VIETNAM NATIONAL UNIVERSITY

University of Languages and International Studies

GROUP ASSIGNMENT
ECO 306

Basel II Project
International Banking Rules

Group No. 9 – KTTC.21E1

Members of group:
Chu Việt Hoàng
Chu Hương Giang
Bùi Ngọc Khánh
Vũ Ngọc Vân Khánh
Hà Trần Mai Chi
:

Table of Contents
Definition .................................................................................................................... 3
Three Pillars of Basel II .............................................................................................. 3
1. Pillar I - Minimum capital requirements............................................................. 3
2. Pillar II - Supervisory review: ............................................................................ 5
3. Pillar III - Market principles: .............................................................................. 5
Pros and cons of Basel II ........................................................................................... 6
Basel III and IV ........................................................................................................... 8
1. Basel III ............................................................................................................ 8
2. Basel IV .......................................................................................................... 10
Basel II, III, and IV .................................................................................................... 11
The Role of Basel in VietNam .................................................................................. 12
1.1. Role of Basel I: ............................................................................................ 12
1.2. Role of Basel II: ........................................................................................... 12
Application process done in Vietnam. ...................................................................... 15
References ............................................................................................................... 16
Definition

Basel is the name of a series of international agreements issued by the Central

Bank of Switzerland (BIS - Bank for International Settlements), with the aim of
promoting and ensuring the stability and reliability of the global banking system.

Basel I was enacted in 1988 and primarily focused on requiring banks to store a
minimum percentage of equity in response to financial risks. However, after the
global financial market experienced a major decline in the early 2000s, the Basel I
indicators could no longer guarantee the stability of the banking system and thus
Basel II was introduced

Basel II is an upgraded version of Basel I, issued in 2004. Basel II focuses on risk

management of banks through classifying loans by risk level, assessing ability to
spend customers' debt and requires banks to meet a minimum capital level
appropriate to the risk level of each loan.
Overall, Basel is a global benchmark for banking financial risk management. Basel I
and Basel II both focus on the risk management of banks, however Basel II provides
more specific conditions and requires banks to meet asset quality and risk
management standards higher than Basel I.

Basel II is the second version of the Basel Accord, which sets forth the general
principles and banking laws of the Basel Committee on Banking Supervision. The
Basel II Accord was issued in June 2004 to define capital standards to limit the
business risks of banks and strengthen the financial system.

With Basel II, the Basel committee abandoned the “one size fits all” methodology
of the 1988 capital treaty for calculating the minimum legal capital requirement and
introduced the “three pillar concept” which seeks to align regulatory requirements
with the economic principles of risk management.

Basel I is limited to the measurement of market risk and the fundamental measure
of credit risk. Basel II introduces a new set of sophisticated and focused credit risk
approaches to operational risk. Basel II uses the concept of “three pillars”: (1)
Minimum capital requirements, (2) supervisory review, and (3) market principles.

Three Pillars of Basel II

1. Pillar I - Minimum capital requirements

Pillar I refers to maintaining a calculated amount of legal capital for the three risk
components that the bank faces: market risk, credit risk and operational risk. Given
the credit risk component can be calculated in three different ways of varying
complexity, namely the standardized approach, the platform IRB and the premium
IRB. IRB stands for "Internal Rating - Based Approach".
 With operational risk, there are three different approaches - the basic index
approach, the standardized approach, and the internal measurement approach. For
market risk the preferred approach is VaR.

With Pilar I, the minimum capital ratio of 8% is unchanged. This ratio represents
the relationship between a bank's own fund (capital) regulations and risk-weighted
assets, a way of calculating risk tolerance. Risk-weighted assets are asset values
multiplied by a parameter (risk weight) that is representative of the risk (credit)
associated with these assets. With regard to operational risk and market risk, two
other types of risk calculated in the Basel I framework, weighted assets (which are
used in the calculation of minimum capital ratios) are derived directly from The
capital requirements are calculated by multiplying them by 12.5 (the inverse of the
8% minimum rate).

