools) aims at upgrading the application of BIS’s standard system toward realizing possible benefits brought

by BIS’s standard system application Even carrying different approaches toward BIS’s standard system application, the five components share the common goal

of how to use BIS’s standard system model to enhance HCM City Commercial Banks

1.9 RESEARCH INSTRUMENTS

Thesis of using the methodology of statistics, surveys, combination Namely as follows:

 Methodology of statistics:

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+ Collecting and processing on the Vietnam banking system

+ Collecting and processing on financial liberalization and international integration in banking in a number of countries to draw the lessons of experiences

+ Focused Interview Questionnaire

After the collection of data, the researcher will build a database, which contains all the interview answers and survey results While the survey questionnaire will be written only, all the interviews will be both written and recorded, then translated into English, serving for the purpose of the research

In the database created, each answer group will be given a specific code

as A, B, C, D, E and F (in capital letters), correlatively to five question groups Each answer will be marked according to the group it belonged to (A, B,…, F) and in ordinal number of the question (1, 2, 3,…, 30), such as A1, B4, C15 etc…

In case a question has more answers to choose from or a sub-question marked

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in small letters such as A3a, B5d etc…, the answer will be correlatively coded as A3a, B5d etc

The data collected will be treated from both qualitative and quantitative perspective The interview answers will be qualitatively transcribed, analyzed and interpreted in relation with the five hypotheses of the study, which will be quantitatively supplemented by the survey answers The survey answers will be analyzed in terms of frequency checking, percentage counts, centrality measurement (i.e mean scores), ranking by mean scores All the statistics will

be included in the appendices, following the Group Code (i.e Appendix A to F) The mean scores will reveal the evaluation of respondents for the situation being asked, while frequencies tell how often an event occur, which help to explain the trend of the issues related to BIS in CBs operation Moreover, written answers to open-ended questions will be categorized, counted and computed for percentage, thus enriching the analysis and discussion of the case

1.11 RESEARCH PROCEDURES

Focused Interview Questionnaire: The Focused Interview Questionnaire

will be used to conduct the interview with top management of CBs As a part of explorative research method, the questionnaire with nineteen questions (mainly open-ended questions) will be started with a definition of BIS model to help respondents have a clear concept of the interview content It will be divided into two parts named as Part I (personal profile) and Part II (study area) The study area then will be grouped into six items including organizational benefits, organizational readiness, external pressure, perceived ease of use, risk tools and other related issues The related issues consisted of four additional questions, which help to explore more deeply the experiences, achievements, solutions, and recommendations that CBs may have to enhance the effectiveness of BIS application, especially the effectiveness relationship between BIS and safe capital The detailed questions for each item will be designed to help respondents a better focus in the interview Depending on the situation during the interview, the interviewer could raise the extra questions to

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clarify the content of the focused question on the purpose of having the correct answers for the questions

Survey Questionnaire: The second type of instrument used in the study

will be survey questionnaire Similar to the interview questionnaire, the survey questionnaire will be also divided into two parts and grouped into the items as the interview questionnaire However, in the role of a tool of descriptive method, thirty questions (mainly closed-ended ones) will be designed to have an overall picture of Risk in business activities of CBs More specifically, these questions addressed situations where the respondents could evaluate the suitable degree

to his/her enterprise The final question will be explorative to find out the contributions, expectations, as well as recommendations from CBs to The Vietnamese Government in an effort of improving the legal frame and infrastructure for the development of BIS

The survey questionnaire will be structured in four main types of questions They are five-scale (5 to 1), degree of importance (1 to 4), multiple choices and questions for specific information from the enterprises For five-scale questions, the choice 5 will be considered very necessary (i.e question No 1), very important (i.e question No.2) or very ready (i.e question No.4) etc… whereas the choice 1 showed the opposite such as unnecessary, unimportant or unready Beside those two types, multiple choices offered the respondents many choices such as “Yes,” “No,” “Don’t know” or other choices depending on the situation where the question will be raised Finally, questions for specific information help respondents freely present their thinking and ideas, which may

be useful for the study

The cover letters, the interview questionnaire and survey questionnaire will

be translated into Vietnamese by the researcher himself to help respondents grasp the content of the questions Both Vietnamese and English versions of the questionnaires will be included in Proposed Interview and Survey Questionnaire

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1.12 RESEAR CHAPPROACH

The two major instruments of the study will be an in-dept interview with the top management of CBs (hereby CEOs and managers) and the formal structured survey questionnaire will be answered by representatives of CBs (may be the CEOs, assistants to CEOs, managers, secretaries and staffs), office worker and civil officer in state bank The content of the questions in the interview and the survey will be mainly derived and guided by the conceptual framework as presented and sent to the respondents in HoChiMinh City Specifically, some open-ended questions from the interview will be put in the questionnaire to better understand the current status as well as the goal of increasing the using BIS in the future of the CBs

