MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM -------- & -------- a thesis for THE DEGREE OF MASTER IN PUBLIC POLICY SYSTEMIC RISKS IN VIETNAM’S FINANCIAL SYSTEM AND MACROPRUDENTIAL IMPLICATIONS by LE XUAN HUNG Ho Chi Minh city, 2015 TIEU LUAN MOI download : skknchat@gmail.com MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM -------- & -------- LE XUAN HUNG SYSTEMIC RISKS IN VIETNAM’S FINANCIAL SYSTEM AND MACROPRUDENTIAL IMPLICATIONS MASTER IN PUBLIC POLICY THESIS CODE: 60340402 supervisors JAMES RIEDEL DO THIEN ANH TUAN Ho Chi Minh city, 2015 TIEU LUAN MOI download : skknchat@gmail.com i CERTIFICATION I certify that the substance of the thesis has not already been and is not being submitted for any other degree. I certify that to the best of my knowledge, any source used and help involed have been acknowledged in the thesis. The views stated in the thesis are of my own and do not necessarily reflect the views of the Ho Chi Minh City Economics University or Fulbright Economics Teaching Program. Author Lê Xuân Hùng TIEU LUAN MOI download : skknchat@gmail.com ii ACKNOWLEDGEMENTS I would like to express my gratitude to everyone in my family, who has provided me with tremendous support and encouragement during my study and my whole life.
I would like to express my sincere appreciation to my supervisors - Mr. Đỗ Thiên Anh Tuấn and Dr. James Riedel, without whom I shall not be able to complete my thesis. With rich knowledge, a lot of experiences and great compassion - my supervisors has guided and enlightened me through many hardships of completing this thesis.
I would like to thank all teachers and staffs in Fulbright Economics Teaching Program (FETP), who have transferred much of their knowledge and experience to me. I truly appreciate FETP’s founders for creating such an inspiring program that opened up to me a whole new horizon of knowledge. Last but not least, I would like to express my thanks to all of my friends and colleagues, who helped and encouraged me during my time at FETP. Author Lê Xuân Hùng TIEU LUAN MOI download : skknchat@gmail.com iii ABSTRACT Vietnam is addressing financial instabilities by strengthening its grip onto the banking sector and financial system in general.
It is done via improving financial safety measures, addressing cross-ownership relations and restructuring non-perform loans. Meanwhile, after the global financial crisis, a new line of research related to systemic risks and macroprudential policy had taken center stage with various implications. This study explores the application of these implications in reducing systemic risk of Vietnam financial system using qualitative analysis; via (1) formulating the implications of macroprudential approach with emphasis on network theory; (2) identifying the systemic risks in Vietnam financial system during 2009 – 2011 and (3) assessing recent reforms’ ability to reduce systemic risks in the financial sector. The results indicate that there are four groups of systemic risks in Vietnam financial sectors: expansionary macro environment, weak currency position, sector-wide degradation of capital quality, and structural weakness at institutional and systemic level.
Recent reforms are positive in addressing those risks, but only from microprudential perspective. Yet, the coverage of macroprudential policies is low and incomplete. The study suggests that a more holistic approach is needed in improving financial stability, with specific recommendations including (1) embrace the networked and dynamic nature of financial system; (2) facilitate development of non-bank financial institutions; (3) address regulation transparency and data availability; (4) construct a dependable set of indicators that reflect phases of risks build-up and roll-out and; (5) further consolidate supervision structure. TIEU LUAN MOI download : skknchat@gmail.com iv TABLE OF CONTENT Certification.
iii Table of Content. iv Table of Abbreviations .vii List of Figures. ix List of Tables. Instabilities of Vietnam’s financial system.
Objectives and scope. 4 Chapter 2: Macroprudential regulation framework. Principles of financial regulation. Systemic risks and macroprudential policy.
Externalities of systemic risks. Phases of instabilities. Network anatomy of systemic risk. Development of macroprudential approach.
