- English
- Tiếng Việt
- 中文
Applying Basel II is an urgency for Vietnam commercial banks with an aim to ensure a safe and sound banking operation and create a buffer against unexpected material risks such as credit risk, market risk and operational risk. In recent years, the State Bank of Vietnam (SBV) as well as Vietnam commercial banks have made a great deal of effort to execute the standards under Basel II. In December 2016, Circular 41 is officially issued by the SBV, taking Vietnam banking system a significant step closer to the international standards. Ten “pilot banks”, including BIDV, VietinBank, Vietcombank, Techcombank, ACB, VPBank, MB, Maritime Bank, Sacombank and VIB, are appointed to implement the capital adequacy ratio calculation regulated in Circular 41 before 2019 while the deadline for other banks is 2020.
Circular 41 covers most elements in the two out of three pillars of Basel II, namely Capital Adequacy Ratio (CAR) and Disclosure of Information. The major part of the circular give banks a clear and detailed guideline on the calculation of CAR where credit risk, operational risk and market risk are all considered. The ratio is calculated with equity’s capital as the numerator and Risk-weighted assets (RWA), Capital requirements for operational risk and Capital requirements for market risk as three components of the denominator. Besides providing regulations and guidelines, Circular 41 somehow encourages banks to come up with low risk-bearing business strategies and targets as well as prioritize loans that are eligible for credit risk mitigation techniques.
Overall, Circular 41 adopts quite well Basel II standards with the standardized approach provided in the report on revised frameworks for International Convergence of Capital Measurement and Capital Standards issued by Basel Committee on Banking Supervision and published by Bank for International Settlements (BIS). They share many similarities in terms of requirements and calculations, for instance, CAR is required to be at least 8%, risk-weighted assets are determined by multiplying the capital requirements for market risk and operational risk by 12.5 (i.e. the reciprocal of the minimum capital ratio of 8%) and adding the resulting figures to the sum of risk-weighted assets for credit risk. In terms of risk weights, Circular 41 bears many resemblances but at the same time some differences with the BIS frameworks and consultative documents. For example, the risk weight for retail portfolio is 75% but the conditions for loans to be treated as retail exposures are not the same. The risk weights assigned for exposures to sovereigns and central banks based on credit ratings are basically the same, however, in Circular 41, it is the case of foreign sovereigns and foreign central banks only, claims on sovereign and central bank of Vietnam are 0% weighted. For residential real estate exposures secured by finished property, the Basel Committee proposed, in its 2014 consultative document, to assign risk weights (ranging from 25% to 100%) based on the loan-to-value (LTV) ratio and the debt servicing coverage (DSC) ratio, as a proxy of the borrower’s ability to service the mortgage. This treatment is also adopted by Circular 41 for home mortgage loans. However, in the second consultative document in 2015, given the challenges of defining and calibrating a DSC ratio, the Basel Committee proposed that the risk weight differentiations for these exposures should be based on the LTV ratio and the material dependency of the repayment on cash flows generated by property only. In Circular 41, this treatment is applied for exposures secured by real estates that do not exist at the time of formation of the loans. In terms of credit mitigation, four techniques including collateral, on-balance sheet netting, guarantees and credit derivatives are accepted by both Circular 41 and the Committee’s accord. Their requirements on the calculations of collateral haircuts, maturity mismatch and currency mismatch are very similar. In brief, although the Basel Accord provides much more detailed classification and complex calculations, it can be said that Circular 41 is an evident effort of the SBV to align the frameworks for Vietnam banking supervision with Basel II standards using standardized approaches.
In comparison with Circular 36 issued previously, Circular 41 provides a much deeper classification of asset and requires higher risk weights as well, 0-250% versus 0-150% earlier. Furthermore, Circular 41 includes counterparty credit risk in the calculation of RWA and requires capital reserved for operational risk and market risk while Circular 36 does not. Those are the main reasons why CAR of banks tends to reduce greatly when Circular 41 requirements are met, or in other words, Basel II standards are applied.
With regards to the implementation of Circular 41, major problems for banks lie in their data system and calculation methodology. As required by the Circular, banks need to provide adequate and accurate data for every loan and transaction as input data for the calculation CAR. It is hard to collect sufficient data and it is even harder to process that huge amount of data with various and complicated calculations. Manual calculation, which is not accepted by the SBV, will take a lot of time and effort while its accuracy cannot be guaranteed. Therefore, an automated calculation and reporting tool is a key to the challenges brought by Circular 41, or in a broader term, Basel II standards.
It is noticeable that banks now do not only face the challenge of data collecting and CAR calculation, they also face the likelihood of not having enough capital by 2020, which is the deadline provided by the SBV. This is a severe problem that demands much time and work of many departments in the banks to solve. Therefore, the sooner banks finish the Basel project, the greater amount of time and effort can be spent on seeking for strategies and solutions for capital and risk management.
To help banks overcome these challenges, we have created the Law and Co Basel SolutionTM , a highly integrated solution primarily for Basel II project using SAS as the platform. With the combination of our leading software and our experience in both local market and oversea markets, we strongly believe that we can be of great support for banks in their implementation of Circular 41 and help them finish the project within 9-12 months. Moreover, not only addressing today’s requirements, our solutions can also be further developed to meet future needs, such as Basel III and Basel IV standards.