MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS, HO CHI MINH CITY

------    ------

VŨ THỊ MAI TRÂM

RISKS TO VIETNAM’S BANKING SECTOR

AND POLICY RECOMMENDATIONS

MASTER IN PUBLIC POLICY THESIS

HO CHI MINH CITY – 2012

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MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS, HO CHI MINH CITY

FULBRIGHT ECONOMICS TEACHING PROGRAM

VŨ THỊ MAI TRÂM

RISKS TO VIETNAM’S BANKING SECTOR

AND POLICY RECOMMENDATIONS

MAJOR: PUBLIC POLICY

CODE: 603114

MASTER IN PUBLIC POLICY THESIS

SUPERVISOR

Dr. JONATHAN R. PINCUS

HO CHI MINH CITY - 2012

 iii

CERTIFICATION

I certify that the substance of the thesis has not already been submitted for any degree and
is not being currently submitted for any other degree.

I certify that to the best of my knowledge any help received in preparing the thesis
and all sources used have been acknowledged in the thesis.

The study does not necessarily reflect the views of the Ho Chi Minh City
Economics University or Fulbright Economics Teaching Program.

Author

VŨ THỊ MAI TRÂM

 iv

ACKNOWLEDGEMENTS

I would like to express my deep gratitude to my parents who always encourage me in my

life and my studying.

I would like to express my sincere appreciation to my supervisor, Dr. Jonathan R. Pincus,

who has helped me in performing the thesis. With rich knowledge, experience and
enthusiasm, he has effectively contributed to my thesis.

I am graceful to Ms. Dinh Vu Trang Ngan for thoughtful and valuable comments on the
early version of my work.

I would like to thank all teachers in Fulbright Economics Teaching Program, who have
retransmitted a lot of their knowledge and experience to me.

Last but not least, I express my thanks to all of my friends who help and motivate me in
performing the study.

VŨ THỊ MAI TRÂM

Ho Chi Minh City - June, 2012

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ABSTRACT

Vietnamese banking system has faced some extraordinary events, which have had a
negative impact on the prestige of the banking system and perceptions of the management
capacity of SBV and reduced the public‟s confidence. In general, Vietnamese banking
system faces the following risks: risk from non-performing loans, liquidity risk, currency
risk and risk from connected lending. To reduce the negative impacts of these risks,
Vietnam should combine many resolutions to manage effectively such risks. The
appropriate incentive and legal framework, the improvement of underlying institutions
(fiscal, financial and monetary institutions) and the strong corporate governance are
deemed prerequisite to maintain the stability and the development of financial system.
 vi

ABBREVIATIONS

ABB An Binh Commercial Joint Stock Bank

ACB Asia Commercial Joint Stock Bank

AGB Vietnam Bank for Agriculture and Rural Development

AMC Asset management company

BAB BACA Commercial Joint Stock Bank

BIDV Bank for Investment and Development of Vietnam

BOM Board of management

BVB Bao Viet Joint Stock Commercial Bank

CAR Capital adequacy ratio

CTG Vietnam Bank for Industry and Trade

DAB Great Asia Commercial Joint Stock Bank

EAB Dong A Commercial Joint Stock Bank

EIB Vietnam Export Import Commercial Joint Stock Bank

ER Exchange rate

FCB First Joint Stock Commercial Bank

GPB Global Petro Commercial Joint Stock Bank

GSO The General Statistics Office

 vii

HBB Hanoi Building Commercial Joint Stock Bank

HDB Housing Development Commercial Joint Stock Bank

JSC Joint Stock Company

JVC Joint Venture Company

KLB Kien Long Commercial Joint Stock Bank

LVB LienViet Post Joint Stock Commercial Bank

MBB Military Commercial Joint Stock Bank

MDB Mekong Development Joint Stock Commercial Bank

MHB Housing Bank of Mekong Delta

MPI Ministry of Planning and Investment

MSB Maritime Commercial Joint Stock Bank

NAB Nam A Commercial Joint Stock Bank

NPLs Non-performing loans

NVB Nam Viet Commercial Joint Stock Bank

OCB Orient Commercial Joint Stock Bank

OCEAN Ocean Commercial Joint Stock Bank

PGB Petrolimex Group Commercial Joint Stock Bank

SBV The State Bank of Vietnam

SCB Sai Gon Commercial Joint Stock Bank

 viii

SEB Southeast Asia Commercial Joint Stock Bank

SGB Saigon Bank for Industry & Trade

SHB Saigon-Hanoi Commercial Joint Stock Bank

SNB Southern Commercial Joint Stock Bank

SOE State owned enterprise

STB Sai Gon Thuong Tin Commercial Joint Stock Bank

TCB Viet Nam Technological and Commercial Joint Stock Bank

TNB Vietnam Tin Nghia Commercial Joint Stock Bank

TPB TienPhong Commercial Joint Stock Bank

TRB Great Trust Joint Stock Commercial Bank

VAB Viet A Commercial Joint Stock Bank

VCAP (GDB) Viet Capital Commercial Joint Stock Bank (Gia Dinh
Commercial Joint Stock Bank)

VCB Joint Stock Commercial Bank for Foreign Trade of Vietnam

VIB Vietnam International Commercial Joint Stock Bank

VPB Vietnam Prosperity Joint Stock Commercial Bank

VTB Viet Nam Thuong Tin Commercial Joint Stock Bank

WEB Western Commercial Joint Stock Bank

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TABLE OF CONTENTS

Page

CERTIFICATION ............................................................................................................... iii

ACKNOWLEDGEMENTS ................................................................................................. iv
ABSTRACT ...........................................................................................................................v
ABBREVIATIONS ............................................................................................................. vi
TABLE OF CONTENTS ..................................................................................................... ix
LIST OF FIGURES ............................................................................................................. xi
CHAPTER 1. INTRODUCTION ..........................................................................................1
1.1. Introduction ..................................................................................................................1
1.2. Research Questions ......................................................................................................3
1.3. Research Objectives .....................................................................................................3
1.4. Research Methods, Sources of Information and Research Scope ...............................3
1.5. Thesis Structure ...........................................................................................................4
CHAPTER 2. LITERATURE REVIEW ...............................................................................5
2.1. General Literature ........................................................................................................5
2.2. Implications for Vietnam .............................................................................................7
CHAPTER 3. RISKS TO BANKING SECTOR OF VIETNAM .........................................8
3.1. Macroeconomic Vulnerabilities ...................................................................................8
3.2. Microeconomic Risks ..................................................................................................9
3.2.1. Risk from NPLs .....................................................................................................9
3.2.2. Liquidity Risk ......................................................................................................19
3.2.3. Currency Risk ......................................................................................................25
3.2.4. Risk from Connected Lending ............................................................................28
CHAPTER 4. POLICY RECOMMENDATIONS ..............................................................34
4.1. Resolution for NPLs ..................................................................................................34
4.2. Resolution for Liquidity Risk ....................................................................................37
4.3. Resolution for Currency Risk ....................................................................................39
4.4. Resolution for Connected Lending ............................................................................40
CHAPTER 5. CONCLUSION .............................................................................................43
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REFERENCES.....................................................................................................................44
APPENDIX I. COMPARISON BETWEEN VIETNAMESE REGULATIONS
AND INTERNATIONAL STANDARDS ON NON-PERFORMING LOANS .................57
APPENDIX II. LITERATURE ON RESOLUTIONS OF NONPERFORMING
LOANS ................................................................................................................................61
APPENDIX III. LITERATURE ON RESOLUTIONS OF LIQUIDITY RISK ................65
APPENDIX IV. LITERATURE ON RESOLUTIONS OF CURRENCY RISK ...............70
APPENDIX V. LITERATURE ON RESOLUTIONS OF CONNECTED
LENDING ............................................................................................................................76
APPENDIX VI. FIGURES ..................................................................................................81
APPENDIX VII. CONNECTED RELATIONSHIP AND LENDING ...............................93
 xi

