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First of all, according to international practice, the framework for resolving a weak credit institution is often conducted based on assessing the impact of resolving a credit institution on the system to propose the most appropriate resolution mechanism.
According to the Financial Stability Institute – Bank for International Settlements, the process of resolving weak credit institutions needs to start from assessing the resolution of credit institutions that have a serious impact on the financial system or not. If it does not affect the system, many remedial measures can be considered, including liquidation and deposit insurance payments. If there is a serious impact on the system, it is necessary to research and apply a resolving mechanism to help credit institutions maintain continuous operations. Then it can be choosed to apply one or several resolving options such as transferring assets and debts to another credit institution or bridging bank; implement bail-in (creditors and depositors bear part of the loss), or as a last resort, nationalization.
Determining whether weak credit institutions are important to the system or not to decide on resolution is also a common experience applied in many countries with advanced deposit insurance organizations as well as countries with model similar to DIV in the region.
The process of resolving credit institutions is weak in some Asian countries
In Korea, the Financial Services Commission (FSC) of Korea will evaluate whether the resolving of weak credit institutions poses a risk to the system or not. If so, priority will be given to open resolving to maintain its business license and operations of credit institutions, including 2 options: Merger and consolidation (M&A) and Self-recovery with financial support. In case a credit institution does not cause systemic risk, choose to close, withdraw the business license and apply the principle of minimum cost to choose a resolving plan such as Purchase and Acquisition (P&A); Bridge bank; Bankruptcy/Liquidation.
In Japan, three mechanisms for resolving weak credit institutions are applied, including: "Limited insurance", "measures to prevent financial crises" and "orderly resolving measures". In particular, the limited insurance mechanism applies to credit institutions that do not pose systemic risks, these credit institutions will be handled through insurance methods (insurance payments; liquidation), P&A or conducting bankruptcy proceedings. The financial crisis prevention mechanism is applied to credit institutions causing systemic risks to maintain the stability of the credit system in a certain region, locality or nationwide. Credit institutions that pose systemic risks and impact the Japanese financial market or the financial systems of other countries will be handled in an orderly manner through two levels: (i) Deposit insurance of Japan (DICJ) special supervises; providing liquidity, guarantees and capital injections; (ii) DICJ comprehensive supervised and manages; transfers systemically important assets and liabilities; financial support.
In Indonesia, this country has built two separate processes for resolving weak credit institutions based on their importance to the system. P&A treatment methods; Bridge bank; Open banking assistance will be applied generally to all credit institutions, however there will be differences in the construction and implementation process for credit institutions with or without important impacts on the system. In addition, credit institutions that do not have an important impact on the system can apply additional liquidation/payment methods. For credit institutions that have important impacts on the system, the banking restructuring program decided to be activated by the Financial Stability Committee will be applied when a financial crisis occurs.
It can be seen that, in addition to commonly used resolving measures such as P&A, Bridge Banking, Open Bank Assistance, Liquidation, etc., the above countries all separate the resolving of credit institutions with or without important effects on the system according to different measures. Credit institutions that have an important influence on the system are often resolved in an open manner to maintain continuous operations, avoiding affecting the entire credit institution system, while credit institutions that do not have an important influence on the system will handled and closed quickly and decisively.
How to identify credit institutions that have important impacts on the system
Regarding international practice, the Financial Stability Board (FSB) introduced the concept of systemically important financial institutions (SIFIs) which are credit institutions that, when falling into difficulty or disorderly collapse, will cause widespread disruption of economic activity and the financial system due to its scale, complexity and system linkages.
SIFIs are also divided into two levels: (i) Credit institutions with important influence on the global system (G-SIBs) and (ii) Credit institutions has important implications for country systems (D-SIBs).
The Basel Committee on Banking Supervision (BCBS) conducted a study, which proposed a method for determining G-SIBs based on a set of indicators used to calculate scores. Credit institutions with scores above a certain threshold are identified as G-SIBs.
The method for determining G-SIBs proposes 5 groups of factors that influence the importance to the global system, including: (i) Cross-border activities; (ii) Scale; (iii) Degree of connection; (iv) Substitutability and (v) Operational complexity.
For D-SIBs, BCBS has also introduced a rating that focuses on assessing the impact of the failure of D-SIBs on the domestic economy and is evaluated based on the same 4 factors as G-DIBs, excluding the factor of cross-border activities, including: (a) Scale; (b) Connection; (c) Substitutability and (d) Operation complexity.
