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| Increasing capital adequacy ratio logical, easy to achieve |
| 03/Sep/2010 Intellasia | Lao Dong |
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| 3 Sep, 2010 - 1:31:49 PM |
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If the meaning of capital adequacy ratio (CAR) and its current level in commercial banks of Vietnam were properly understood, the decision to increase CAR from eight percent to nine percent from October 1, 2010 would be proved to be reasonable and necessary.
According to statistics from a study at national level, the request to increase CAR is logical and most credit institutions would easily achieve this.
CAR is a measure of bank's capital safety, expressed as a percentage of a bank's risk weighted credit exposures. CAR is defined as (Tier 1 capital + Tier 2 capital)/Risk weighted assets *100 percent. This is used to determine the ability of banks' payments at all terms and ensure that it can face other types of risks such as operational risk. In other words, if banks are able to maintain this ratio at regulated level, they have created a safeguard against financial shocks, which could protect themselves and the depositors.
Countries always clearly define and supervise banks in maintaining a certain CAR, in Vietnam, this rate is currently at eight percent, in accordance with the Basel standards applied by banking systems in the world. From October 1, 2010, according to Circular No. 13/TT-NHNN dated May 20, 2010 of the State Bank of Vietnam (SBV), this rate would be adjusted to nine percent (the popular CAR in the world is 12 percent).
Previously, the public paid little attention to CAR. However, since there have been various views from Vietnam Banks Association mentioning that many banks could not raise CAR to nine percent, it became a matter of concern. In technical and economical ways, increasing equity capital is easier than reduce the risk weighted assets, since all assets in the risk weighted assets are related to banks' activities, reducing those would reduce profit or the scope of banks' activities. The concern of the market is raising CAR could lower profit and tighten the money supply of commercial banks.
The system is fully capable of increasing CAR
To date, announcing CAR is not compulsory and SBV has never reported full information about this index of the entire system and of each credit institution. Therefore, there is not enough data for the market to evaluate. Nevertheless, according to a survey in 24 commercial banks conducted by Dr Ha Thi Thieu Dao (from Banking University of Hochiminh city), only Vietnam Bank for Agriculture and Rural Development has not met the eight-percent ratio, other banks are able to maintain CAR from eight percent. Of that, Vietcombank' CAR is 8.11 percent, and Vietinbank's CAR is 8.06 percent. Notably, CARs of joint stock banks are at relatively high level.
According to data of a study group at national level coded KX.01.19/06-10, to the end of 2009, CAR was 7.14 percent in group of state owned commercial banks; 10.8 percent in group of joint stock commercial banks; 10.9 percent in group of foreign or joint venture banks; 13.9 percent in group of financial and financial leasing companies, and 10.5 percent in group of people's credit funds. The above rate has fallen from 10.25 percent in late 2008 to 9.32 percent to late 2009. Despite reducing, the 2009 CAR of the entire system reached 9.32 percent, the adjustment from eight percent to nine percent from October 1, 2010 of SBV is reasonable and most credit institutions would easily achieve this level. Thus, the CAR increase (if is properly understood) would not put negative impacts on the stock market.
Dr Dao noted that the current CAR of Vietnam has not been calculated accordingly to the international standards, only based on Vietnam's accounting standards. When there have been more and more banks operating as parent-child companies and the economy and financial market of Vietnam have become more open, SBV should gradually increase CAR to ensure the operation of the entire system, as banking operations become more risky. The current issue is that the state budget should allocate sufficient charter capital to the state-owned commercial banks and a few small banks have to improve their compliance with the CAR requirement.
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