22 Chapter 3: Financial instabilities and systemic risks. Risks build-up. 25 TIEU LUAN MOI download : skknchat@gmail. Biased banking sector.
Quality of capital. Exploitive cross-ownership. Systemic stress materialization in financial sector. Non-performing loans.
Real-economy spillovers. 38 Chapter 4: Reforms in financial sector. Shock absorption capability of credit institutions. Contagions and network structure.
Information and regulation framework. Systemic risks in Vietnam’s financial system. Applications of macroprudential policy. Benchmark of recent reforms.
Notes on macroprudential policy implementation. 53 List of References. 55 List of Regulations. 62 Appendix 1: Seismic anatomy of financial crises.
62 Appendix 2: Financial accelerator effects and macro-financial linkages. 62 Appendix 3: BICRA (Banking Industry Country Risk Assessment) score. 63 Appendix 4: Theory of financial instability. 63 Appendix 5: Network model of systemic risks.
64 Appendix 6: Group of 30’s set of macroprudential tools. 65 TIEU LUAN MOI download : skknchat@gmail.com vi Appendix 7: Motivations for macroprudential policy adoption. 66 Appendix 8: Cost of prudential regulations. 69 Appendix 9: Capital inflow and the potential build-up of vulnerability.
71 Appendix 10: Cross shareholdings, interbank lending and investment vehicles. 72 Appendix 11: Shareholding structure in Vietnam’s banking sector. 73 Appendix 12: Indicators for identifying global SIFIs. 74 Appendix 13: Financial soundness indicators.
75 Appendix 14: Macroprudential instruments reference. 76 TIEU LUAN MOI download : skknchat@gmail.com vii TABLE OF ABBREVIATIONS BIS - Bank of International Settlement CAR - Capital Adequacy Ratio CCA - Contingent Claims Analysis CI - Credit Institution CoVaR - Conditional Value-at-Risk DSA - Debt Sustainability Analysis DTI - Debt-To-Income ratio ECB - European Central Bank EU - European Union FETP - Fulbright Economics Teaching Program FI - Financial Institution FSI - Financial Soundness Indicators FTA - Free Trade Agreement GDP - Gross Domestic Product GSO - General Statistics Office IAS - International Accounting Standards IFRS - International Financial Reporting Standards IMF - International Monetary Fund IT - Information Technology JPoD - Joint-Probabilities of Distress JSCB - Joint-Stock Commercial Bank LCI - Law on Credit Institutions LTD - Loan-to-deposit ratio TIEU LUAN MOI download : skknchat@gmail.com viii LTI - Loan-to-income ratio LTSF - Loan-to-stable-funding ratio LTV - Loan-to-value ratio NPL - Non-Performed Loan SBV - State Bank of Vietnam SIFI - Systemic Important FIs SOBC - State-Owned Commercial Bank TPP - Trans-Pacific Partnership agreement USD - United States Dollar VAS - Vietnam Accounting Standards VCBS - Vietcombank Securities Company VELP - Vietnam Executive Leadership Program VND - Vietnamese Dong WB - World Bank WTO - World Trade Organization TIEU LUAN MOI download : skknchat@gmail.com ix LIST OF FIGURES Figure 2.1: Loss and margin/haircut spiral that arise due to leverage and maturity mismatch .2: Build-up of Systemic Risk: Sources and Channels .3: Transmission Channels of an Exogenously Induced Credit Supply Shock .4: Macro-financial linkages between real and nominal (i.1: Exchange rate from 1/1/2007 – 2012.2: Share of credit to the economy by group of credit institutions and total credit to GDP .3: Growth of credit, deposits and GDP during 2000 – 2010.4: Market share in banking sector.5: Net credit between CIs. Showing large SOCBs acted as credit providers to JSCBs.6: NPLs ratio of commercial banks. Showing adjustments after Circular 13 in effect.1: Understanding network topology is key in macroprudential policy.