LIST OF FIGURES

Page

Figure 3.1. GDP, credit, mobilization and inflation rate (2001-2011) 20

Figure 3.2. Interbank average interest rate (10/2011 - 4/2012) 24
Figure 3.3. Ratios of FX deposits to total deposits and FX loans to total credit 25
Figure 3.4. Growth rate in capital mobilization from and credit to the economy 26
(2008 - 2010)
Figure 3.5. Investments outside the main business of state corporations 29
 1

CHAPTER 1. INTRODUCTION

1.1. Introduction

Recently the Vietnamese economy has experienced some difficulties. The banking
system has also faced some extraordinary events, such as systematic and serious violations of
the deposit rate cap, rapid credit growth and major incidents of fraud. All of these events have
had negative impacts on the prestige of the banking system and perceptions of the
management capacity of the State Bank of Vietnam (SBV). Some of the reasons for these
include weaknesses and shortcomings in financial capacity, management and competition
among banks in the market. Therefore, the public‟s confidence in the banking system has
declined sharply.

A growth model that is excessively dependent on the continuous supply of capital has
put pressure on credit provision to the economy. Average credit growth for the period 2001-
2011 is not only higher than the mobilization rate but also far higher than the GDP growth rate
(approximately four times). Banks via their intermediary role pumped large amounts of money
into the market. When cheap loans were easily accessible, conditions were created for
inefficient investments. The trend of loosening credit standards has encouraged an increase in
leverage of local enterprises, especially state owned enterprises (SOEs). The inefficiency and
wastefulness in using available capital resources have accumulated non-performing loans
(NPLs) over time and impaired asset quality. The consequence is that the Vietnamese
economy experienced high credit growth with a rising stock of domestic credit relative to
GDP. In 2011, this rate was at nearly 125 percent. Such a high rate compared to economic
capacity and other neighboring countries has led to the increase in NPLs and inflation rate.

During the period 2001 to 2011, credit growth of Vietnamese banks averaged 30.41
percent per annum. High profits in that period induced many new investors to join in the
establishment of new banks or upgrade rural to urban banks. The banking system experienced
a boom of new banks and a strong growth in total assets just in a short time. Many of these
 2

banks lacked the necessary financial and technological capacity required for such a risk-taking
industry as well as professional experience and ethical standards expected of sound bankers. In
addition, the shortfall of skilled employees reduced workforce quality and in that way
indirectly lowered the banks‟ risk assessment ability and exposed them to future credit risks.
The more violent competition and struggle for market share as well as profits forced bank
managers to loosen credit-granting criteria. In such conditions, prudential requirements of
capital adequacy, liquidity and asset quality were ignored not only by banks but also by SBV.
The lack of appropriate regulation of credit risk provision has made the banking system
become vulnerable at a time of monetary contraction.

When the global financial crisis, reduction of economic growth, capital outflows, the
public debt crisis in the EU, contraction of export markets and a drop in the price of real estate
projects emerge, many enterprises could not continue doing business. The latent problems in
the banking system were exposed. Liquidity problems and bad debt are becoming more and
more serious with frenzied efforts by problem banks, which are illiquid or even insolvent, to
mobilize deposits and maintain normal banking business. This is also the first time that
collateral requirements have been attached to interbank lending. It is a signal of serious
deterioration of confidence among banks in this normally safe market. In addition, risks from
currency mismatch and connected lending seem to be larger and are not being well-controlled.
These facts put SBV in a challenging position and required a prompt response to prevent the
system from collapsing. The official declarations regarding bank restructuring sent by the
Prime Minister and Governor of SBV indicated that bank restructuring is an important part of
economic restructuring to avoid the danger of a banking crisis. Therefore, the identification of
important risks faced by the banking system becomes an important and urgent task for policy
recommendations.

The third meeting of 11th Communist Party of Vietnam Central Committee highlighted
the restructuring of financial markets with a focus on the banking system as one of the three
most important objectives of the next five-year period. The restructuring plan to improve
safety and soundness of the banking system is to be carried out in the spirit of guaranteeing the
 3

interests of depositors and doing the utmost to handle any bank collapses. Therefore, the need
to specify major risks threatening the stability of the banking sector becomes very important.

1.2. Research Questions

This thesis intends to answer the following questions:

(i) What important risks (microeconomic risks) is the Vietnamese banking system facing?
(ii) What should be done to reduce such risks?

1.3. Research Objectives

The thesis has the following research objectives:

(i) To specify the main risks (microeconomic risks) faced by the Vietnamese banking
system through analyzing the banks‟ financial data.
(ii) To research and propose policy recommendations in order to reduce adverse effects of
such risks.

1.4. Research Methods, Sources of Information and Research Scope

This research uses qualitative method by secondary data collected from financial
statements, annual reports of commercial banks, SBV annual reports, and related reports of
other organizations. Through this analysis, the research intends to specify the main risks faced
by the banking system and propose recommendations to effectively control and manage such
risks.

Because joint-venture banks and foreign-owned banks account for only a small share
of the market and most of these banks do not make their financial statements public, it is hard
to analyze such banks‟ financial situation. Therefore, for the purpose of this thesis, the
research will be limited to the data analyzed within scope of commercial banks including state
banks and other domestic commercial banks.
 4

1.5. Thesis Structure

The thesis is structured as follows:

(i) The first part reviews literature on risks to the banking sector;
(ii) The second part analyzes important risks faced by the banking system with the focus
on microeconomic risks;
(iii) The third part mentions some policy implications; and
(iv) The forth part concludes the thesis.
 5

CHAPTER 2. LITERATURE REVIEW

2.1. General Literature

There is extensive literature regarding banking crises around the world. Initial
researches paid more attention to macroeconomic approach and these tried to investigate the
relationships between macro-economic conditions and banking system stability (Demirgüç-
Kunt and Detragiache, 1998; Eichengreen and Rose, 1997). However, due to the limitations of
the macro approach, many recent researches have started to shift their focus to the micro
economic approach (Jonghe, 2009; Goldstein and Turner, 1996).