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CHAPTER II

SURVEY OF RELATED LITERATURE AND STUDIES

THE ORETICAL BASIS FOR MANAGING THE STOCKHOLDER’S EQUITY OF COMMERCIAL

BANK

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2.1 SOME GENERAL ISSUES OF STOCKHOLDER’S EQUITY OF

COMMERCIAL BANK

2.1.1 Overview of the equity capital of commercial bank

The concepts of equity capital of commercial bank

Sources of owner’s equity capital of commercial banks (CB) are operating business in the market divided into four categories:

- Capital of commercial bank, including chapter capital and basic construction capital…

- The funds of commercial bank

- Undistributed profits of commercial bank

- The difference amounts from revaluation of assets, foreign exchange, gold, silver,

Sources of owner’s equity of commercial banks is also called the equity of commercial bank Standpoint of business risks, the equity of bank is considered the "strength and buffer" safe for business operation of bank

 According to Basel II regulations of the Bank for International Payment Service(BIS), the equity capital of commercial bank include capital

level 1, level 2 and level 3

Capital level 1 (or core capital), a high-quality capital, including capital on the books of common stock, irregular accumulated preferred shares and reserve funds from the cumulative income after tax

Capital level 2 (or supplementary capital), is low quality capital, including funds related to the changing conditions, such as reserves for loan losses in general, dependent long-term debt and preferred share for accumulation or re-usability

Capital level 3 (which is expected to expand the definition of capital), including debts depending short-term is used to offset market risks

 According to the professional aspects, the equity capital of

commercial bank is interpreted as follows:

- In accounting aspect, the equity of a bank is a net asset value, or the

difference between the book value of credit assets and book value of debit

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assets of the bank at a certain time With this interpretation, the own capital is not considered an debit asset of the bank as traditionally conceived, but based

on the relationship between equity with other financial indicators, bank can determine their own capital more accurately

- In economic aspect, equity capital is the bank's own capital contributed by

the owners and capital created in the business process under form of retained earnings and other forms of attraction In this view, equity is the basis for banks

to actively orient the financial distribution policies, the implementation of strategies to attract capital, expand cooperation and business development

- In legal aspect, the bank's own capital is the basic legal conditions for the

bank was founded and is the main financial factors to ensure debts owed to clients, ensuring the safety for activity The codified of each stockholder’s equity helpingto clarify legal liability of the bank for depositors and the ability to ensure cooperation and investment capacity

- In administration aspect, the bank's own capital is divided into core capital

and supplementary capital The differentiation between equity capital according

to structure increases the flexibility for management activities, capital expenditures will be cut and the core capital will be better protected Bank can raise quality of total capital by active management policies to increase competitiveness

In general, the concept of equity of bank includes chapter capital and undivided profit capital in owner’s capital that the bank must organize to mobilize, and the capital share formed through technique to determine safe equity under the supervision regulations of State bank that the banks themselves can not impose according to the subjective

2.1.2 Constitute stockholder’s equity of commercial bank

The own capital of bank can be composed in many different ways, depending on the type of bank ownership has three main types exist:

Capital stock of bank, the amount of capital contributed by shareholders

directly or purchase shares written in the charter or contract when establishing

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bank, or a total value of outstanding shares of the founding shareholders and normal shareholders According to the Financial Credit Law Vietnam, the capital stock of commercial bank can only be formed when at least 35 or more shareholders, including shareholders are State Enterprises must have shares of

at least 10% or shareholders are the foreign legal entity or individual, but total ownership of shares less than 30% of charter capital

The funds of the bank, as the capitals are formed when increasing the

value of assets, including surplus of capital stock, undistributed profit supplemented into chapter capital; difference in revaluation of assets; unused funds, According to Decree No.146/2005/ND-CP of Government dated 11/23/2005, annual regulations on the basis of net profit that the bank must deduct 5% for the reserve fund to supplement into Charter capital (the balance of fund does not exceed the level of Charter capital) The remaining profit after deduction of losses of last year and amounts due to violations of law will be deducted 10% for the financial reserve fund (fund's balance does not exceed 25% of the level of Charter capital) and deducted 50% to make professional development investment fund and 5% for reserve fund of unemployment benefits (the balance of fund not exceeding six wage months) For joint stock commercial banks these rates decided by Board of Directors