Pillar I, also provides a fundamental update of the Basel I method for calculating
risk-weighted assets, the denominator of the capital ratio. First, operational risk was
introduced as a new type of risk for banks that had to hold regulated capital. This risk
includes damages from inadequate or failed internal processes, people or systems,
or from external events.

Second, a range of increasingly sophisticated and risk-sensitive options can be

used to determine a bank's capital requirements, both for credit risk and for
operational risk. In this way, the option can be selected to best suit the unique
characteristics of each bank. Furthermore, the incentive is applied to banks that take
a more sophisticated approach and thus improve their risk management over time. In
the field of credit risk, there are two approaches, namely the standard approach and
the internal rating-based approach (IRB). The prior approach binds risk weights to
ratings provided by accredited rating agencies. The latter approach uses the bank's
own estimates of certain risk factors, based on the calculated risk factors, a gap is
created between the baseline approach and the advanced approach. The new credit
risk regulations also include detailed dealing with securities and credit risk mitigation.
Finally, in the area of operational risk, a bank can calculate capital requirements on
the basis of its gross income (baseline approach and standard approach). Given the
market risk, the new Basel framework does not fundamentally change the current
approach.

A. Standardized approach to credit risk.

In the standardized approach, assets are classified into a normalized set of asset
classes and a risk weight is applied to each class, reflecting the relative degree of
credit risk. The change from Basel I involves the use of external credit ratings as the
basis for deciding on risk weights. Compared to Basel I, where all assets were 100%
weighted, there are now different considerations for risk weights. The weighting for
investment businesses has been significantly reduced (for example, up to 20% for
AAA), while in the non-investment business segment, a risk weight of 50% applies to
the rated business under “BB”. Furthermore, unrated firms now obtain a risk weight
similar to that obtained under Basel I.

B. Internal ratings-based approach to credit risk.

The internal ratings-based approach to credit risk (IRB) is one of the most
innovative elements of the new Basel II framework because it allows the banks
themselves to determine the fundamentals when calculating credit risk of their capital
requirements. With the IRB approach, the minimum capital requirement is based on
a “loss probability distribution” based on default risk in a portfolio of loans or other
financial instruments. Perception of risk assessment is established in one year. The
IRB model further assumes a 99.9% confidence level, (that is, once in a thousand
years) that actual losses are expected to exceed the model's estimates.

2. Pillar II - Supervisory review:

Pillar II defines the process of monitoring the organization's risk management

framework and ultimately capital adequacy. It places specific supervisory
responsibilities on the board of directors and senior management, thereby reinforcing
the principle of internal control and other corporate governance by regulators in
different countries around the world. implementation world.

According to the Basel Committee, the New Treaty emphasizes the importance of
bank management in developing an internal capital assessment process and setting
targets for capital commensurate with its unique risk profile and control environment
of banks. The supervisor will be responsible for assessing how well banks value their
capital adequacy needs in relation to the bank's risk. After measuring, internal
processes will be subject to review, monitoring and intervention when appropriate.
As a result, the supervisor may require, for example, a restriction on dividend
payments or an immediate increase in additional capital.

With the supervisory review process, questions will also be raised as to whether
banks should hold additional capital for the risks that are not, or not at all, covered in
Pillar I, and whether this may involve surveillance action when this actually happens.
An active role for the supervisory authority will provide banks with incentives to
further improve their own and risk management models and systems. Given the
current situation, Pillar II requires supervisors to apply more careful decisions in
assessing the capital adequacy of individual banks.

3. Pillar III - Market principles:

 Pillar III aims to strengthen market discipline through increased disclosure of
information by banks. It sets forth disclosure requirements and recommendations in
a number of areas, including how banks calculate capital adequacy and how they
assess risk. Increased bank-to-bank comparison and transparency is the desired
outcome of Pillar III. At the same time, the Basel Committee sought to ensure that
Basel II aligns with accounting standards and, in fact, does not conflict with the
broader accounting disclosure standards that banks are required to comply with.

