New regulation prepares for BASEL II

Illustrative photo (Source: vietbao.vn)

Hanoi (VNA) - The State Bank of Vietnam (SBV) has issued a new circular to prepare for the application of BASEL II standards in the domestic banking system.

Under Circular 41/2016/TT-NHNN issued recently, commercial banks must maintain a capital adequacy ratio (CAR) of at least 8 percent from January 1, 2020.

The new circular will replace Circular 13/2010/TT-NHNN that currently regulates minimum CAR of at least 9 percent for banks.

However, according to the central bank, commercial banks that are capable of implementing the new regulation earlier than the above date can register to apply earlier.

The central bank’s move is aimed to prepare for the application of BASEL II standards in the domestic banking system. Under BASEL II standards, minimum CAR is required at 8 percent.

According to a recent report from the National Financial Supervisory Commission (NFSC), minimum CAR of the entire banking system this year is estimated at 11.3 percent.

However, experts estimate that when the BASEL II is applied, the current CAR at banks would reduce sharply due to an increase in the amount of their risky assets.

The NFSC also reported that a pilot application of BASEL II at 10 banks showed that the CAR at the banks will reduce sharply compared with the current situation. Taking the four State-owned banks of Vietcombank, BIDV, Vietinbank and Agribank for example, their current CAR stands at nearly 9 percent, but it reduces to less than 8 percent when applying BASEL II standards.

Vietnam currently applies Basel I for the banking industry. However, the central bank has selected the 10 largest and most prestigious domestic commercial banks to apply in a pilot phase the BASEL II standards.

The banks, which will pilot capital and risk management methods according to Basel II standards, is due to complete the pilot run by 2018 and the Basel II application will be then deployed at other commercial banks in the country.

Basel II is a new, higher level for Vietnamese banks in accordance with Basel Accords standards set by the Basel Committee on Banking Supervision. The application is flexible to different countries but the overall spirit is tighter regulations on banking operations.

Industry insiders said the Basel II application in Vietnam would be a challenge for local banks; however, it is a must as it is believed to be the best solution to make Vietnamese banks healthier.

Le Trung Kien, Deputy Director of the SBV’s Department for Banking Operation Safety Policies, said banks would face challenges in human resources and finance when the Basel II is applied, however, applying Basel II’s standards is a key task listed in the programme on credit institution restructuring.

Besides this, Kien said, "it is essential for local banks to apply Basel II when Vietnam integrates with the global economy, as most of other regional banks have, so far, applied Basel II or even Basel III."-VNA