Under the macroeconomic approach, the banking system is deemed vulnerable to

macroeconomic shocks, and bank failures usually follow adverse developments in the macro-
economy (Bernanke, 1983). Adverse shocks reduce domestic money demand and/or cause
foreign capital outflows. Banks, which do not have a diversified base of capital or are too
dependent on short-term foreign capital, will find it difficult to mobilize funds to meet a
deposit outflow, lending commitments and other financial obligations. A decline in the terms
of trade or asset prices can reduce profitability among bank borrowers while capital
contraction reduces their ability to rollover debts. Such contractions, therefore, significantly
increase their debt burden (Bernanke 1983). The combination of both makes it difficult for
them to pay back loans at the due date and quickly increases NPLs and erodes asset quality on
bank balance sheets. In turn, the contraction of deposits and loans limits the supply of money
and credit and thus will exacerbate macroeconomic shocks that cause them (Calomiris, 2007).

Conversely, a surge of international capital and/or sudden increase in deposit demand

exceeding the absorptive capacity of the economy can create a lending boom. The expansion
of lending activities without improvements in managerial skills can let banks gather NPLs and
reduce their resistance to adverse changes. Unstable fiscal policy with volatile domestic
interest rates also has a part in creating shocks to the financial system by changing
expectations of inflation and deposit demand. In addition, the structure and level of public
debt, if not managed carefully, also creates pressure on the banking system (European public
 6

debt is a very famous example) (Gavin and Hausmann, 1996). However, using this approach
alone cannot explain why not all banks fail even when they suffer the same adverse macro
shocks. For this reason, it is better to pursue a combination of macro and micro approaches to
explain bank failures (Hermosillo, 1999).

Under the microeconomic approach (bank-specific level), individual banks‟ financial

data are used to evaluate the condition of banks. Hermosillo (1999) asserts that models based
on bank-specific variables, including different measures of market, credit and liquidity risks
and proxies for moral hazard, seem to work reasonably well in most cases. Due to the result of
different risk-taking behavior, sound and unsound banks have different characteristics. Failed
banks usually have a large percentage of loans in the real estate sector, maintain a high
leverage ratio and unsuitable levels of liquid assets. The ratio of NPLs to total loans (or total
assets) is often higher for problem banks and hence, capital can be quickly wiped out in a time
of crisis. The significant reserves to cover NPLs or sufficient increases in equity can help
banks improve their financial standing. Hermosillo (1999) also shows that the effect of a one-
unit increase in NPLs ratio increase the probability of failure and reduce the survival time of
banks by more than the equity to total assets ratio. Low liquidity and coverage ratios compared
with the sector average can imply that banks are in trouble and may not have enough money
for extraordinary needs or to deal with a sudden run. The deterioration in banks‟ coverage
ratio can signal the actual failure in near future. In addition, capital adequacy ratios (CARs)
cannot serve as a cushion to absorb shocks if they are not high enough. A well-diversified
portfolio has an important role in helping banks to withstand banks‟ shocks. Banking crises in
California (1980s), the Northeast (1991-1992) in the US and in Japan (1990s) are examples of
maintaining poorly-diversified portfolios with high concentrations in real estate markets, some
specific commercial and industrial loans (Hermosillo 1999).

In addition, Pomerleano (1999) also mentions that crony capitalism was at the core of
the East Asia crisis. Crony capitalism supports bad polices including implicit government
guarantees and poor banking supervision. This practice causes poor credit allocation decisions
in the banking dominated system. The close and long-term relationship between banks and
 7

companies usually leads to the lax credit allocation processes (connected lending) without
regard to the profitability and viability of the projects.

2.2. Implications for Vietnam

From the lessons mentioned above, Vietnam has promulgated some regulations
regarding increasing capital, tightening prudential ratios and accounting practices in the
banking sector. However, these regulations still have many drawbacks and fail to reflect the
actual risks faced by the banking system. The surge of international capital inflows beginning
in 2007 and excessive credit growth have reduced banks‟ loss-absorbing capacity. In the
context of unstable macroeconomic conditions and high inflation, the pressure from NPLs and
liquidity risks have increased the vulnerability of the banks and reduced their capacity to lend.
Capital cannot flow to the most needed and productive activities. Although there are some
papers, reports and discussions regarding risks to the banking system (such as researches of
Béllocq, 2008; Hoang Tien Loi, 2006 and Dam, 2010), these documents are still limited in
content and analytical scope. Some researches such as Rosengard et al., (2011) and Nguyễn
Kim Anh et al., (2010) also mention some aspects of bank risk but just as a part of their
researches. Therefore, this dissertation focuses on the risks to Vietnamese banks, especially
the microeconomic risks, and based on this analysis, proposes policies to strengthen the
banking system and reduce the probability of systemic failure.
 8

CHAPTER 3. RISKS TO BANKING SECTOR OF VIETNAM

3.1. Macroeconomic Vulnerabilities

After Vietnam became the WTO‟s 150th member, a surge of capital inflows caused the
increase of asset markets. The combination of high domestic credit and massive foreign
portfolio investment (FPI) created conditions for the formation of asset bubbles, especially in
real estate and stock markets. To protect the exchange rate (ER), SBV bought about $9 billion
using or issuing VND. However, due to the “impossible trinity” of simultaneously trying to
maintain a fixed ER, an open capital account and an independent monetary policy, the
sterilization failed to manage the expansion in the monetary base (Doan, 2008). The strong
and quick increase of high power money put into circulation (more than ten percent of GDP)
and the money supply (more than fifty percent) within a year, while having low capability in
effectively absorbing capital inflows, flooded the banking system with liquidity. Significant
portions of loans went into speculative activities and inefficient SOEs rather than went into
productive investments (Rosengard, et al., 2011; FETP, 2008; Leung, 2009 and Menon, 2009).
The inflation in Vietnam, therefore, can be seen as a dispensable consequence of three
combined forces including pressure from the large inflow of foreign capital, aggressive public
investment (pro-cyclical fiscal spending) and external shocks (Ohno, 2008). The high inflation
rate reduced the attractiveness of keeping VND and encouraged the capital flows to high-
return and high-risk sectors. This further exacerbated the boom of asset prices.