With Pillar III, banks will be required to disclose information focused on key
parameters of their business profile, risk exposure and risk management. Such
disclosures are seen as a prerequisite for the efficient functioning of banking market
discipline. Both qualitative and quantitative information must be made public. It is
therefore necessary to disclose the capital structure and adequacy, and the public
information must include details of the underlying capital. Regarding credit risk
disclosure, information on credit risk reduction techniques and securities accounts
must be provided. Banks will be asked to outline some of the details of using the IRB
approach, which represents a major component of the New Treaty. Disclosure
requirements also include compliance with operational risk requirements. Finally, the
New Treaty requires information on equity stakes and interest rate risk in the
published banking book.

Pros and cons of Basel II

With the introduction of basel II, banks have made a stronger step forward in
banking risk management as they are based on fundamentals to help banks have
sufficient capital to cover for losses arising from the risks. And here are the benefits
of basel II. Firstly, the bank’s activities are evaluated comprehensively. Applying
Basel allows financial institutions to quantify risks for all past and current
transactions. Quantifying these risks helps institutions determine the necessary
capital for each transaction. The results of the business will be compared with the
required capital to ensure safety, providing banks with a clearer understanding of the
corresponding profit-to-risk ratio for all past transactions. Secondly, banks can plan
business strategies according to risk, preventing them from a bad situation. Under
Basel, all risks must be quantified by specific numbers, which will indicate how much
capital the bank needs to compensate for those risks. Thus, if current business
strategies primarily rely on profit and downplay the impact of risks, the role of risks
will become more significant after the implementation of Basel. Basel quantifies
current risks and estimates future risks with an accurate probability accepted by
financial institutions worldwide. Depending on their general perception, experience,
and risk, bank managers proactively evaluate which risks are acceptable and which
need to be adjusted. Business decisions must consider not only market expectations
but also the quantified risks at the time of decision-making. And finally, the risk will
be mitigated in the future with the help of Basel II. After the financial crisis, the issue
of whether banks could survive in challenging market conditions became a major
concern. Basel has supplemented bank resilience assessments through stress tests.
With regular stress testing, managers are fully aware of their bank's resilience under
market stress. Thus, with risk awareness, financial market members will react more
responsibly for market stability. Moreover, there are some points that show how the
Basel II is better than the Basel I. Basel II is a broader and more risk-based
framework than Basel I. It aims to improve the stability of the banking system by
requiring banks to hold more capital against their risk-weighted assets, implement
more sophisticated risk management systems and disclose more information about
their risk exposures. And there are a few points that show the change from Basel I to
Basel II: Basel II uses a risk-based approach to capital requirements, while Basel I
uses a standardized approach. This means that Basel II allows banks to use their
internal models to assess the risk of their assets, while Basel I requires banks to use
a set of standardized risk weights. Basel II is based on three pillars, while Basel I has
only one pillar: minimum capital requirements. Additionally, Basel II is more complex
than Basel I. This is because banks need to implement more sophisticated risk
management systems and disclose more information about their risk exposures.
Although Basel II has many advantages for banks, there are also disadvantages
that make Basel II move up one level to become Basel III. To begin with, the Basel II
norms created a motivation for bank managers to downplay credit risk. They
permitted banks to utilize their own models in evaluating risk and determining the
necessary capital to comply with regulations. Many banks opted for models that were
excessively positive, thereby creating risk models that necessitated less capital for
regulatory compliance and boosted the return on equity. Furthermore, the efficacy of
Basel II relied heavily on the presence of a robust regulator as it allowed banks
significant leeway to determine how to implement the regulations in accordance with
their intended purpose. This made it a prime opportunity for bankers seeking to
evade the rules. The presence of a regulator was crucial to ensure the proper
implementation of rules. However, in countries such as the U.S., where regulators
were frequently lenient, this led to disastrous consequences like the subprime crisis.
Finally, the Basel II regulations were insufficient in addressing market risk,
particularly for investment banks that had significant investments in market-related
securities. Securitization involves the sale of a collection of loans, such as
government, mortgage, auto, and card loans, packaged as bonds. Unfortunately,
many of these bonds were low-quality assets. To solve the shortcomings of Basel II,
they changed some parts and named it Basel III. Basel III is a broader and more risk-
focused regulatory structure than Basel II. It is intended to strengthen the global
banking system's resilience to shocks and lower the danger of another financial
crisis. Basel III is better than Basel II because Basel III requires banks to hold further
capital, which will make them more flexible to shocks. It requires banks to ameliorate
their threat operation practices, which will help them to identify and manage pitfalls
more effectively. Also, Basel III requires banks to be more transparent about their
threat exposures, which will help investors and controllers to make better decision.
Basel III and IV

