Have you heard about Basel standards or Circular 41 compliance for commercial banks in Vietnam?

If not, my short explanations in next few minutes will help you understand this.

Ok, let’s get started.

So, first of all, What is Basel standards?

Basel standards or Basel accords is a set of banking regulation recommendations and guidelines,
statements of best practices issued by BCBS (Basel Committee on Banking Supervision) – mainly about
risk in banks and financial system. In fact, accords were named by the city, Basel in Switzerland where
BCBS is located and normally held committee here.

You may wonder why Basel accords was introduced. Its aims is to strengthen stability or health of
banking system as well as provide a fair and consistent equality in competition among international
banks. (From ability to absord shocks arising from financial and economic stress to improving risk
management and governance to strengthen banks’ transparency and disclosure). Banking system always
play such an important role in the economy (or backbone of the economy) so if there is a major bank
collapsed, it will have massive impact on national economy or even on the world scale. Therefore, to
ensure stability of banking system through Basel regulations will help ensure stability of the whole
economy and keep the number of brankruptcy to a minimum.

Those standards are non-binding high-level principles. Countries are expected but not obliged to
undertake effort to implement them. The ultimate decision to implement is up to national authority
when considering development level of the economy, such as Circular 41 is a customerized version of
Basel II to suit domestic market in Vietnam.

Until now, there are 4 official versions of Basel accord, named Basel I, II, III and IV respectively. The first
one is released in 1988. Each version is supplemented and updated from shortcomings of previous
version and changes in the economy as well as feedbacks from FIs implemented. E.g Basel II is covered
broader types of risk that banks face instead of only focusing on credit risk in Basel I or Basel III is
developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–
08 (through bank capital requirements by increasing bank liquidity and decreasing bank leverage). Basel
IV is currently being built, and is expected to be a consolidated version of the revised Basel III and IFRS 9.

And next, I will precrisbe brieftly about Basel II – standards that are applied in Vietnam. Basel II accord
contains 3 pillars: (1) maintain required minimum capital adequacy requirement for 3 main types of risk
(credit risk, market risk and operational risk), (2) provide tools and framework to monitor and manage
risks and (3) Increase bank’s transparency and disclosures.

State Bank of Vietnam has released Circular 41 (in 2016) for complying with Pillar 1(only with
standardized methods) and Circular 13 (in 2018) for applying internal capital adequacy review (ICCAP)
process based on Pillar 2 of Basel II.

However, ten pilot commercial banks are still struggling to implement Basel II, while the rest of the
world is already planning to move onto Basel IV.

Many banks especially state-owned banks will face significant capital deficiences compared to mininum
ratio in Circular 41 (which is 8%) because there are more tightened/ stricter regulations on recognizing
eligible capital, more risk-sensitive measurement of risk weighted asset as well as more difficulties in
raising capitals for banks. To comply with Basel II, banks must make huge efforts and investments in
building and changing not only information system but also data management and robust risk
management process across various banks’ departments.

Hopefully this content of my presentation is helpful for you. Thanks for watching and see you next time.