In an effort to reduce the rate of inflation, many measures were employed including
increased reserve requirements and interest rates, ceilings on credit growth and required bank
purchase of treasury bills on the monetary side and limitations on SOE non-core investments
on the fiscal side (Leung, 2009). Although these policies reduced inflationary pressures, they
forced the banking system to face liquidity problems. The domestic macroeconomic instability
at the time of global financial crisis triggered a sudden stop in capital flows and a reduction of
major export market demand. Due to the wealth effect from the booming asset markets, the
need for imported goods increased and resulted in a large trade deficit, which reached the
 9

worrying level during the period 2007-2009. The external and internal instabilities caused the
drop of growth rate and the bursting of asset bubbles (Rosengard, et al., 2011). The tough
business environment put pressure on and reduced the profits of the corporate sector. In
addition, because many of the banks‟ loans are collateralized by real estate, the bursting of the
real estate bubble significantly reduced the value of collateral, reducing asset quality in
banking system and triggering massive loan defaults (Lê Vân Anh, 2008 and FETP, 2008).

The widening of the savings-investment gap left the economy and banking system
much more dependent on external resources. In addition, despite having large short-term
capital inflows, foreign-currency reserves, which can protect the economy in case of a sudden
shift in capital flows, were quite low compared to other neighboring countries (FETP, 2008).
In 2011, inflation was still an area of concern, though there was some improvement in the
balance of payments. Monetary tightening polices helped control credit and money supply
growth at a price of slower GDP growth. Tightening fiscal and monetary policy, high inflation
and interest rates increased the burden on the banking sector and made production difficult
(WB, 2011). In a context of increasing risks from NPLs, illiquidity and currency mismatches
threatening the health of the banking system, restructuring has become more important as a
tool to restore the public confidence and the stability of the financial sector.

3.2. Microeconomic Risks

3.2.1. Risk from NPLs

With the largest portion of revenue from credit, credit risk is deemed the most
important risk for not only Vietnamese banks but nearly all other emerging countries‟ banking
systems. According to the World Bank, the domestic credit to GDP ratio grew quickly during
last ten years and reached 125 percent in 2010, one of the highest rates in the region. NPLs in
Vietnam increased to 3.39 percent in 2011 from 2.14 percent in 2010 using Vietnamese
accounting standards (SGTT, 2011a). In absolute terms, bad debts are equivalent to USD four
billion. This is the inevitable result of a long period of credit expansion and struggle for
market share. However, Mr. Tran Minh Tuan, SBV‟s Vice Governor, publicly admitted that
 10

this number does not reflect the true nature of banks‟ NPLs and implied that risks from NPLs
might be understated. The understatement of NPLs is due to the difference between
Vietnamese regulations and international standards on categorizing NPLs (see Appendix I).
The definition of NPLs according to the Basel Committee and the IMF is not based solely on
payment at the due date but also on the probability that the bank will be able to collect the
total due according to the terms of the loan agreement. Accordingly, the standard definition of
NPLs is more stringent than under the Vietnamese regulations. In addition, Vietnamese banks
have found ways to move NPLs off their balance sheets, for example converting bad loans into
bonds or selling them to off-balance sheet vehicles.

In addition, current regulations are not closely adhered to due to the fear of a recorded
increase in NPLs on the banks‟ balance sheets. The increase in NPLs leads to a correlative
increase in provisions and substantially reduces net income. This means no dividends to
shareholders, which then means that the bank finds it hard to attract new equity investment or
improve the liquidity of bank shares on the stock market. In addition, the existence of
principal and agent problems together with bad incentive structures discourages managers
from reporting the true situation because this can affect their benefits or even their position at
the bank. That is why few researchers have confidence in the SBV Inspectorate‟s conclusion
that domestic credit is approximately VND 2,500,000 billion, of which NPLs account for 3.39
percent or VND 85,300 billion (Anh Vũ, 2011). Moreover, NPLs of nearly all banks are
categorized pursuant to the quantitative method rather than qualitative method, which is the
more prudent and advanced method (see Appendix I for the difference between these two
methods). For example, BIDV‟s NPLs were 3.9 percent in 2007 pursuant to the qualitative
method but only were 1.56 percent if the quantitative method was used. That is the reason why
many researchers and global rating agencies such as Fitch Ratings believe that if NPLs were
calculated under international standards, the NPLs of Vietnamese banks would be three or four
times higher than the SBV estimates (FitchRatings, 2012).

Consequently, although NPLs in the banking system are only 3.39 percent, still below
the threshold of five percent, this number itself does not reveal the overall picture. In addition,
 11

banks also grant credits in the form of corporate bonds, which are not assessed using the same
credit risk rules and therefore, proper provisions are not made and collateral is not required.
According to the National Financial Supervisory Commission, if corporate bonds and trust
funds were also taken into account, real estate credit would account for twenty percent of
outstanding loans. NPLs would also be from eight to twelve percent, in which debts in group
five (losses) make up forty percent (equivalent to twelve percent of charter capital). This is
also one of the banks‟ methods of avoiding credit growth restrictions and limits on
“nonproductive lending”.1 In this way, reported NPLs and credit provision can be lowered,
while at the same time actual risks faced by banks can be concealed.

In 2009 and 2010, credit grew quickly at 37.53 percent and 31.19 percent, respectively
(SBV Annual Reports). In addition, due to the negative effects of the global financial crisis
and the slowdown of economic growth, SBV carried out a monetary expansion and applied
some programs to overcome the crisis including a four percent interest rate subsidy for
corporations. Inexperienced management combined with weak control and implicit guarantees
from government stimulated bank managers to take more risks in their portfolio for higher
profits.

However, when the fear of high inflation forced SBV to implement monetary
contraction including controls on credit, money supply growth, interest rate ceilings and
curtailment of credit for “nonproductive” sectors, the weak points of the banking system were
exposed and threatened the stability of the banking system. High lending rates have put many
domestic enterprises under pressure and have increased the incidence of bankruptcy. The
difficulties of these enterprises are also reflected in banks‟ balance sheets by deteriorating
asset quality, an increase in NPLs and provisions for bad loans. As shown in Appendix VI,
Figures 1 and 7, the NPLs ratio in 2011 increased when compared to 2010 (eight out of nine
listed banks and similar trends for non-listed banks). In addition, while provision for credit

1
Pursuant to Official Letter 2956/NHNN-CSTT: “Providing loans to non-production areas shall include:
loans, discount of valuable paper for securities investment and dealing; loans for real estate investment
and dealing; loans to capital demand for serving life, loans through the issuance and use of credit cards
(collectively referred to as consumer loans)”.
 12

losses to loans granted to customers slightly increased (six out of nine listed banks), provision
for credit losses to NPLs decreased in 2011 (eight out of nine listed banks) (Appendix VI,
Figures 13 and 14). This means that NPLs accounted for a larger share of bank loans and there
is a slight change in the structure of NPLs in 2011 at some banks. Total NPLs of nine listed
banks were VND 11,819 billion as of December 31, 2011, in which debts in group 5 (losses)
were VND 5,500 billion, the equivalent of 47 percent of total NPLs. For both groups (listed
and non-listed), the NPL ratios were highest in 2008, at the time of global financial crisis.
Although the NPL ratio began falling in 2009, it increased again in 2010 and the rising trend
of NPLs is clearer in 2011.