Supplement bonds and debentures of banks, deposits are not subject to

compulsory reserve requirements, with long-term, with attraction costs are relatively low and do not reduce income per share when issuance of new stocks The debt securities are an important sources of capital used by Commercial Bank

to supplement capital and often ranked after distrained property as payment of debts Currently the State of Vietnam has promulgated the Law on Negotiable Instruments, but due to lack of guidelines so commercial banks are sufficient legal basis to exploit these tools

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2.1.3 The characteristics of the equity capital of commercial banks

Capital used with plan and target, stockholder’s equity always mobilize and frequently participate in all development process of product, new service, expansion of operations… Using capital with plan will increase the active for bank

in making financial policies

Social capital, stockholder’s equity formed from legal capital sources that allowed to circulate widely on the market In the integration condition, stockholder’s equity of bank with international nature attached to high competition environment Capital attraction through financial market by multi form financial

instruments opened many linking directions for banks may the risks

Valuable capital and private price, the value of stockholder’s equity attached to prestige, capacity, position of capital’s owner and capital supply and demand relationship on the market The internal capacity of capital decided by administration capacity, quality of product and service, risk position, advantage

and developmental potential of bank

Capital with cost, the level of cost ruled by characteristic of attraction

channel, each channel only adapts fixedly with management mechanism and position of each investor and each bank that uses capital Supply and demand relationship of investment is very multiform and has high opportunity, determine position exactly, prepare well basic conditions and decide timely, all are condition

for the bank to select suitable investment capital resource, bring high benefit

Economic capital, the efficiency of capital use only proves when

stockholder’s equity accumulated and concentrated to a necessary level, enough

to meet developmental requirement of organization in each period and on each specific market The economics of capital scale will increase gradually according

to competitive advantage stair, higher stockholder’s equity, the more bank has

condition to select more favorable market

At developmental countries, operation of bank is in innovation process, law system and policy mechanism hasn’t been complete, so management of stockholder’s equity of commercial banks of ten meets many difficulties Full

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awareness of attributes of stockholder’s equity, banks can find the way to develop capital more appropriately

2.1.4 Basic functions of stockholder’s equity of commercial banks

During the process of business operation, stockholder’s equity of commercial banks performs three functions: responsibility function, operation function and adjustment function

2.1.4.1 Stockholder’s equity performs responsibility function of asset

for depositor

As a limited company, firstly commercial banks must show fully responsibility of assets of trader for deposits in order to create trust and peace for customers The nature of protecting interests for depositors is protection of safety for bank When performing this function, the bank must have enough stockholder’s equity to ensure payment capacity in any case, and the bank must provide reserve capital to maintain debt payment capacity to avoid threat by loss

Bank business is operation field with high susceptibility, often attached to risks A bank still bear unexpected damages, although all operations are happening very well and prepared enough effective measures to minimize risks Therefore, during administrative process, banks must consider carefully estimates of profit and estimates of risks This is the reason made the Central Bank very interested in establishment of special safe regulations to monitor closely stockholder’s equity of commercial banks, in order to avoid bad effects to the economy and protect interests for society

In general, when performing responsibility function of assets for depositors, stockholder’s equity of bank must be prepared fully as frequent capital resource that ready to compensate all risks that may occur A commercial bankwith large stockholder’s equity will have a responsibility of assets larger than commercial banks with small stockholder’s equity, but that doesn’t mean that large stockholder’s equity then operation of bank will be safer Therefore,

“stockholder’s equity for a commercial bank doesn’t depend on decision of

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business operation scale, but it mainly attached to the real risk that the bank accepted or is accepting”

2.1.4.2 Stockholder’s equity performs investment function to meet

requirements of bank business operations

Stockholder’s equity isn’t only used as “shield” and “safe buffer” but also used in investment to meet business operation of bank When performing investment function, stockholder’s equity of bank used for investment target in fixed asset and short-term and long-term investment to create profit

The fixed assets are material and technological condition that have decisive meaning to stature, scale of a bank Modernization ability of fixed assets depending on whether the bank has enough scale of necessary stockholder’s equity source and investment strategy used properly or not According to Law of Vietnam Credit Organizations, commercial banks only allowed to invest in fixed assets by 50% of stockholder’s equity

When investing into short-term and long-term assets, stockholder’s equity

of commercial banks used to invest in shares, corporate bond, public bond… one side to create profit, other side to maintain usable capital level for bank

2.1.4.3 Stockholder’s equity performs function to set up limitation for

business operation of bank

When establishing or developing new branches as well as when deploying new operations, new banking operations or when deciding to investment in lending, purchase of asset, or when deciding repurchase, mergence… to have enough capacity to perform the above decision and enough legal base to be issued business license, stockholder’s equity of bank is necessary to be redefined so that corresponding with the real requirement that may occur

