BANKING ACADEMY FACULTY OF COMMERCIAL BANKING GRADUATION THESIS Topic: THE STATUS OF BASEL II IMPLEMENTATION IN JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM Student: Lê Nguyễn Diệu Hương Class: K18CLCB Year: 2015-2019 Student’s ID: 18A4000337 Supervisor: Nguyễn Diệu Hương Hanoi, May 2019 BANKING ACADEMY FACULTY OF COMMERCIAL BANKING GRADUATION THESIS Topic: THE STATUS OF BASEL II IMPLEMENTATION IN JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM Student: Lê Nguyễn Diệu Hương Class: K18CLCB Year: 2015-2019 Student’s ID: 18A4000337 Supervisor: Nguyễn Diệu Hương Hanoi, May 2019 ACKNOWLEDGEMENTS Firstly, I am deeply indebted to my thesis instructor and advisor, Ms. Nguyen Dieu Huong, for her great support and conscientious assistance in the preparation process of this thesis. Secondly, I would like to give my special thanks to all lecturers in Banking Academy, for having taught and instructed me since my freshman days. I am also grateful for a number of friends and classmates who had constantly supported me in starting the work, persevering with it, and finally publishing it.
Finally, I would like to acknowledge with gratitude, the support of my beloved family – my grandmother, father, mother, and brother. They all kept me going, and this thesis would not have been possible without them. i STATUTORY DECLARATION I herewith formally declare that I myself have written the submitted Graduation Thesis independently. I did not use any outside support except for the quoted literature and other sources mentioned at the end of this paper./2019 Signature ii TABLE OF CONTENTS LIST OF ABBREVIATIONS .v LIST OF TABLES.
vii LIST OF FIGURES .1 CHAPTER 1: OVERVIEW ABOUT THE BASEL II ACCORD. Overview about the Basel Accords and Basel II. History of the Basel Accords. Overview about Basel I.
Overview about Basel II. The purpose of Basel II. The “three pillars” concept. Overview about Basel III and Basel IV.
New elements of Basel II compared to Basel I. Basel II implementation in foreign countries. Basel II implementation in BCBS and other EU countries. Basel II in non-BCBS countries.
18 CHAPTER 2: OVERVIEW ABOUT BASEL II IMPLEMENTATION IN VIETNAMESE COMMERCIAL BANKS. Overview about Basel II implementation in Vietnam. Regulations and guidelines on Basel II implementation by SBV. Overall implementation of Basel II in Vietnamese commericial banks.
Impacts of Basel II implementation on Vietnamese commercial banks. Overview about Basel II implementation in Vietcombank. 27 CHAPTER 3: THE STATUS OF BASEL II IMPLEMENTATION IN VIETCOMBANK. Overview about Vietcombank.
Current operation status (Achievements + Remaining problems). Vietcombank’s practice of Basel II implementation. Achievements and limitations in Vietcombank’s Basel II implementation. Achievements in Basel II implementation.
Maintained the minimum capital requirement. Improved risk management efficiency. Maintained the positive performance of information disclosure activities. Limitations in Basel II implementation.
Limitations in raising CAR and increasing capital. Limitations in human resource. Limitations in the data system. The reasons for limitations in Basel II implementation.
An uncompleted legal framework. Capital shortage and the challenge to raise capital. High requirement for human resources. An uncomplete data system management.
High requirements on costs and financial capability. 49 CHAPTER 4: ORIENTATIONS AND RECOMMENDATIONS ON VCB’S BASEL II IMPLEMENTAION AND. Orientations of VCB in Basel II implementation for the year 2019-2010. Discussions and recommendations .56 iv LIST OF ABBREVIATIONS Abbreviation Full form A-IRB Advanced IRB BCBS Basel Committee on Banking Supervision BIA Basic indicator approach BIS Bank for International Settlements BOD Board of Directors BOM Board of Management CAR Capital adequacy ratio EAD Exposure at default EWS Early warning signal F-IRB Foundation IRB FRM Fraud risk management FSI Financial Stability Institution HOSE Ho Chi Minh Stock Exchange IPO Initial Public Offering IRB Internal rate based approach LGD Loss given default NIM Net interest margin NPL Non-performing loans OECD Organization for Economic Cooperation and Development ORM Operational risk management PD Probability of default POS Point of sale ROC Taiwan ROE Return on equity RWA Risk-weighted assets SA Standardized approach SBV The State Bank of Vietnam SEACEN South East Asian Central Banks SoCBs State-owned commercial banks v TSA Standardized approach VAMC Vietnam Asset Management Company VaR Value at Risk VCB Vietcombank VND Vietnamese dong vi LIST OF TABLES Table 1.1 Differences between Basel I and Basel II accords in terms of risk shares .2 Roadmap of Basel II implementaion.1 Key CAR requirements in Vietnamese commercial banks .1 Key financial ratios 2013-2017 .2 VCB's CAR ratios from 2014-2018 .3 The expected charter capital increase after share issuance .4 VCB bond issuance for the year 2018.
36 vii LIST OF FIGURES Figure 1.1 Basel II implementation in the Philippines .1 Outstanding balance at VAMC (unit: billion VND) .3 Revenue growth in the first 9 months of 2018 over the same period .4 ROE for the nearest quarters until September 2018. 40 viii INTRODUCTION Statement of the problem and rationale for the study As a country with a bank-based financial system, Vietnamese banking industry will be highly focused and create huge impacts on domestic finance. Given the current context, it is necessary that Vietnamese commercial banks be well-prepared for implementing international standards that helps maintain sustainability and guarantee safety in banking operation, therefore prevent banks from unpredicted volatility of the financial market. Therein, the Basel Accord, which states a set regulations and requirements for banks to increase safety and operational efficiency, receives a lot of attention from banking regulators.