Of concern in the debt structure of many banks is the increase of special mention debts
(Group 2) (Appendix VI, Figures 5 and 6). Because most NPLs are initially classified in
Group 2 before being transferred to the NPL groups, debts in this group are considered “pre-
NPLs”. Some banks try to hide NPLs by classifying them in Group 2 to reduce provisions and
increase profits. Therefore, it is reasonable to believe that an increase or a high proportion of
debts in Group 2 will signal rising NPLs in the future. If the financial situation of the bank‟s
borrowers does not improve, it is probable that the banks must reclassify such loans as NPLs.
An increase in provisions2 and a reduction in net profits, therefore, are unavoidable. For
example VCB, although its NPLs to total gross loans ratio is lower than in the previous year,
increasing debt in Group 2 may imply a deterioration of asset quality rather than an
improvement (Appendix VI, Figures 1, 5). Because a few percentage points increase in VCB‟s
NPLs is much larger in absolute terms than a large increase in small banks, this signal
concerning VCB‟s NPLs situation is more of a cause of concern than in other banks. A similar
circumstance is also apparent among non-listed banks. As presented in Appendix VI, Figure
10, BIDV, one of the biggest state banks, has a large share of loans in Group 2. This is a
danger signal, especially if this bank hides its real NPLs under the cover of special mention
debts.

2
According to Decision 493/2005/QD-NHNN, the rates of specific provision for each debt group are as
follows: Group 1: zero percent, Group 2: five percent, Group 3: twenty percent, Group 4: fifty percent,
and Group 5: one hundred percent.
 13

In absolute terms, the NPLs of four state banks AGB, BIDV, VCB and CTG
substantially exceed all other banks (Appendix VI, Figures 3 and 8). This fact is easy to
understand due to the large size of such banks in the sector. Nevertheless, for that very reason,
together with the high percentage of debts in Group 2 and the fact that their main customers
are SOEs, leads to suspicions that actual NPLs are larger than the reported figures. In addition,
the largest and most exposed state bank, AGB (Agribank), did not publish its complete annual
financial statements and failed to release information on its actual situation. Although the bank
announced that its NPLs ratio was six percent in 2011, equivalent to VND 26,609 billion or
nearly USD 1.3 billion, the degree of confidence in this number is low. Even if this number is
accurate, the NPLs of AGB are equal to 120 percent of equity capital and five percent of its
total assets.3 Due to their poor risk management, state banks in fact need closer supervision
than small banks to prevent considerable adverse effects and huge bailout costs.

Moreover, a consideration of banks‟ NPLs also reveals the dangerous position of two
merged banks, TNB and SCB. Both of them have many NPLs in their debt structure. It can be
seen that they were in a dangerous situation during the period 2008-2010 (Appendix VI,
Figure 7). This can explain why both banks were illiquid and ultimately must be merged.
Besides, a few small banks did not make their financial statements public or published
incomplete statements. Therefore, it is difficult to analyze these small and high-risk banks.
The ambiguity of real numbers of NPLs makes others suspicious about these banks‟ credit
risks. Since financial and banking risks are systematic, any bank failure can lead to systematic
contagion effects. The concealment of risk can make the latent credit risk more serious and
complicate efforts to manage it.

In addition, provision for credit losses in some banks was lower than 100 percent in
2010 and 2011 (Appendix VI, Figures 14 and 16). This means that provisions of these banks
(including general and specific) were not sufficient to cover all NPLs in the worst case. This

3
Until September 2011, Agribank‟s equity capital and total assets are about VND 22,176 and 524,000
billion, respectively (Agribank, 2011).
 14

fact contradicts the opinion of SBV that NPLs in the banking system were not worth worrying
about because sufficient provisions had been made for all of them.

The increase in NPLs of the banks has resulted from problems on both the banks‟ side
and the borrowers‟ side. On the banks‟ side, many credit officers lack necessary credit risk
management skills. Therefore, many of them do not have enough knowledge of project
appraisal and required understanding of borrowers‟ business lines. Moreover, although
financial statements are considered as one of fundamental sources for assessing borrowers‟
financial situation, their reliability is still very low due to the limits in ensuring compliance
with accounting regulations. The fact that borrowers have two sets of accounts (accounts for
tax purpose and for internal use) and keep incorrect and/or unclear records is widely known.
For this reason, without internal information, it is very hard for credit officers to have an
accurate assessment of the feasibility of projects and to apply a suitable risk premium for
specific risks incurred by banks. Because of these difficulties, collateral is required by banks
for loans (Huỳnh Thế Du, 2004b). However, collateral, mainly real estate, is not a perfect
safety net for banks. Although banks have the legal right to liquidate collateral, the legal
process of foreclosure takes time and high fees can sharply reduce the asset value and
expected cash flow from foreclosures.

Credit risks are also higher in banks in which professional ethics of officers is too low
and supervisory systems are lax. In these banks, collusion between credit officers and high-
risk borrowers or their related parties happens more often. Bank officers can easily lend
hundreds or even thousands of billion VND without adequate security or completing required
procedures and enjoy high commissions from these loans. These sources of money are then
invested in speculative sectors such as real estate, securities or even unofficial credit.
Although some bank officers have been arrested and prosecuted, financial consequences
suffered by banks in the form of NPLs are still unresolved. In 2010 and the first ten months of
2011, 69 cases related to banking were prosecuted. However, only a quarter of losses were
recovered. During the economic boom, most banks only paid attention to profit growth,
deposit mobilization and credit expansion without paying enough attention to credit risk.
 15

Competition pressure for market share led credit officers to loosen lending standards and grant
credits to unqualified borrowers. A one-time real estate lending strategy offered lucrative
profit for banks in short time. And now banks are paying the price for it, as SBV reduced non-
production credit to 22 percent on June 30, 2011 and 16 percent on December 31, 2011.4 In
addition, the level of NPLs rose sharply in this sector when the real estate market softened.
The NPLs arising from real estate investments in 2008 and 2009 account for a large proportion
in the NPL structure and carry the most risks for banks, especially for small and illiquid banks.

To hide NPLs, banks and their borrowers choose to shift debts among banks. For
example, bank A will release collateral and let the borrower use the asset as security to borrow
money from bank B and then use the proceeds to repay the loans for bank A. This practice
helps banks to conceal the real number of NPLs from real estate credit and increases the
systemic risk for all banks. In addition, the belief that SBV and the government would not let
the banking system collapse has encouraged banks to take excessive risks.