1. Basel III

a. Overview
Basel III is the Third Accord, augmenting and superseding parts of the Basel II
standards; it was developed in response to the deficiencies in financial regulation
revealed by the financial crisis of 2007–08. It aims to strengthen the requirements in
the Basel II regulatory standards for banks. In addition to increasing capital
requirements, it introduces requirements on liquid asset holdings and funding
stability, thereby seeking to mitigate the risk of a run on the bank. Basel III was
published by the Basel Committee on Banking Supervision in November 2010, and
was scheduled to be introduced from 2013 until 2015; however, implementation was
extended repeatedly to 1 January 2022 and then again until 1 January 2023, in the
wake of the COVID-19 pandemic.

b. Leverage ratio
Basel III introduced a minimum "leverage ratio" from 2018 based on a leverage
exposure definition published in 2014. A revised exposure definition and a buffer for
globally systemically important banks (G-SIBs) will be effective from 2023. The ratio
is calculated by dividing Tier 1 capital by the bank's leverage exposure. The leverage
exposure is the sum of the exposures of all on-balance sheet assets, 'add-ons' for
derivative exposures and securities financing transactions (SFTs), and credit
conversion factors for off-balance sheet items. The ratio acts as a backstop to the
risk-based capital metrics. The banks are expected to maintain a leverage ratio in
excess of 3% under Basel III.

c. Liquidity requirement:
Basel III introduced two required liquidity/funding ratios. The "Liquidity Coverage
Ratio", which requires banks to hold sufficient high-quality liquid assets to cover its
total net cash outflows over 30 days under a stressed scenario. The Net Stable
Funding Ratio requires banks to hold sufficient stable funding to exceed the required
amount of stable funding over a one-year period of extended stress.

d. Tier 1 vs Tier 2 capital

Banks have two main silos of capital that are qualitatively different from one
another. Tier 1 refers to a bank’s core capital, equity, and the disclosed reserves that
appear on the bank’s financial statements. If a bank experiences significant losses,
Tier 1 capital provides a cushion that can allow it to weather stress and maintain a
continuity of operations. The minimum Tier 1 capital increases from 4% in Basel II to
6%, applicable in 2015, over RWAs. This 6% is composed of 4.5% of CET1, plus an
extra 1.5% of Additional Tier 1 (AT1). CET1 capital comprises shareholders equity
(including audited profits), less deductions of accounting reserves that are not
believed to be loss absorbing "today", including goodwill and other intangible assets.
The original Basel III rule from 2010 required banks to fund themselves with 4.5%
of Common Equity Tier 1 (CET1) (up from 2% in Basel II) of risk-weighted assets
(RWAs). Since 2015, a minimum CET1 ratio of 4.5% must be maintained at all times
by the bank. This ratio is calculated as follows:

