Risk Management in Finance in Vietnam Takes a Leap Forward with Basel III Implementation

Ten major commercial banks in Vietnam have successfully completed the implementation of the Basel III risk management standard, marking a significant milestone in the country’s efforts to strengthen its financial sector. This adoption demonstrates Vietnamese banks’ commitment to upgrading their risk management practices and capital adequacy ratios, ensuring stability in the financial market.

Key Aspects of Basel III

Higher Capital Quality and Adequacy

• The minimum common equity tier 1 ratio has been raised to 4.5%, with an additional capital buffer of 2.5% bringing the overall minimum requirement to 7%.
• This increased requirement aims to prevent banks from violating minimum adequacy ratios by setting a capital buffer to mitigate potential risks.

Separate Capital Adequacy Ratios

• The introduction of separate capital adequacy ratios for common equity and tier 1 capital highlights the importance of a bank’s own capital structure, rather than focusing solely on total capital adequacy.
• This emphasis on quality and soundness is crucial in ensuring the resilience of Vietnam’s commercial banking system.

Counter-Cyclical Capital Buffer

• The introduction of a counter-cyclical capital buffer requires banks to add capital buffers during periods of economic expansion and reduce or remove them during recessionary periods.
• This mechanism will help banks maintain sufficient capital reserves during growth periods and offset capital declines during crises.

Other Key Aspects

Write-Downs and Conversions

• Regulations allowing write-downs and conversions of capital instruments into equity when financial institutions fail to meet minimum capital adequacy ratios.

Adjustments to Capital Charges

• Adjustments to the standardized approach for estimating capital charges for credit, market, operational, and counterparty credit risks.
• The introduction of credit valuation adjustment risk.

Internal Capital Estimation Models

• Stricter requirements in internal capital estimation models, including model validation, demonstration of model application in day-to-day management, and the introduction of an output floor.
• This ensures that banks’ internal models are robust and accurate in estimating their capital requirements.

Leverage Ratio

• The leverage ratio aims to limit banks from excessively using debt instruments while maintaining a healthy level of capitalization.
• This requirement promotes a more stable financial system by reducing systemic risk.

Enhanced Monitoring

Large Exposures

• Enhanced monitoring of large exposures aimed at minimizing risk concentration and systemic risk among financial institutions.
• The scope of large exposure has been expanded to include risk exposure arising from counterparties/customers beyond outstanding credit loans.

Greater Transparency

Disclosure Requirements

• Improved disclosure requirements promote greater transparency in banks’ risk management activities, increasing trust and confidence in the financial market.

Robust Risk Governance Framework

• The establishment of a robust risk governance framework is emphasized, including the development of an appropriate compensation regime that integrates both business performance and long-term risk assessment results.

Conclusion

The successful implementation of Basel III in Vietnam is a significant step forward in strengthening the country’s financial sector and promoting stability in the global economy.