On the borrowers‟ side, many companies did not foresee risks when doing business.
The lack of preparation for the worst-case scenarios exposed their weaknesses when macro
conditions changed adversely. Moreover, the highly leveraged model employed by many
enterprises for expanding production and taking advantage of easy and cheap capital proved to
be extremely risky given the nature of domestic macroeconomic fluctuations. According to the
Ministry of Planning and Investment (MPI), the average debt to equity ratio of total Vietnam
enterprises is 2.33 times. However, in some SOEs this ratio is far higher than the average, such
as Vietnam Shipping Industry Group (Vinashin) (10.9 times) and some Civil Engineering
Construction Corporations (CIENCO) (from 12 to 21.6 times) in 2010, Vietnam Electricity
(EVN) (4.25 times) and Vietnam National Industry Construction Group (VNIC) (3.91 times)
in 2011, while the permitted threshold is only three times. In addition, speculative sectors also
attracted SOEs. According to the MPI, total investment value outside of the main business
sectors of eleven SOEs is VND 19,500 billion, and most of this amount flowed into the

4
Instruction No. 01/CT-NHNN, Item 2(b).
 16

financial, banking and real estate sectors. The four percent subsidy interest rate was designed
for enterprises and individuals to fund working capital for production and trading activities.
However, from the third quarter of 2009, borrowers increasingly used money from such loans
for speculative activities.

The threat of NPLs forced banks to restructure, recall loans and try to maintain NPLs
at a low level. For that purpose, many banks restricted new loans and tightened lending
standards. The age of easy and cheap capital ended quickly and those who depended on it
swiftly perished when supply from banks dried up. Moreover, interest rates up to 20-25
percent or even 28 percent wiped out their profits. From January to August of 2011, credit for
non-production was estimated to drop approximately 17 percent. Due to the credit contraction
and difficulty in obtaining new loans, some borrowers choose not to pay mature payments and
accept a penalty rate to have funds for daily business. When borrowers‟ capacity to repay
loans at the due date is doubtful and they become more vulnerable to shocks, the unavoidable
result is that NPLs must increase to reflect higher credit risks incurred by banks. With the fact
that profits decreased in about sixty percent of listed companies in 2011 and more than 50,000
enterprises suffered losses, liquidated or ceased operations (gross number) in 2011 and the
first two months of 2012, it seems that the hope of reducing NPLs is rather slim.

To restructure debts, many banks have found ways to sell or transfer assets and
collateral to collect debts. However, since many NPLs are real estate loans, the collection of
debts cannot be carried out as quickly as expected. The relationship between the banking and
the real estate sectors may exist under the form of equity investment (banks have subsidiaries
or affiliates in the real estate sector) or related ownership (banks‟ large shareholders are also
the owners of real estate enterprises) (see Appendix VIII. Connected Relationship and
Lending). Banks grant real estates loans, either in the form of direct loans or corporate bonds,
via these related parties and thus losses accrued by them and NPLs arising from such loans
place a heavy financial burden on banks. If all banks try to sell real estate investments
simultaneously, the wave of mortgage releases can result in a sudden fall in asset prices and
 17

cause more losses for the banks. Moreover, other movable collateral such as machines or
vehicles might not be sold at their collateral value or book value but at their break up value.

Meanwhile, the Law on Bankruptcy 2004 has not worked as expected due to the
limitations in specific regulations on rights of lenders and borrowers, time-limits and the
ambiguity of some legal terms.5 That is the reason why the efficiency of insolvency
proceedings in Vietnam is only ranked 142th by IFC and World Bank. The average time for
insolvency proceedings is five years with the average cost up to fifteen percent of the estate
value and a recovery rate of only 16.5 (cents on the dollar) (World Bank and IFC, 2012).
Therefore, with such a lengthy debt restructuring process, banks currently cannot choose this
kind of resolution if they want to quickly deal with NPLs.

In addition, the attractiveness of the stock market at its first stage made many banks
run a race to establish securities companies and grant loans for stock trading. Now that the
VN-Index is just about one third of its peak (1,170.67 on March 12, 2007), many securities
companies have negative profits. Because many securities companies are banks‟ subsidiaries
or affiliates, banks have suffered losses from these equity investments and had to reduce
profits and make large provisions. In 2011, the losses of sixteen securities companies totaled
more than VND 2,200 billion. The majority of these companies are banks‟ subsidiaries,
affiliates or financial investments (see Appendix VIII Connected Relationship and Lending).
The NPLs of these companies have increased over years and is also another potential risk for
banks.

In addition, many banks have followed the model of universal banking and financial
corporation, participating in many banking activities including both commercial and

5
For example, the definition of bankruptcy is rather ambiguous and does not clarify amount and elapsed
time of overdue debts (this creates the arbitrariness in determining bankruptcy). Regulations on rights of
new lenders are also unclear. Some articles limit rights of guaranteed lenders to solve collaterals
(Articles 27, 35). The time limit for the court to consider whether accept the filing of petitions for the
commencement of bankruptcy procedures is not feasible. Other regulations regarding invalid
transactions, role and responsibility of guarantor, rehabilitation procedure also have problems when
being put into practice.
 18

investment banking. Therefore, investments in subsidiaries, affiliates and other financial

investments form a large part of the banks‟ total assets. However, provisions for NPLs losses
of such entities are not sufficiently quantified. Some banks‟ subsidiaries or affiliates have
issued bonds to sell to banks and have used this money to pay back loans to banks to avoid
increasing NPLs.

Credit growth pressure to provide finance for economic growth has forced many
banks to distort the real asset quality reflected in their balance sheets by way of turning bad
into good debt. Moreover, most investors seem unaware of latent credit risks incurred by
banks and only show excessive interest in profits and growth of assets and gross revenue. That
is the reason many banks have linked wage funds and managers‟ compensation to annual
profits while having few criteria relating to liquidity and solvency ratios. Such incentive
schemes unintentionally play a central role in shaping lending activities and discourage
managers from taking actions which can reduce net profits, including increasing provisions for
NPLs.

Furthermore, to satisfy requirement on raising capital pursuant to Decree No.

141/2006/ND-CP, banks must try to make financial statements as clean as possible to attract
new funds at a good price. Therefore, revealing the true status of their NPLs is not desirable
for many bank managers. Meanwhile, the regulations of Decision No. 493/2005/QD-NHNN
are outdated and cannot keep track of credit risks incurred by banks (especially regarding
regulations on NPLs classification, credit provision, the value of collateral and internal credit
ranking system). Pressure to apply international standards is usually absent except for those
banks that want to attract foreign strategic investors. In addition, credit risk management
requires investment in specialized skills, advanced technology and trained officers. This
process takes time, money and effort, but some banks do not have enough resources to attempt
it. In addition, the illiquid banks often find it hard to have enough funds for NPLs provisions.