To prevent the potential of double-counting of capital across the economy, bank's

holdings of other bank shares are also deducted. Furthermore, Basel III introduced
two additional capital buffers. A mandatory "capital conservation buffer", equivalent
to 2.5% of risk-weighted assets, phased in from 2017 and fully effective from 2019. A
discretionary "countercyclical buffer" allowing national regulators to require up to an
additional 2.5% of RWA as capital during periods of high credit growth. This must be
met by CET1 capital.
By contrast, Tier 2 refers to a bank’s supplementary capital, such as undisclosed
reserves and unsecured subordinated debt instruments. Tier 2 capital includes
undisclosed funds that do not appear on a bank's financial statements, revaluation
reserves, hybrid capital instruments, subordinated term debt—also known as junior
debt securities—and general loan-loss, or uncollected, reserves. Revalued reserves
is an accounting method that recalculates the current value of a holding that is higher
than what it was originally recorded as such as with real estate. Hybrid capital
instruments are securities such as convertible bonds that have both equity and debt
qualities. Tier 2 capital is supplementary capital because it is less reliable than tier 1
capital. It is more difficult to accurately measure due to its composition of assets that
are difficult to liquidate. Often banks will split these funds into upper and lower level
pools depending on the characteristics of the individual asset.

e. Implementation of Basel III

Implementation of Basel III capital standards diverges significantly across the
globe.
In the Latin America region, the official members of the Basel Committee on
Banking Supervision Argentina and Brazil have fully implemented the initial Basel III
capital requirements, followed by Mexico although a few rules are pending
implementation. Limited progress with respect to the final Basel III framework
published in 2017 (also referred to as the “endgame” rules by authorities) has
occurred in the region. The remaining Latam jurisdictions are not official members of
the Basel Committee so there is less pressure on to meet the Basel Committee
implementation timelines. Chile, Colombia, Costa Rica, Panama, Peru and Uruguay
have yet to publish draft and/or final regulations related to some aspects of Basel III
(or are still in the phase-in period). Furthermore, some jurisdictions, such as
Honduras, Jamaica, Peru and Nicaragua, have implemented similar prudential
regulations to provide additional capital buffers. Nevertheless, about one-half of the
Latam jurisdictions monitored by Fitch Ratings have yet to consider any aspects of
the Basel III Accords issued by the Basel Committee on Banking Supervision in
response to the 2007–2009 financial crisis. A lack of prioritization to improve
capitalization in some Latam countries has accentuated the regulatory gap across
the region.
In Asia, The pandemic and the war in Ukraine have delayed the implementation
of Basel III in many markets, with push backs coming from some of the biggest
economies. Japan announced it would push its deadline for its megabanks, namely
Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho
Financial Group, to the fiscal year ending March 2024. Its smaller regional banks had
already seen their deadline extended to the fiscal year ending March 2025. In
China, the approach has been to actively prepare the banks for shocks worse than
those anticipated by Basel III. The rules are being applied based on the size and the
status of the bank. The country’s six biggest banks – the big four of Industrial and
Commercial Bank of China, Agricultural Bank of China, Bank of China and China
Construction Bank, along with Bank of Communications and China Merchants Bank
– are considered the most technically competent and are using the IRB approach.
This allows the banks to model their own probability of default, and the regulator
gives them a loss given default parameter of 45% for unsecured senior debt and
equivalent class of liability.

2. Basel IV

Basel IV was finalized by the Basel Committee in December 2017, and is due to
be implemented from January 2022. It proposes a number of changes, some highly
technical which include improving the earlier accords' standardized approaches for
credit risk, credit valuation adjustment (CVA) risk, and operational risk. These rules
lay out new risk ratings for various types of assets, including bonds and real estate.
Credit valuation risk refers to the pricing of derivative instruments. Constraining the
use of the internal model approaches used by some banks to calculate their capital
requirements. Banks generally will have to follow the accords' standardized
approach unless they obtain regulatory approval to use an alternative. Internal
models have been faulted for allowing banks to underestimate the riskiness of their
portfolios and how much capital they must keep in reserve. Introducing a leverage
ratio buffer to further limit the leverage of global systemically important banks (banks
considered so large and important that their failure could endanger the world
financial system). The new leverage ratio requires them to keep additional capital in
reserve. Replacing the existing Basel II output floor with a more risk-sensitive floor.
This provision refers to the difference between the amount of capital that a bank
would be required to keep in reserve based on its internal model rather than the
standardized model. The new rules would require banks by the start of 2027 to hold
capital equal to at least 72.5% of the amount indicated by the standardized model,
regardless of what their internal model suggests.

