Not among the 10 banks selected by the State Bank of Vietnam (SBV), but the Orient Commercial Bank (OCB) has announced to complete the application of advanced capital and risk management method i.e. Basel II.
*OCB takes the lead in implementing Basel II
With the rigorous standards about capital adequacy and risk management, the application of Basel II is expected to help banks operate safer, healthier, while the capital source is managed more efficiently, bringing about better and more sustainable business results.
Especially, after carrying out Basel II, with capital indicators and requirements about liquidity and risk management meeting international standards, Vietnamese banks will have opportunity to reach out to the markets of other developing countries.
The most obvious benefit that Basel II brings about to Vietnam banking system is to strengthen the healthy and transparent competition of the system, strengthening the resistance of banks against market instability and fluctuations. Better risk management capability of banks helps Vietnam economy grow more sustainably, reducing the risks of bankruptcy, crisis and bad impacts to the economy as crisis happens.
It can be seen that even for big banks, the application of Basel II is entirely not easy.
Seeing these great benefits, the State Bank chose 10 banks to pilot applying the capital and risk management method under Basel II standards including BIDV, Vietinbank, Vietcombank, Techcombank, ACB, VPBank, MB, Maritime Bank, Sacombank and VIB. It is expected that at the beginning of 2018, this pilot will be completed, and then will be expanded to other domestic commercial ones. Under Circular No.41/2014/TT-NHHH, the year 2020 will be the time when all Vietnamese banks have to comply with these regulations.
However, so far, the 10 aforementioned banks still have not announced the pilot completion of Basel II application. Meanwhile, OCB was proactive in carrying out Basel II. At the end of 2017, this bank officially announced to complete the application of Basel II standards.
According to OCB, risk management under Basel II standard is important for the global integration roadmap and is also the best way to protect customers. Moreover, the sooner the completion of the application of Basel II standard, the more optimal the operation efficiency is, so OCB has determined to complete the project soon.
The application of Basel II standard is a very great challenge not only for OCB but also for all Vietnamese banks because criteria for banks to apply Basel II risk management framework is too strict, from database to capital safety ratio. That is also the reason why many banks have not completed plans for implementing and applying Basel II standards in spite of knowing that is very important for their activities.
OCB said there have had many different difficulties since Basel II implementation project was newly established until now. Especially, the sufficiency and quality of data is one of the very great challenges of which banks that want to carry out Basel II will have to overcome.
For example, the information collection of more than 40,000 customers having contract transactions, BL, LC at 117 transaction points of OCB nationwide during six months, along with the implementation of business activities, was a very difficult period for the bank’s leaders and employees.
Besides, the change in perception, opinions about risk management of the entire system, from the lowest level to the highest level, including the abandonment of traditional products with high risks and the replacement of lower risk products, was also one of the challenges that OCB had to overcome.
In addition, there were numerous difficulties from many sides such as the coordination among units was not always smooth, the training and assurance that more than 5,000 OCB employees clearly understood about values and challenges that Basel brought about and explained to customers about OCB changes.
The fact that OCB becomes the first, surpassing 10 pilot banks in the application of risk management standards under Basel II, apart from the bank’s great determination, also has advantages of scale compared to banks in the aforementioned group, especially for four state-owned joint stock commercial banks. With smaller scale, the application of capital safety standards and completion of risk management system will also be easier.
*Vietnamese banks face a lot of difficulties in applying Basel II
The application of Basel II of Vietnamese banks under the roadmap is coming closer. At the end of last year, after OCB announced to have met risk management standards under Basel II, some large banks signalled that they are coming closer to the application of international standards about risk management.
First was HDBank. According to this bank’s leader, since 2015-2016, before the State Bank’s issuance of Circular No.41, the bank made plan to apply capital and risk management standards similar to Basel II.
HDBank hired E&Y to be the consultant about Basel II application and has now completed the first stage, and is carrying the second stage of the project and there only remain two uncompleted criteria now. It is expected that in this year, HDBank will meet standards of Circular No.41, two years sooner than the compulsory period of the State Bank.
Meanwhile, Vietcombank said the project has basically completed the target of developing a solid framework for market risk measurement and management for current and future capital business products. With the completion of this risk management framework, Vietcombank has basically completed the major targets of the risk management programme under Basel II standard, except the capital increase.
Though BIDV has not released the specific implementation roadmap, in its recent announcement, the bank expressed the determination to carry out Basel II successfully and quickly, and strongly apply international practices and standards to change business methods towards risk-based business decisions.
Being in the restructuring phase after the merger of SouthernBank, but as one of the 10 banks selected to pilot applying Basel II, Sacombank has recently made quite strong moves to touch Basel.
Specifically, the bank signed the contract to build Loan Origination Software (LOS) with the total investment of more than 100 billion dong with the partner i.e. Aurionpro-Integro joint venture.
LOS Sacombank project includes three major systems including creation of credit records, limit management and management of collaterals. The new software system is expected to make it easier for Sacombank to manage credit records, collaterals, limits as well as control, look up, report, manage credit risks and minimise incurred bad debt. It is expected that at the beginning of 2019, Sacombank will complete the construction process and put LOS system into use.
The reality shows that the implementation of Basel II still has many difficulties for Vietnamese banks.
The capital treaty Basel II aims to enhance the safety, effectiveness, healthiness, and competitiveness of the banking system through three pillars. The first one is to meet capital safety ratio (ensuring capital for credit risk, operation risk and market risk). The second one is to enhance operation capability, risk management, self-evaluation of capital adequacy of banks and inspection, monitoring responsibility of management agencies. The third one is to strengthen information transparency and publicity about operation of banks, and comply with market disciplines.
The first pillar requires the minimum capital adequacy ratio (CAR) at more than eight percent, but currently, many banks cannot meet when the CAR is calculated following Circular No.41 and Basel II. The second pillar and the third pillar are also the challenges for banks.
Most banks have just met a small part of Basel II’s requirements for pillar 2. Banks have not identified risk-based targeted capital, not calculating additional capital or adjusting targeted capital based on the examination of capital durability following normal operation scenarios and adverse ones, not making capital plan including expected capital increase and distribution of targeted capital for business operation, not supervising and making internal report about the capital adequacy.
For the third pillar about information disclosure, most commercial banks announced information about business operations, contents that require information disclosure following the guidance of Circular No.41 and unimplemented regulations about transparent information announcement of Basel II.
The supervision and monitoring activities have not fully complied with Basel II’s 29 principles of inspection and monitoring, information technology infrastructure and new qualification model at simple level, human resources have not met, the new supervision method is approaching supervision and monitoring on risk basis.
Therefore, to carry out Basel II, banks will have to face a lot of pressures. Not only the capital increase pressure but also the enhancement of management capability, compliance with market principles are also large hindrances that banks have to overcome.
According to VCBS’s assessment, the pilot application of Basel II will put pressure on capital increase and operation costs for banks in this year. In this race, 10 state-owned commercial banks will have to suffer from more pressure, because this average CAR is lower than the group of private banks and is just higher than Basel II’s prescribed level. In order for CAR to increase one percent, the bank’s chartered capital must improve 8-10 percent.
As such, it can be seen that for large banks, the application of Basel II is entirely not easy. The application of Basel, in spite of being at Level I, Level II or Level III, is all about capital safety. On the other hand, for commercial banks, having suitable chartered capital to do business is inevitable.