Another alarming issue is NPLs occurring from interbank lending. The extraordinary
matter is not the very high interbank rate but the imposition of collateral requirements for
 19

interbank loans. This fact derives from concerns about some banks‟ financial situation and
proves that trust among banks, one of the most important factors in banking activities, has
been seriously damaged. Some borrowing banks cannot pay back mature loans due to liquidity
difficulties. Meanwhile, the lack of a provisioning mechanism for this kind of NPLs has
created gaps and allowed arbitrariness in provisions. Some lending banks are forced to record
such loans as longer term deposits at borrowing banks to avoid making provisions and hence
actual risks suffered by such banks have not been fully reflected in financial statements. If
borrowing banks are closely supervised by SBV, demands to pay debts are more difficult.
Because such banks will be supervised closely by SBV and must give priority to pay back
depositors rather than interbank transactions. In such cases, lending banks have no choice but
to extend the tenor of the loans. Since all banks have lending relationships with other banks,
lending banks can find it difficult to pay back their own debts and this can lead to systemic
risks if not managed and supervised by SBV.

3.2.2. Liquidity Risk

For many years, the Vietnamese economy grew based on capital mainly supplied by
the banking system. This environment created good conditions for disguising latent liquidity
risks. The ratio of loans to deposits is high: 92.04 percent in 2008, 103.89 percent in 2009,
100.99 percent in 2010 and 100.4 percent in 2011.6 Credit growth was higher than
mobilization growth for the period 2001-2010 (Figure 3.5). With an average GDP growth rate
of 7.26 percent, credit growth was 4.43 times higher than GDP growth for this period. This
practice reflects not only a growth model based on capital accumulation but also inefficiency
in capital utilization, which has made banks vulnerable to liquidity risk.

6
Calculated from data in SBV Annual Report and other sources.
 20

FIGURE 3.1. GDP, CREDIT, MOBILIZATION AND INFLATION RATE

(2001-2011)
53.89
47.64
41.65
36.53
37.53 36.24
32.08
28.41 31.1 31.19
27.6 33.2 23.38 29.88
24.1 25.8 25.44
22.5 22.84
21.4 19.89 18.58
9.5 8.44 12.6 11.75
6.89 7.08 7.34 8.23 6.52 10.9
7.79 8.4 8.46 6.78 5.80
3 6.6 6.31 5.32
0.8 4
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e
GDP rate Credit rate Mobilization rate Inflation rate

Source: SBV, GSO and MPI

Due to low technology levels, unskilled staff and the absence of new products and
services, banks mainly focused on domestic resource mobilization and credit allocation to
search for quick profits. This explains why loans granted to customers make up a large share
of many banks‟ asset structures. In the deposit and credit structure of many banks, the maturity
mismatch seems rather serious. High inflation reduces the role of VND as a store of value.
Moreover, interest rate competition and the deposit rate ceiling have distorted the interest rate
curve, in which the short-term interest rates are equal to or higher than long-term interest rates.
The capital structure, therefore, is more focused on short-term sources. During the period 2009
to 2011, one-month deposits increased quickly and made up the largest share of the deposit
structure of many banks (Appendix VI, Figures 17, 22). Long-term deposits (more than one
year) seem to be very little at some banks (Appendix VI, Figures 19, 24). However, the ratio
of short-term capital sources used for medium-term and long-term loans of many banks
(calculated pursuant to Circular No. 15/2009/TT-BTC, Article 5.2) is still within the permitted
limit 30 percent (Appendix VI, Figures 27, 29).7 Meanwhile, the simple ratio of short-term

7
However, the Governor admitted that some banks had used 60-70 percent or even 100 percent deposits
for medium and long-term loans (TBKTSG, 2012b).
 21

deposits used for medium-term and long-term loans is generally higher than the previous ratio,
which is a similar but more complex (Appendix VI, Figures 28, 30). This means that banks
may use sources of capital other than retail deposits to finance long-term loans. The core
liquid asset ratio also indicates that some banks are illiquid, especially some of the non-listed
banks (Appendix VI, Figures 31, 32, 33, 34).

Although some liquidity ratios can be calculated from the banks‟ financial statements,
the reliability of these ratios is in doubt. For example, the nominal maturity of long-term
deposits has little meaning in calculating liquidity ratios because depositors usually have the
right to withdraw their money at any time without penalty or little negative effect on interest
received. A 36-month deposit with one-month interest rate option can be withdrawn at any
time with full interest paid for the time deposited and therefore is not different from a one-
month deposit. In this way, banks can reduce their required reserves and accrue profits by
taking on more liquidity risk. In addition, long-term loans can be concealed under the cover of
short-term loans by refinancing or transferring loans to other banks. This practice appears to
be widespread at most banks. Therefore, liquidity ratios do not accurately reflect the liquidity
situation of banks.

As part of their intermediary role and the function of maturity transformation, banks
have to lend money for longer periods on average than the terms under which they take
deposits. Therefore, tenor mismatches are an inherent characteristic of the banks‟ balance
sheets. However, in Vietnam, such mismatches are more serious than ever (Nguyên Khang,
2012). On the credit side, most credits focus on production and investment for terms equal to
or longer than three-months (Appendix VI, Figures 18, 23). While on the deposit side, with
long-term rates equal to or lower than short-term rates and strong fluctuations in interest rates
and inflation expectations, depositors have no choice but to choose short-term deposits equal
to or shorter than three months (Appendix VI, Figures 17, 22). Due to declining interest rate
expectations, banks also do not want to receive long-term deposits. Previously, the gap
between deposits and loans was compensated by other sources such as interbank borrowing.
 22

However, tight monetary policy has reduced the supply of other sources of funds. Higher NPL
risks have also increased liquidity pressures. In addition, due to interest rate competition,
depositors move their money to banks in which pay the highest interest rates. This action leads
to large fluctuations in banks‟ sources of capital, especially for small and weak banks. To
solve their liquidity problems, banks have to increase their deposit rates and try to borrow on
the interbank market, even at high rates. This capital thirst derives in part from the maturity
mismatch, but a deeper reason is the lax discipline of SBV and the poor performance of banks
themselves with regard to liquidity management.

According to SBV Governor Nguyen Van Binh, about ten percent of credit institutions
are experiencing difficulties accessing interbank loans. Because they do not have stocks of
tradable securities, these banks cannot borrow at the SBV discount window, and they are not
eligible to take part in open market operations. Therefore, they only access funds through the
interbank market in order to reduce liquidity pressure at year‟s end. However, due to the fear
of counterparty credit risk and the increasing trend of liquidity hoarding, lending banks have
required collateral and limited the size of new loans. Such actions have forced the interbank
rate up and have made it more difficult for the liquidity-thirsty banks to access this market. In
addition, a few surplus banks have taken advantage of their favorable position to exploit other
banks. The interbank market is distorted and aggravates the illiquidity problem. This explains
why interest rates on gold and non-dollar foreign currencies such as EUR, AUD and CAD
have increased recently up to 4.35 percent and 4 percent, respectively. Because deposit rates
for these currencies are not capped like VND and USD, these rates have been raised to attract
more funds to use as security for interbank loans and/or transferring to VND for covering cash
outflows. Although this strange phenomenon can temporarily reduce liquidity pressure,
exchange and gold price risks simultaneously increase and threaten the stability of banks,
especially those that are not expert in ER risk management.