The banking supervisory authorities often determine the required equity capital by giving the regulations to limit specific minimum capital for each operation of the bank These limits are legislated by the specific legal standards

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with a range of related binding provisions, based on the risk classification of invested assets, the level of difficulty, differences between banks

In many countries, the management and supervision of banks use regulations about the limitation rate stockholder’s equity as a macro tool to regulate the activities of commercial banks The very strict constraints made banks to more attention to restructuring the portfolio and risk management, to develop strategies to exploit and use their own capital so that high effective as long-term investment capital

In summary, the full implementation of the functions of own capital is a necessary condition for the bank to create a healthy framework for the governance, reduce risky behavior with risk However, banks also need onvation point in management of positive equity and better suited to really bring long-term growth and steady profits, maintain sustainable development, and prevent the ultraconservative policies that undue danger or risk

2.2 REQUIREMENTS TO ENSURE CAPITAL SAFETY IN BUSINESS

OPERATIONS OF BANK

Capital increase is a basic condition for banks to fulfill the functions, but increase of capital will also increase costs and reduce profits To achieve the desired return, the banks often reduce the limit rate or keep high equity capital, but also increase the risk trading method To force the banks to go into operation carefully, at countries, the Central Bank will focus on strengthening measures to ensure safety of capital, the main content is to build and improve the regulations

on capital safe regime

2.2.1 General provisions on capital safe regime in business operation of

bank

2.2.1.1 Regulation of capital safe concepts

As announced by the Basel Committee in 1989, commercial banks often must reserve enough necessary reserve funds, ready to cover any losses that

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may occur to ensure safe business operations Depending on the nature of each loss, the bank used the appropriate funds to offset:

For the losses with foreseeable risks, banks may use funds from reserve

fund for bad debts that classified according to standard for compensation Although this fund is established from the business cost, but if the rate is too high that may directly affect to the profit and the interests of shareholders that reduce the bank's reputation in the market

For losses with unforeseen risks, banks must use their own capital as a

source of reserves to compensate If the ability of risk management is weak causing high losses in the bank's own capital will be worn, financial scale and competitiveness of the banks will be affected

From the above theoretical basis, BIS has launched a number of definitions

to measure the safety stockholder’s equity for a commercial bank as follows:

Safety stockholder’s equity, is the necessary minimum stockholder’s

equity required by a commercial bank to perform the major functions: "reserve for

un predict able losses" in order to protect the interests of the depositors and lenders[22]

The minimum equity capital, the minimum equity capital is for a

commercial bank to ensure business requirements The level of the minimum equity capital depending on the specific object, the laws of each country and economic development requirements in each period[22] These standards are defined as follows:

- For new banks came into operation, the minimum level of own capital is a

nominal value fixed by Central Bank

- For banks went into operation, the minimum equity capital is capital ratio

based on risks

- For bank supervisors, the minimum equity capital is the compliance of

banks on the necessary guarantee limits based on consideration of each circumstance

Stockholder’s equity ratio based on risks, is a relative criterion

expressed in percentage between the bank's own capital and the value of assets

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are risky in internal accounting tables and amounts of risk in balance-sheet accounting The coefficient of determination was defined by the different risk levels, depending on the nature of each property

In general, the term of safety stockholder’s equity is used to show the minimum equity capital that a bank activity required to meet the requirements to cover unexpected losses than expected, corresponding to the current level of risk that banks may bear on the specific competitive market

2.2.1.2 Regulations of determination regime of safety stockholder’s

equity

According to BIS, the regime to determine necessary safety stockholder’s equity for a commercial bank basically defined including three elements: components, regulation and safe stockholder’s equity formation resources Although the regime to determine safe stockholder’s equity in each specific

country with some different rules, but all respect the general principles as "All

safe stockholder’s equity sources must focus on elements ready to cover the unexpected losses”

Regulation of components of safe stockholder’s equity, stipulates safe

stockholder’s equity of a commercial bank to be created from the elements can compensate for unexpected losses These elements are arranged according to the nature of each capital type Basically safe stockholder’s equity is classified into two types:

- The first type is called core capital, including capitals with high quality as

capital stock and basic reserve funds

- The second type is called secondary capital or additional capital, also

includes the factors that can cover the unexpected losses, but considering the nature and stiffness of these elements are lower

Rules about safe stockholder’s equity, specifies the elements on

balance sheet considered the capital of the bank itself, in which elements are considered the foundation of core capital and the composition the capital be considered supplementary capital Specified the amounts to be deducted from