Australia is one of the leadinding countries to implement Basel IV. The Australian
Prudential Regulation Authority (APRA) has continued to burnish its conservative
credentials by being the first regulator to publish proposals to implement the Basel III
endgame standard, also known as "Basel IV".

Basel II, III, and IV

Basel III is an extension of the existing Basel II Framework and introduces new
capital and liquidity standards to strengthen the regulation, supervision, and risk
management of the whole of the banking and finance sector. Compared to Basel II,
Basel III rule introduced the following measures to strengthen the capital requirement
and introduced more capital buffers: Capital Conservation Buffer is designed to
absorb losses during periods of financial and economic stress. Financial institutions
will be required to hold a capital conservation buffer of 2.5% to withstand future
periods of stress, bringing the total common equity requirement to 7% (4.5%
common equity requirement and the 2.5% capital conservation buffer). The capital
conservation buffer must be met exclusively with common equity. Financial
institutions that do not maintain the capital conservation buffer face restrictions on
payouts of dividends, share buybacks, and bonuses. Countercyclical Capital
Buffer is a countercyclical buffer within a range of 0% and 2.5% of common equity
or other fully loss absorbing capital is implemented according to national
circumstances. This buffer serves as an extension to the capital conservation buffer.
Higher Common Equity Tier 1 (CET1) constitutes an increase from 2% to 4.5%.
The ratio is set at: 3.5% from 1 January 2013; 4% from 1 January 2014; 4.5% from 1
January 2015. Minimum Total Capital Ratio remains at 8%. The addition of the
capital conservation buffer increases the total amount of capital a financial institution
must hold to 10.5% of risk-weighted assets, of which 8.5% must be tier 1 capital. Tier
2 capital instruments are harmonized and tier 3 capital is abolished.
Basel III introduced a minimum "leverage ratio". The leverage ratio was calculated
by dividing Tier 1 capital by the bank's average total consolidated assets; the banks
were expected to maintain a leverage ratio in excess of 3% under Basel III. In July
2013, the US Federal Reserve Bank announced that the minimum Basel III leverage
ratio would be 6% for 8 SIFI banks and 5% for their bank holding companies.
Basel III introduced two required liquidity ratios. Liquidity Coverage Ratio (LCR)
ensures that sufficient levels of high-quality liquid assets are available for one-month
survival in a severe stress scenario. Net Stable Funding Ratio (NSFR) promotes
resilience over long-term time horizons by creating more incentives for financial
institutions to fund their activities with more stable sources of funding on an ongoing
structural basis.
Compared to Basel III, changes made in Basel IV are all presented above.
The Role of Basel in Viet Nam
Basel I, II, and III were developed by the Basel Committee on Banking
Supervision with the primary purpose of supporting banks in dealing with potential
risks and enhancing their ability to absorb losses.

1.1. Role of Basel I

The first Basel Accord, known as Basel I, was issued in 1988 and focused on the
capital adequacy of financial institutions. The capital adequacy risk (the risk that an
unexpected loss would hurt a financial institution), categorizes the assets of financial
institutions into five risk categories—0%, 10%, 20%, 50%, and 100%.

In the context of international economic integration with many opportunities and

challenges, Vietnamese banks need to improve their risk management capacity,
comply with Basel’s standards… to increase competitiveness with banks in the
region and the world, attracting the attention of foreign investors

In Vietnam, the application of Basel standards was first implemented since 2005
with the issuance of Decision No.457/2005/QĐ-NHNN based on some standards of
Basel I. Under Basel I, banks that operate internationally must maintain capital (Tier
1 and Tier 2) equal to at least 8% of their risk-weighted assets. This ensures banks
hold a certain amount of capital to meet obligations.