45 TIEU LUAN MOI download : skknchat@gmail.com x LIST OF TABLES Table 2.1: Classification of FIs based on their systemic risk contribution.2: Externalities and Macroprudential policies .3: Comparison of macro- and micro-prudential perspectives.4: The macroprudential toolkit.5: Classifies the set of potential tools. 21 TIEU LUAN MOI download : skknchat@gmail.com -1- Chapter 1: INTRODUCTION 1. Instabilities of Vietnam’s financial system Vietnam’s macro environment is relatively stable in the 1997-2006 period, with low inflation, a higher growth rate – 7% to 9% annually – and a moderate level of trade deficit. Early 2007, Vietnam joined the WTO1.
It marked the start of a turbulent time when firms in public and private sector began to experience structural problems, rising inefficiency, and waste of resources. Problems exhibited via macro indicators, including: reduced GDP growth, unemployment2, high inflation, plummeted exchange rates, liquidity shortage in banking sector, stagnated stock market, etc. Area that received the most media coverage was financial sector with banking system at the epicenter. Vietnam’s banking sector expanded rapidly during this period and its troubles were pronounced indication of fundamental weaknesses in financial system.
In this period, we can see many kinds of issues - at different severities: liquidity shortage, regulation circumventions, cross-ownership, prevalent Non-performing loans, etc. To be fair, it is not all bad as the economy is still growing, and the government succeeded at re-gaining control of the economy with steady single digit inflation rates and above 6% growth for the first quarter of 2015. Optimistic as it sounds, it is also a point for debates. Was these macro issues remedied by short-term solutions? Were root causes addressed? It is considered (VELP, 2012) that these problems are consequences of long-standing structural problems nested inside the economy: misallocation of resources, ownership structure, inefficient public spending, 1 Actually, its effect has already appeared a year prior with VNIndex growth of 140% at the end of 2006 compare to end of 2005.
2 Official data does not show a high unemployment rate. However, it may be due to the more people work in subsistence agriculture with little or no engagement with the market economy (Phu Huynh, 2014) TIEU LUAN MOI download : skknchat@gmail.com -2- local credit-fueled growth, and other factors. With TPP entrance in sight, will history be repeated? In the wake of 2007 – 2008 global crises, the idea of systemic risk has risen as a prevalent approach to analyze instabilities in financial system. The macroprudential approach - as a way to reduce systemic instabilities - has emerged as a recommended practice in supervising financial systems.
Studies also indicated that the application of these theories is not limited to developed economies but also highly applicable for emerging economies (Mihet, 2013). In Vietnam during 2006 – 2011, besides external factors, a major source of financial instabilities came from wrongdoings of FIs and shortcomings of regulations (VELP, 2012). The negative consequence was not limited in those faulty FIs or within financial sector but also affected negatively other well-behaved FIs and the rest of the economy. It is questioning that will and how macroprudential approach (1) help with understanding and (2) provide regulators with tools to mitigate these problems of Vietnam? 1.
Objectives and scope This study argues that macroprudential approach is beneficial for Vietnam by taking into account the instabilities of Vietnam financial system and general economy during period of 2006 – 2011. It focuses on aspects of systemic risk and indications of microprudential supervising approach’s deficiencies. The study also briefly reviews new regulations (since 2012) against macroprudential recommendations. To meet those objectives, the research questions are: 1.
What are the aspects of systemic risks in Vietnam financial system during 2006 – 11? 2. How macroprudential policy can prevent/mitigate those risks in the context of Vietnam? 3. How does recent financial reforms compare against the recommendations? The main research subjects are: (1) mechanism of systemic risk and financial instabilities; (2) motivations, tools and indicators of macroprudential approach in financial system TIEU LUAN MOI download : skknchat@gmail.com -3- supervision; (3) systemic risks of Vietnam’s economy and financial system during the period of 2006 – 11; (4) current financial reforms.