The 1988 Basel Accord (Basel I), which stated a set of minimum capital requirements for banks has been successfully enforced in many countries, including Vietnam. Nevertheless, the first Basel accord carries several pitfalls, which paved the way for the implementation of Basel II. In Vietnam, applications of Basel II have been projected and put into practice. The State Bank of Vietnam (SBV) has issued different legal documents that provide guidelines and requirements in accordance with Basel II.
Specifically, 10 selected Vietnamese banks are piloting the first phrase of the Basel II roadmap indicated by SBV. As expected, in phrase two, most banks will have regulatory capital meeting Basel II requirement, and at least 12-15 banks will be able to fully apply Basel II. Among the 10 piloting banks, Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), shows noticeable progresses in the implementation process. At the end of 2018, Vietcombank (VCB) was allowed by SBV to apply capital adequacy requirements under Basel II.
The bank expects to apply the advanced approach under Basel II in 2019. VCB has set a good image of a pioneer in the roadmap, as well as one of the top-notched banks in Vietnam. Therefore, the researcher chose to study the implementation process of Basel II in VCB, along with challenges the bank had and has confronted throughout the period, therefore provide recommendations on addressing existing difficulties. All things mentioned 1 above, the topic for this study will be “The status of Basel II implementation in Joint Stock Commercial Bank for Foreign Trade of Vietnam”.
Aims and objectives of the study The research studies principle standards and regulations stated in the Basel Accord, especially in Basel II, along with experiences of Basel II implementation in other countries around the world. After the overview about Basel II, the research will focus on analyze and assess Vietnam and VCB’s current approaches for Basel II implementation, thereafter provides findings on existing and existing limitations that the bank may face during the process of implementing. Accordingly, the research expects to give out solutions for the issues, helping to increase the efficiency of the implementation project, especially in maintaining and managing capital adequacy within the bank. Significance of the study The study will concentrate on VCB’s approach to meet the capital adequacy requirement under Basel II standards, specifically through the capital increase plan conducted by VCB.
It is undeniable that capital adequacy requirement still remains one key factor in Basel II, and also a prioritized objective of each institution piloting the project. Vietnamese banks do get huge difficulties in increasing and maintaining their capital levels. Therefore, capital adequacy is certainly put high on the agenda when analyzing Basel II implementation in banks like VCB. Data and research methodology Qualitative approach was mostly applied for data collection in the study.
Secondary data from officially published documents and researches of organizations, publishers, and other researchers accounted for the majority. Besides, primary data was gathered through observation method during the time the researcher worked at VCB Head office in Hanoi. Multiple information and opinions were observed and accumulated from VCB Basel II project management and execution boards, mostly 2 related to the status of model development under Basel II and existing data issues during the project implementation. Primary and secondary data was collected and then filtered based on each key element related to the study, which helps the analyzing process more well- constructed, logical, and objective.
The study uses logical analysis, along with economic activity analysis, statistical comparisons between multiple factors, and references from previous studies of other authors. Qualitative analysis has been fully utilized inside the study in order to help the researcher provide both detailed and overall assessments of the topic. Literature review Conventionally, the Basel accord was introduces as a way to help monitor and supervise banking activities. Indeed, a number of empirical studies have been proposed for investigating the impacts of Basel requirements on banks and produced rather mixed outcomes.
While comparing the three existing Basel accords, Ioana (2014) reflected that Basel II comes mainly with an enlargement of the areas covered by the risks to be taken in the calculation of the capital adequacy indicator, but also with a diminishing of risks share related to the retail exposures. Francis and Osborne (2012) propose that by following a change in capital requirements, banks are inclined to adjust their assets portfolios by altering the composition rather than the volume of loans and other assets, for instance by shifting toward lower risk-weighted assets. In terms of capital, banks tend to focus on relatively inexpensive, lower quality, Tier-2 capital, rather than higher quality, Tier-1 capital. When assessing Basel II application in risk management in Vietnamese commercial banks, Phan Thi Bich Nguyet (2009) put focus on the completion of information technology infrastructure, therefore developing an internal rating-based system under the standardized approach.
3 Organization of the study Apart from Introduction and Conclusion, the study includes 4 main chapters: − CHAPTER 1: OVERVIEW ABOUT THE BASEL II ACCORD − CHAPTER 2: OVERVIEW ABOUT BASEL II IMPLEMENTATION IN VIETNAMESE COMMERCIAL BANKS; − CHAPTER 3: THE STATUS OF BASEL II IMPLEMENTATION IN VIETCOMBANK; − CHAPTER 4: ORIENTATIONS OF THE BANK AND RECOMMENDATIONS FOR THE PROJECT 4 CHAPTER 1: OVERVIEW ABOUT THE BASEL II ACCORD 1. Overview about the Basel Accords and Basel II 1. History of the Basel Accords In 1974, the Basel Committee on Banking supervision (BCBS) was established in Basel, Switzerland, by central banks and regulatory authorities from the Group of Ten countries (G10). Its initial goal was to prevent massive banking crisis in the 1980s, which originated from the messy liquidation of Cologne-based Herstatt Bank.
Specifically, from 1965 to 1981, about eight bankruptcies happened in the United States. While banks throughout the world were lending extensively, countries’ external indebtedness was also increasing significantly. Consequently, there was a high potential of massive international bank failures due to low security. To stop the crisis, the Basel Committee on Banking supervision was founded.
Currently, the committee consists of representatives from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. BCBS runs its own governance arrangements, reporting lines, and agendas, which is quite similar to other committees. Its 45 members comprise central banks and bank supervisors from 28 jurisdictions.