1.2. Role of Basel II

Basel II comprises minimum capital requirements, supervisory review and market

discipline. Basel II divided the eligible regulatory capital of a bank from two into three
tiers. The higher the tier, the less subordinated securities a bank is allowed to
include in it. Each tier must be of a certain minimum percentage of the total
regulatory capital and is used as a numerator in the calculation of regulatory capital
ratios. It aims to enhance competition and transparency in the banking system and
make banks more resistant to market changes.

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.

In 2012, State Bank of Vietnam (SBV) announced that it will introduce a Basel II
type risk-based supervisory approach over the next five years. A consultant was
selected to oversee initial stages of the project, but only few comments or status
updates were given on this initiative. Under BASEL II standards, minimum CAR
(which is a measure of a bank’s capital expressed as a percentage of a bank’s risk-
weighted credit exposures) is required at 8 per cent. According to a report from the
National Financial Supervisory Commission (NFSC), minimum CAR of the entire
banking system in 2017 is estimated at 11.3 per cent. 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.

Vietnamese banks are almost Basel II-compliant with the State Bank of Vietnam
(SBV) instructing 10 banks to complete pilot practice by 2018 and 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 per cent, but it reduces to less than 8 per cent when
applying BASEL II standards which indicates that a bank has less capital relative to
its risk-weighted assets and may be more vulnerable to economic downturns.

And The SBV has allowed the Joint Stock Commercial Bank for Foreign Trade of
Vietnam (Vietcombank) to apply Basel II standards one year earlier than the
deadline initially set by the central bank. . Under Vietnam’s banking sector
development strategy, by 2020, banks must have regulatory capital meeting Basel II
standards. In order to realize the target of being the best risk management bank,
Vietcombank’s Board of Directors has since 2014 directed a project to analyze the
difference between the Basel II requirements and the status of Vietcombank. On this
basis, it offers the Basel II Implementation Roadmap with a total of 82 initiatives to
meet Basel II standards by the end of 2018 and meet the advanced approach in
2019.

The capitalisation of Vietnam's banking sector has been improving in recent

years, supported by stronger profitability and banks raising capital to meet Basel II
requirements. Fitch estimates that banks that are not yet Basel II compliant need to
raise only USD0.6 billion in new capital prior to the January 2023 implementation
deadline.

Basel II Accord is An important management platform to help banks develop

healthily, safely, efficiently; thereby promoting and ensuring the sustainable
development of the entire financial market, improving credit ratings, and enhancing
competitiveness in the international market.

1.2.1 Challenges faced by banks

With the exception of those who have worked in foreign banks, Vietnam’s banking
sector face a shortage of people who have experience in working with Basel II.
Banks need to invest time to build and develop adequate human resources to
operate risk management under Basel II. Banks are also looking into hiring
consultants to implement the Basel II project as well as provide training to their own
staff.
As SBV has yet to complete the legal framework, it is difficult for banks to
implement policies and risk management framework around Basel II. SBV has only
issued a draft version of the directives. Thus, any revisions in the central bank’s
policies will also result in changes for banks in their implementation of Basel II
roadmap. Active collaboration with the central bank is necessary in order for the
banks to be informed of the central bank’s latest policies, and to allow them to review
their own policies.
There are problems in gathering sufficient data to measure and run analysis as
banks need exact and copious amounts of historical data. It can take up to three
years to collect enough data to build a model with low error rate.
Vietnam’s banking system is thinly capitalized relative to operating environment
risks and international peers. The average capital adequacy ratio of Basel II
compliant state-owned and private-sector banks stood at 9.2% and 11.4%,
respectively, at end-3Q21. This was much lower than the weighted-average of
19.4% for banks in other major south-east Asian markets

Industry insiders said the Basel II application in Viet Nam 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 program on credit institution restructuring.

