Application of Basel II for sustainable development

13:46-23/03/2018

If Basel II is applied, capital will be allocated toright business operations, contributing to improving business effectiveness, increasingshareholders’ interests, minimizing possibility of capital losses in case of marketdistress or crisis.

ApplyingBasel II in the banking system was defined by the State Bank of Vietnam (SBV) as one of the key tasks of the banking sector more than 10 years ago. In 2014, 10 banks werechosen to pilotthe Basel II applicationso that it would be introduced to all domestic banks…However, the roadmap for the Basel II application in risk management ofcommercial banks is very complicated, unexpected problems have arisen that need further study to find outmeasures.

Opportunities, challenges were identified atthe National Scientific Conference titled “Applying Basel II standards in risk management of Vietnamese commercial banks: Opportunities, challenges and roadmap forimplementation” held by the School of Banking – Finance  (the National Economic University) on December 14th 2017.

At this conference, Dr. Phan Huu Viet (the Banking  Supervision Agency – the SBV) told that over 10 years ago, the orientation of implementing Basel II in the banking system had drew great attention from the SBV and wasidentified as one of its key tasks.

To undertake the Basel II applicationas planned in the roadmap, the SBV established a Steering Committee to direct theapplication process, promulgated necessary legal framework to guide commercial banks to fully realize three pillars of the Basel II standards. Besides, the SBVsynchronously tookspecific measures to guide 10 commercial banks to pilot Basel II as planned.

Banks havepositively changedtheir perception of the role and impact of the Basel II implementation in developingbanks towardsinternational standards andpractices oncapital adequacy and risk management. Therefore, though focusing resources for the banking restructuring andbad debts settling, the 10 pilot banks showedtheir determination to implement the Basel II.

Discussing the Basel II implementation in recent time, representatives of commercial banks told that the legal framework for the implementation of Basel II was basically available but there remained difficulties in practice.

Regulations in the Basel Accords are very complicated. Besides, it has beendifficult to change the mindset of managers and directors. The gap between management of Vietnamese commercial banks and requirements of Basel II has been quite large. Weak database and information infrastructure have posedhuge challenges tothe Basel II implementation. Actually it also costs quite much to implement Basel II, especially for small and medium-sized banks.

As a medium-sized commercial bank, the Joint-stock commercial Lien Vietpost bank (LienVietPostBank) has the total assets of 155,000 billion dongs. Ms Nguyen Thi Thanh Son, the Deputy General Director of LienVietPostBank said “Applying Basel IIaims at not only satisfying the SBV’s requirements but also developingthe bank in a long-term and stable way, contributing to enhancing their position, image, and ranking”.

Sharing difficulties in theimplementation of Basel II, Ms Son pointed out that the biggest difficulty faced by commercial banks is the management of past data which needs to be appropriately allocated. The second biggest difficulty isthe perception of each staff member. The other problem is financial source associated with the Basel II implementation because these costs have immediate impact on capital cost. For example, in real estate lending, the rate of risk provision used to be100% but according to Basel II this rate should beincreased to 200% even 250%. Therefore, commercial banks have to choose either to raise lending rates or reduce input costs.

“In a more and more competitive environment, raising lending rates may lead to losing clients, so commercial banks have to opt for improving management efficiency, lowering management expenses and input costs”, told Ms Son. This difficulty is a stressful challenge but also the motivation for banks to improve their management efficiency.

Sharing difficulties in the Basel II implementation process and methodsas mentioned by Ms Son, the representative from Joint-stock commercial bank Phuong Dong (OCB) also cited some positive impacts brought by the implemention of Basel II.

Firstly, for clients, Basel II requires banks to make information transparent, helping clients tomake right decisions, and therefore deposits of clients put at banks are protected against risks.

Besides, shareholders and investors also receive a lot of interests when banks apply Basel II, since their capital will be allocated to and used for right business operations, contributing to enhance business efficiency andincrease shareholders’ interests. Shareholders will be provided with periodic, transparent information according to certainstandards, minimizing possibility of capital losses in case of market distress or crisis.

The conference also made recommendations to the National Assemby and the Government on the orientation of developing adebt market and improving the performance of the asset management company; and at the same time,suggested that the SBV continue completing the legal framework for ensuring operational safety of the banking system according to international standards, enhancing financial capacity of commercial banks, carrying out the roadmap of applying Basel II in banks associated with restructuring the banking system.

For commercial banks, they should pay attention to their human resources who undertake the Basel II application, to setting up and completing the database and information system so that financial datawould be standardized. Besides, a clear roadmap would be in need to increase bank owners’equity, improve management capacity, draw up risk management strategies and policies. 

Supervision Department – DIV’s North West regional branch