Challenges of Basel II for local banks

05-Nov-2004 Intellasia | 4/Nov/2004 Thoi Bao Kinh Te Vietnam page 9 | 1:05 PM Print This Post

Although Vietnamese commercial banks say they are attempting to overcome all challenges to integrate regionally and internationally, more tangible steps are needed than just talk particularly when banks must face up to the realities of Basel II when it soon comes into force.
This is one of the key topics proposed for discussions at Asian Banking Association’s annual meeting, scheduled to take place in Hanoi on November 4–5.
Basel II governs the capital adequacy standard, enhances global financial administration as well as exploits off profit potentials and minimises risks for financial institutions. This is considered a measure proposed with the aim to improve standards of Asian banks. The Basel II draft mentions major matters including regulations on the minimum capital adequacy ratio, the supervisions of financial management agencies and finally market rules.
Regarding the minimum capital adequacy ratio, the Basel II draft governs the paid-in capital of credit institutions, assets adjusted depending on risk levels, especially highlighting the methods to calculate and define credit risk levels.
The draft Basel II governs provisions on supervising, administering and guiding the management of risks for banks. This supervision and administration process not only helps banks confirm maintaining a capital ratio suitable with risks in business activity but also encourages banks develop and utilise professional banking techniques to manage risks better.
The Basel Committee on Banking Supervision has proposed four basic rules on banking supervision and administration comprising:
§ Banks must devise a method to valuate the capital adequacy ratio in the regard of the risk structure of banks and a strategy to maintain their capital.
§ Agencies in charge of managing banks must continuously deliberate and valuate the capital adequacy defining system in banks as well as their supervision capacity and conformity for rules on the minimum capital adequacy ratio and these agencies must devise and materialise measures to intervene strictly on time if they feel displeased with valuation results.
§ Agencies in charge of managing banks must request banks to operate with higher capital level than the minimum capital adequacy ratio and must be able to force banks to maintain the higher capital level than the minimum capital level.
§ Agencies in charge of managing banks must soon make necessary interventions aiming to prevent the drop in banks’ capital and request banks to issue timely measures to stop the capital drop if their capital adequacy ratio is not restored and maintained.
In market rules of the Basel II draft, the Basel Committee requests banks to conform to the rule “Banks must have transparent and public policies passed by their management board. These policies must show clearly the targets and strategies for publicising information on finances and performance of banks”.
In addition, banks must build plans to work out the financial publicity including the cycle of publicising finances.
According to financers, Vietnamese banks will face up to a lot of difficulties and challenges when the Basel II is passed by the Basel Committee on Banking Supervision. Basel II rules very strictly the minimum capital adequacy ratio closely associated with risk levels of banks’ assets, mention many factors such as the trust and belief of clients, terms of loans and the like.
However, the credit standardisation method proposed in the Basel II highlights the role of ranking agencies in classifying asset risks too much. Meanwhile, large companies specialised in ranking prestige sometimes do the job inaccurately.
In addition, Many countries especially Vietnam, most banks are not ranked to reach the capital adequacy ratio ruled in Basel II, which causes disadvantages to Vietnam banks because all loans for clients by these banks are not ranked in Basel will be considered to have 100% risk.
“Basel II ruling that banks are not ranked having less risks than ranked banks are not accurate”, said a local financer.
Basel II also requests agencies in charge of managing banks to consider and valuate which credit institutions can reach the standard of Basel II to use the local risk valuation risk system to classify risks in assets of credit institutions. However, in fact, very few central banks—agencies in charge of managing banks have enough capacity to verify the local risk valuation risk system of credit institutions in developing countries.
Although the minimum capital adequacy ratio is still maintained at 8% as currently, banks must maintain the capital higher than the rules in Basel I because banks must supplement capital to ensure their operation effectiveness.
This will be extremely difficult to Vietnamese banks because the common operational risk of large international banks is lower but it still applies to a common reserved capital for operational risks is 20% of total revenues. In addition, the local risk valuation method is too complicated to banks in developing countries. To apply modern risk management methods, Vietnamese credit institutions must invest a very large capital in their network.

 


Category: Finance

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