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

1.3 Role of Basel III

Recently, almost banks in Vietnam Banks are investing and developing Basel II
according to the advanced method and aiming for Basel III standards.

Basel III is a risk management framework with stricter criteria than Basel II,
announced by the Basel Committee on Banking Supervision (BCBS). The goal of the
new standard is to deal with the financial crisis, improve the sustainability of the
banking system, contributing to preventing systemic losses that may occur in the
future.
 Basel III with many new proposals on capital, leverage and liquidity standards to
strengthen regulations, supervision and risk management of the Banking industry.
New capital standards and capital buffers will require banks to hold more capital and
of higher quality than the capital level under current Basel II regulations.

In October 2020, VIB was recognized as the first Vietnamese bank to pilot the
application of Basel III liquidity risk management standards with the successful
implementation of a system of tools to measure the ratio of net stable capital.
(NSFR). NSFR is calculated as the ratio between actual and required stable capital,
with the goal of helping banks operate on long-term stable capital to minimize the
risk of capital shortage in the future, maintain stable finance and protect the interests
of depositors- an opportunity for banks to enhance their position.

Application process done in Vietnam.

The application process for adhering to the Basel Convention in Vietnam involves
several key steps.
Firstly, it is important to familiarize yourself with the provisions and requirements
outlined in the Basel Convention. Starting by understanding the provisions and
requirements outlined in the Basel Convention will help you to ensure compliance
throughout the application process. Secondly, contacting the Ministry of Natural
Resources and Environment (MONRE) or the Environmental Protection Agency in
Vietnam is crucial to obtain specific information on the application process. The
government agencies can provide guidance on any additional steps that need to be
taken into account during the application process. They may be able to answer
questions, provide clarification on certain requirements, and offer assistance in
completing the application correctly. Thirdly, gathering the necessary documentation
is an essential step, including legal documents, operational information, waste
management plans, and proof of financial responsibility. It enhances transparency,
accountability, and helps ensure that hazardous waste is managed safely and
responsibly in Vietnam. Next, completing the application form accurately and
comprehensively is vital. The form, provided by the relevant authorities, requires all
necessary information to be filled out, ensuring compliance with the Basel
Convention's requirements. Once the form and supporting documents are complete,
they are submitted to the designated authority. After that, the authorities responsible
for implementing the Basel Convention will review the application and assess its
compliance. This process may involve site visits or requests for additional
information. The evaluation ensures that the application aligns with the Convention's
requirements, environmental regulations, and best practices. Finally, upon meeting
all the necessary criteria, approval to adhere to the Basel Convention is granted. The
authorities will notify the applicant of the decision and provide any further instructions
or requirements. This stage marks the acknowledgment of the commitment to
responsible hazardous waste management.
 The application process for adhering to the Basel Convention in Vietnam may
share similarities with the process followed in other countries, but there can be
differences based on the specific regulations and procedures of each country.
The first difference is the regulatory framework. Each country has its own set of
laws and regulations governing hazardous waste management. Therefore, the
specific requirements and guidelines for adhering to the Basel Convention can differ
from country to country. Vietnam, like other countries, has tailored regulations to
align with international standards while considering unique environmental context.
The second one is that administrative procedures can vary between countries. The
process of administrative procedures differ in terms of the number of steps involved,
the review and evaluation process and the time it takes for approval or notification.
Furthermore, the capacity and resources available for implementing the Basel
Convention can be different across countries. Developing countries like Vietnam
have to face additional challenges in terms of resources, infrastructure and technical
expertise. The application process in Vietnam involves considerations and support
mechanisms tailored to the country's specific capacity, such as assistance programs
or capacity-building initiatives. Finally, cultural and language factors can influence
the application process. In countries with diverse cultural and linguistic backgrounds,
additional efforts may be required to ensure clear communication and understanding
of the requirements. The application process in Vietnam involves documentation and
communication only in Vietnamese, which can be much easier than some countries.

References

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