Besides, according to a research paper of the World Bank (1998), “When there is widespread evidence that bank failures affect more than 20% of total deposits in the banking system, policy and the activities used to handle failed banks and bring the banking system back to a sustainable state are called “systemic banking restructuring”.
In most countries that apply the division of credit institutions according to their important impact on the system, regulatory agencies apply criteria similar to BCBS, and may add some specific factors of each country.
In Korea, the Decree guiding the implementation of the Law on Restructuring Credit Institutions stipulates the basis for identifying organizations with important influence on the system including four criteria: Functions of credit institutions; Scale of credit institutions; Relationship with other credit institutions; Impact on the domestic financial market.
The Financial Services Commission (FSC) also issued the Regulations on supervision of banking business activities, which stipulates that there are five indicators for evaluation including: (i) Regulations on banking business activities; (ii) Connectivity; (iii) Substitution ability; (iv) Complexity; (v) Special circumstances.
Specific calculation standards and scoring methods will be prescribed by the Chairman of the Committee from time to time. Every year, the FSC will nominate systemically important credit institutions from various banks and bank holding companies based on their functions and sizes as well as their relationships and influence with other banks and bank holding companies.
In Japan, the method of determining banks has an important influence on the system closely following the BCBS method. Banks with important influence on the system are divided into two categories: globally important to the system (G-SIBs) and important to the national credit institution system (D-SIBs).
Japan requires a global system critical impact assessment to determine G-SIBs to be carried out by the FSB. Global banks or their holding companies whose aggregate leverage exposure converted at exchange rates on a consolidated basis as of the end of the most recent business year exceeds EUR 200 billion are required to perform the above evaluation process. G-SIBs are determined based on five factors: Scale, interconnectedness, replaceability/infrastructure of the credit institution, complexity and global operations.
The assessment of the significant impact on the national credit institution system to identify D-SIBs is carried out by the regulator in each jurisdiction. During that assessment process, credit institutions with total consolidated assets of not less than 15 trillion yen will be counted and examined. Each bank is scored based on 12 indicators grouped into 4 categories to assess systemic importance according to Basel; including scale, connectivity, substitutability/infrastructure of credit institutions and complexity. In addition, the importance of the market or other specific factors for each subject is also examined to determine whether the credit institution complies with agreed international standards or not. After comprehensive consideration of scores and other specific factors, credit institutions considered to have an important influence on the national system will be identified as D-SIBs.
In Indonesia, banks are classified into commercial banks; Agricultural bank and Sharia bank. The criteria applied to identify credit institutions with important influence on the system are based on capital classification from BUKU1 to BUKU5. Usually banks with important influence on the system will be commercial banks classified as BUKU4 and BUKU5 according to Indonesian standards.
In Vietnam, the Law on Credit Institutions amended in 2017 does not have regulations on criteria for classifying credit institutions that have important impacts on the system, but in fact, in the regulations on restructuring plans, there has been a decentralization of authority to approve plans according to the level of resolving and type of credit institution, specifically: The Government has the authority to approve plans for forced transfer and bankruptcy of credit institutions subject to special control; The Prime Minister has the authority to approve plans for recovery, merger, consolidation, and transfer of all shares and capital contributions for commercial banks, cooperative banks, and financial companies subject to special control; State Bank of Vietnam (SBV) has the authority to approve plans for recovery, merger, consolidation, and transfer of all capital contributions to people's credit funds and microfinance institutions.
In 2017, the SBV issued Decision No.397/QD-NHNN approving the group of credit institutions that have important influence on the system including 17 credit institutions. These banks account for 70% of the system according to the calculation in Circular No.08/2017/TT-NHNN and the Banking Supervision Manual issued by the SBV to serve the supervision and monitoring of the activities of these credit institutions.
The current draft amendment to the Law on Credit Institutions has a number of changes in the authority to approve restructuring plans such as assigning the Board of Directors or Council of Members to approve and implement remedial plans, the SBV has the authority to the right to approve some restructuring plans... but there are still no regulations on criteria for determining credit institutions with important influence on the system.
Therefore, to contribute to the process of resolving credit institutions in Vietnam being carried out quickly, effectively and closer to international practices, it is proposed that the SBV should consider supplementing legal regulations on the resolving of credit institutions in Vietnam. Identify credit institutions into 2 groups: (i) having influence on the system and (ii) having no influence on the system according to specific criteria to apply in the process of resolving/restructuring credit institutions. From there, it serves as a basis to propose definitive resolving measures, suitable for each group of credit institutions and limit negative impacts on the safety and stability of the banking system.
Communication Department
