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Apply Basel II: What is the bank's benifit?

For Basel, all risks must be quantified by specific numbers and this number will show how much capital the bank needs to make up for the risk.
From the lessons learned of the world's financial crises, strengthening risk management and financial capacity is the optimal solution for commercial banks to stand up to fluctuations. Unpredictability of the financial market. When applying Basel II capital adequacy standards, banks adhere to international practices and standards for successful integration.

The Basel Committee has proposed a framework with three main pillars for version 2:

 

 

(I) Minimum Capital Requirement on Basel I Basis, whereby the Minimum Capital Requirement (CAR) remains 8% of total risky assets such as Basel I, but the risk is calculated. There are three main factors that banks face: credit risk, operating risk (or operational risk) and market risk;

(Ii) Provides a framework for addressing the risks that the bank faces, such as systemic risk, strategic risk, reputation risk, liquidity risk and regulatory risk, that the Comprehensive Treaty Again under the name residual risk (residual risk)

And (iii) the effective use of disclosure, whereby banks must disclose relevant information in a marketable manner and Basel II issues a list of requirements that oblige banks Information must be disclosed, from information on capital structure, capital adequacy, to information regarding the bank's sensitivity to credit risk, market risk, operating risk and The bank's assessment process for each type of risk.

Since February 2016, 10 banks have been nominated by SBV to pilot Basel II risk and capital management, namely BIDV, VietinBank, Vietcombank, Techcombank, ACB, VPBank, MB, Maritime Bank, Sacombank and VIB. The application of Basel II standards is an indispensable and compulsory trend as Vietnam integrates deeply with the region and the world. The application of Basel II to the top 10 banks will cause them to balance their loan growth targets and ensure a capital adequacy ratio.

 

The general benefit of applying Basel II to banks

The implementation of Basel II helps standardize, improve and healthyize the banking sector through the application of global standards. Basel is built on the fundamentals to ensure banks maintain sufficient capital to cover losses that may arise from the risks that banks hold. Basel II - the standardized method is standardized and is considered to be the first step towards risk-sensitive assessment.

In addition to the initial goal of creating a benchmark for measuring the health of financial institutions, Basel has created aggregate common risk management frameworks. Accordingly, risk management in commercial banks has been transformed from individual management of risk groups such as credit risk, market risk, operational risk, liquidity risk .... A unity with three pillars and the quantification of risk through the concept of "Risk Weighted Assets" (RWA). The Basel Standard is the first fundamental change for a commercial bank to have a keen understanding of how to change its operating mode, make a risk based approach, Widespread in the world after the financial crisis of 2007.

 

What are the specific benefits banks have when applying?

 

- Comprehensive review of bank operations: Apply Basel allows banks to quantify risk for all activities, all transactions have been generated. Quantifying the risk will help commercial banks quantify the capital needed for each transaction. Business results will be compared against the amount of capital required to ensure safety, and banks will have a better view of the rate of return relative to the level of risk for the operations that have arisen.

For risky business planning: For Basel, all risks must be quantified and the number will show how much capital the bank needs to cover for risk. So if business planning is primarily based on the profitability of the business, the risk factor impacts only to a modest extent, after Basel is applied. The role of risk will become stronger.

This is very necessary for the bank executives in Vietnam today. Basel does not justify the amount of risk in the present but more importantly the quantification of risk for the future with a precise probability accepted by banks around the world. As such, bank executives, subject to common perceptions, experience and risk appetite, will actively assess what risk is acceptable and which risks need to be adjusted. Business decisions are not only based on market expectations, but also on the level of risk that was quantified at the time the business decision was made.

In other words, Basel paints a comprehensive picture with a full array of light on business operations for executives, enabling executives to make the right decision.

- Prevention of future risks: After the 2007 financial crisis, the issue of whether banks can survive in the harsh market has become a major concern. Basel added bank endurance ratings through stress tests. With periodic tests, managers are fully aware of the stamina of their bank under the impact of the market in harsh conditions. Thus, with risk awareness, members of the financial market will respond more responsibly to the stability of the market.

 

... but banks in Vietnam are easy to achieve?

In order to promote banks to apply Basel II, the State Bank of Vietnam has issued Circular 36/2014 / TT-NHNN regulating limits and prudential ratios in the operations of credit institutions. Circular 06 amended a number of articles of Circular 36 to put banks into orbit to operate more and more safely according to international standards. This shows that the direction of policy change of the SBV in recent times has made higher requirements for banks.

In the past, when the general conditions were still difficult, the SBV temporarily reduced the requirement for safety indicators to support banks, support the market and economy, avoid collapse and damage to the market. Current norms have been introduced in the world and commercial banks have anticipated the SBV will set such high standards to apply Basel II. The problem is that many banks in Vietnam still do not meet Basel I. If they want to apply Basel II, banks have to make great efforts to raise capital, control risks, improve management level. Operate and improve system security. These problems are not easy for banks under current conditions!

 

How will application of Basel II affect the banking system of Vietnam?

The deployment of the Basel II Treaty affects not only the economies of the countries applying but also the banking system itself. In order to meet the requirements of the Basel II Treaty with international standards on capital adequacy and liquidity, banks will re-plan their business and business strategies more aggressively. Advanced risk management tools and methods have been developed to ensure that banks with a well-defined risk management system minimize costs and focus on developing business operations. New and more effective in the decision to allocate business capital.

Implementing Basel II helps banks to be safer and more secure due to enhanced risk management, risk management measures, especially risk models and internal ratings. At the same time, capital is managed more effectively. In the area of ​​credit, commercial banks will have to shift their focus to customer credit rating, rather than relying heavily on collateral. Moreover, following the application of international standards on capital adequacy and liquidity, the banking system in Vietnam will attract more foreign investors as the bank operates in a national standardized environment. fall.

In addition, after deploying Basel II with capital indicators and liquidity requirements, risk management meets international standards, Vietnamese banks will have the opportunity to reach out to developed markets. At that time, when the financial market was opened under the commitments of Free Trade Agreements (FTAs), Vietnamese banks not only attracted more foreign investors but the banks themselves would penetrate. Markets develop and attract capital in these large markets.

However, when deploying Basel II widely at banks, higher capital and liquidity requirements will affect the spread of interest rates, or in other words, increase the cost of capital, resulting in higher capital costs. Net profit of the bank will decrease. As the Basel Committee study found, when the capital adequacy ratio increased by 1%, the difference in lending rates and borrowing costs increased to 1.3%. However, the bank can offset the net profit loss by a number of measures: increase non-interest earnings such as fees, commissions ..., increase the effectiveness of governance to reduce operating costs.

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