Banks are trying to raise standards under Basel II

Banks are trying to raise standards under Basel II

High determination.

Since February 2016, 10 commercial banks, including BIDV, VietinBank, Vietcombank, Techcombank, ACB, VPBank, MB, Maritime Bank, Sacombank, and VIB have been required to implement Basel II by the State Bank. Under the road map, after 3 years of application (until the end of 2018), the 10 banks must meet the capital standards under Basel II and the State Bank will implement it in the entire system.

Thus, from the early days of 2017, the Governor of the State Bank issued Directive No. 02/CT-NHNN on enhancing the safety assurance for the credit institution system, continuing to promote the structural credit institution system, and handling bad debts. In particular, the Governor has asked to improve the financial strength of credit institutions, apply Basel II standards and international risk management principles along with the promotion of information technology application, implemention of encouragement and obligation measures (in some cases required) to raise charter capital to improve the financial capacity and the level of safety.

In the action plan of the Government to comply with Resolution No. 05/NQ-TW of the fourth plenum of the 12th Party Central Committee and Resolution No. 24/2016/QH14 of the National Assembly on the economic restructuring plan 2016-2020, the Government has required the State Bank to continue to make financial health, improve the ability of management of credit institutions in accordance with law and international practices; by 2020, commercial banks will have equity capital under Basel II standards, in which at least 12-15 commercial banks have applied Basel II successfully (above the standard method).

In order to prepare for these targets, by the end of 2016, the State Bank has issued Circular No. 41/2016/TT-NHNN regulating the capital adequacy ratio for banks, and branches in foreign countries at 8%. Thus, this ratio is 1% lower than the minimum CAR of 9% prescribed in Circular No. 13/2010/TT-NHNN being applied currently. This Circular comes into force on January 1, 2020 but banks which have the ability to implement the capital adequacy ratio before the deadline may submit registration documents to apply. This move is considered as a signal of paving the way for the application of Basel II standards (CAR under Basel of 8%).

However, according to Prof. Tran Tho Dat, University of National Economics, the regulations on CAR of Vietnam’s banks have gradually complied with the international practices but have not yet applied all regulations under Basel II. The minimum capital adequacy ratio of commercial banks in terms of Vietnam’s accounting standard is much higher than the current minimum of 9%. Though commercial bank shares have the lowest average of CAR, it is still above 10%. However, the CAR of Vietnam’s banking system is much lower than other countries in the region – in the condition of most of them have applied Basel II, and started applying Basel III.

Big pressure.

As reported, the pilot banks applying Basel II have significant moves in capital, monitoring financial disciplines and publishing information. However, in order to meet Basel II standards widely, experts still have many concerns because if the CAR raises by 1%, it is equivalent to an increase in capital of about 8-10%.

A report of Vietcombank Securities Company (VCBS) shows, among 10 banks participating in the pilot, the private commercial banks have adapted better thanks to the CAR being much higher than the levels in regulations, such as ACB, VIB, Techcombank. Meanwhile, the group of state commercial banks will be under pressure of large capital increases.

“Success or failure of the application of new standards also depends mostly on the 3 banks. In particular, Vietcombank has more geographical balance thanks to the ability to mobilize capital from various sources. BIDV and Vietinbank are under much pressure due to their CAR is nearly at the level as provision (9%).

At present, most banks have applied short-term measures to increase capital by issuing bonds, in 2016, ACB and Vietcombank successfully issued 2 trillion vnd of bonds, VietinBank with 2.9 trillion vnd. However, this action has only resolved the situation in 1-2 years to replenish capital, improving indirectly the CAR under the pressure of Basel II standards.

Along with the measures above, many banks have plans to raise capital to complete the process of applying Basel II quickly. Eventually, joint stock commercial banks have proposed to raise foreign investment caps for banks to have increased financial resources.

It can be seen, along with the efforts of authorities, commercial banks are trying to meet international standards, contributing to reach the markets in developed countries. This is an inevitable process of integration and is needed to remove the remaining obstacles that impede the progress of the banking system.