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the safe stockholder’s equity including assets meet difficult and the assets with less tangible value In addition, regulations stipulates, banks must establish adequate reserves and use the additional funds to increase resilience to risk, safety protection for the core capital, and leverage to expand operation scale to increase profitability

Regulation on safe stockholder’s equity formation resourcesstipulates

- Basic capital source, also known as core capital includes factors related

directly to net profit and the ability to expand the financial volume of bank The determination of basic capital associated with evaluating the quality of total capital as the basis for establishing standard of minimum safety stockholder’s equity Basic capital, including:

+ Common share, is formed from two sources, partly from retained

earnings are used to provide additional capital for the shares and partly from the issuance of new shares to be used to increase share capital

+ The basic reserve funds, the funds are established or determined the rate of keeping interest or other surplus amounts extracted from profits after tax, such as stock bonus and undistributed profit after paying dividends, general reserves, legal reserve funds to supplement into capital, profits from equity contribution at branches

- Supplement capital, also known as secondary capital, commercial

banks can set the following additional funds depending on the permission of Supervison Agencies:

+ The underground reserves, including the cumulative surplus aftertax of

accumulated profits These funds can be created in several ways depending on regulations and accounting regimes of each country

+ Reserve funds from revaluation of assets, depending on the accounting

regime in each country Usually there are two ways, formal assessment of bank’s assets in settlement of the volatility of the market and the revaluation of investment securities of banks have been accounted in asset balance sheet in comparison with previous price

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+ General reserve fund, is the general reserve funds to prevent loss of

capital loan is created to prevent the loan loss can not be determined in the future, not related to those assets have been classified The maximum level of this fund is 1.25% or highest 2% of assets that contain risk

+ Mixed capital instruments(Debt - Equity), including capital instrument with coordination nature of both debt and equity, but must satisfy several requirements: Firstly, not guaranteed, unimportant and entirely subject to the contribution; Secondly, the first holders not to sell if they had not been inspected; Thirdly, ready to offset the losses that banks are not forced to suspend work business (other than the auxiliary debts); Fourthly, paid a fixed interest rate Currently this type has preferential shares with accumulation and capital instruments, such as long-term preferred shares in Canada; certificate of capital contribution and auxiliary bond vote with unspecified duration in France, Gensscheine in Germany; the perpetual auxiliary debts such as preference shares in the UK; convertible debt instruments, trust in the United States,

+ Dependent Debts with term (capital bonds and debentures), including

depending debt not guaranteed According to common practices, these instruments must have a minimum original term of 7 years from the date of issuance, if the shorter will be subject to the legal reserve requirements and must have a time limit to offset the preference shares General provisions, within the last 5 years these debts will be subject to cumulative discount factor of 20% per year in order to demonstrate the value declines as a continuous resource These means are often limited to a maximum of 50% of basic capital by not available to cover losses

2.2.1.3 The policies about shareholder

From 1999 until now:

On Jan 1990, the Commission proposed a new capital regulation known

as Basel II After two times of expansion of supervision, counsel activities on 1/2001 and 4/2003 to direct a research into accurate quantitative impact Factors,

on 5/2004 Basel II Act has been officially declared which based on three main

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issues: minimum capital requirements, comprehensive supervision and market discipline Basel II's new capital framework is set by the three contents:

 Firstly, further increasing the sensitivity of the capital framework,

connect the minimum capital requirements with those risks, actual economic losses Banks can chose appropriate risk assessment perspectives and have

to commit to have made other forms of mortgage insurance and deposit insurance less complex, as well as the use of simple control mechanisms is suitable with the purpose of capital rules to allow accurate assessment easier credit quality If operations of the bank are detected many potential risks, oversight agency will require to create an internal credit risk measured system (IRB) In addition, banks are also right choice appropriate risk assessment when ranking credit risk, but must be clear legal responsibility if the losses caused For the operational risk, depending on quality risk management, oversight organization may conduct internal control in some areas where risks are particular;

 Second, is strengthening regular oversight programs about internal

judgments of the entire risk Deciding minimum capital level requirement, operation area adjustment must be based on evaluating the category of operations and risks according to separately each bank Basel II recommendations supervisors and commercial banks should hold dialogues,

as well as expand the participation of reputable control organizations to unite the internal assessment in measurement and management these risks process;

 Third, motivate prudent managements of banks, Basel II requires bank

supervision agencies have to focus on: determining accurate and declared limited ability to market points for restricting to spreading of credit investments; upgrading the length of time for transferring financial documentation to eliminate the ability to deliberately create larger potential hidden loans into full capital; expanding the public's awareness and comprehensive participation of market organizations in the bank activities and controlling risks;