Interbank loans are normally granted based on trust with the primary purpose of
satisfying temporary liquidity needs in the very short-term such as overnight or one week
only. The other purpose is to enable banks to earn money on short-term excess liquidity.
 23

Therefore, the interbank market is not intended to serve as a source of capital mobilization.
However, in the previous period, when the interbank rate was lower than the deposit rate,
some banks borrowed cheap funds on this market and lent it to their customers or even
deposited this money back in other banks to earn the spread between the deposit rate and
interbank rate. This practice left some banks dependent on the interbank market as a source of
funds. However, from October 2011 to February 2012, the interbank rate experienced some
periods of sharp increases. In the middle of October, the interbank rate suddenly increased and
on November 7, 2011, it was 36.58 percent for a 12-month term (Figure 3.6). In addition, the
promulgation of regulations tightening interbank activity (borrowing in the secondary market
not more than twenty percent of the primary market) and the holding of bonds and other
valuable papers among banks has placed banks that were frequently dependent on interbank
market and borrowing from other banks in difficulty. The high and unacceptable interest rate
at some terms indicated that a few banks could not obtain funds at the deposit rate capped by
government and depended on the secondary market to meet urgent liquidity needs. The
inability to obtain funds in a timely and cost-effective way to replace a decline in deposits or
other sources of funds implies that such banks have liquidity problems. Meanwhile, due to the
declining market, the banks‟ assets in the form of real estate cannot be quickly converted into
liquid assets. Therefore, some banks have tried to mobilize funds above the deposit rate cap
(such as through implicit agreements with customers or selling corporate bonds at a rate higher
than the deposit cap) and some even petitioned SBV to give permission to export gold to
improve liquidity.

From the end of March, interbank rates have decreased below the deposit rate (Figure
3.6), which signals an improvement in the banks‟ liquidity situation. However, this is only true
for the large banks, but not the small and illiquid banks although SBV and some state banks
have committed to support the liquidity shortage. The fear of default has meant that large
banks limit the amounts they lend that are not backed by suitable collateral. This has excluded
the small and illiquid banks from the interbank market. Illiquidity risk, therefore, is still a big
problem for these banks.
 24

FIGURE 3.2. INTERBANK AVERAGE INTEREST RATE (10/2011 - 4/2012)

25
20
15
10
5
-

Over night 1 Week 2 Weeks 1 Month 3 Months 6 Months 12 Months

Source: SBV

To ensure efficiency in capital utilization and produce more profits, the deposit to loan
ratio is kept low in many banks. A low deposit to loans ratio is common at most banks for the
period 2007-2011 (Appendix VI, Figures 21, 26). As a result, there is greater dependence on
more volatile funds to cover the gap between the liability side (deposits) and the asset side
(loans and other illiquid assets). Therefore, when liquidity stresses occur, banks face more
illiquidity risks than if they had backed their assets with more stable deposits.

In addition, in a dollarized economy in which dollars and gold are used as a means of
payment and investment, deposit inflows are also affected by fluctuations and expectations in
the gold and dollar price. When investment by domestic residents increases, liquidity pressure
recurs at some banks. The concentration of medium and long-term loans in specific borrowers
such as large SOEs, real estate companies and the concentration of short-term deposits among
some large corporate depositors leaves banks more vulnerable. Whenever large borrowers
cannot repay their debts or large depositors move their money out, banks will get into trouble.
Therefore, funding risks are the origin of liquidity pressure and recent interest rate
fluctuations. In addition, the implicit guarantee of government makes banks more willing to
 25

choose a risk-taking strategy. With the coexistence of these issues, liquidity risk is still one of
the most important risks in Vietnamese banking sector.

3.2.3. Currency Risk

During 1999-2002, due to a sharp increase in foreign-currency deposits and a decrease

in foreign-currency loans, a serious currency mismatch emerged. Liability dollarization was
much higher than credit dollarization (banks held more foreign-currency deposits than foreign-
currency loans) (Figure 3.7). Therefore, in this period, banks incurred a high ER risk and less
default risk in the case of a depreciation of VND.

FIGURE 3.3. RATIOS OF FX DEPOSITS TO TOTAL DEPOSITS AND FX

LOANS TO TOTAL CREDIT
45.0%
41.2% 42.0%
40.0% 39.0%
38.6%
38.4% 36.6% 33.1% 36.8% 36.7%
35.0% 30.3% 30.0%
30.0% 33.1% 31.2% 32.5% 29.8%
31.4% 25.6% 24.5% 26.1%
25.0% 24.4%
25.2% 21.9%
20.0% 21.7%
20.0% 21.1%
15.0% 19.3%
10.0%
5.0%
0.0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Foreign exchange deposits/Total deposits Foreign exchange loans/Total credit

Source: Cited in Vo and Pham (2008), pp. 27

During 2008-2010, while the VND credit and mobilization growth rates stabilized, the
USD credit and mobilization growth rate took the opposite trend. While the USD mobilization
growth rate fell from 29.29 percent in 2009 to 20.95 percent in 2010, the credit growth rate
sharply increased to 48.45 percent in 2010 from 15.12 percent in 2009 (Figure 3.8). Because
the dollar lending rate was substantially lower than the VND lending rate in 2010, enterprises
tried to borrow in USD to reduce their cost of funds (Minh Đức, 2012c and Thy Thơ, 2012).
 26

Such movements were the main reason that the foreign-currency credit growth rate in some
banks increased sharply in this year. However, there was no corresponding increase in foreign-
currency deposits (Appendix VI, Figures 35, 36). Foreign-currency credits to foreign-currency
deposits of some banks were significantly higher than one hundred percent, especially in 2011
(Appendix VI, Figures 37, 38). These banks lent in foreign-currency more than they
mobilized, and therefore they relied on less stable sources of foreign-currency such as
borrowing abroad or on the interbank market to finance foreign-currency loans.8

FIGURE 3.4. GROWTH RATE IN CAPITAL MOBILIZATION FROM AND

CREDIT TO THE ECONOMY (2008 - 2010)
60.00%

50.00%
48.45%
43.51%
40.00% 41.00%
Credit (VND)
30.07%
30.00% 27.74% Credit (USD)
25.02% 27.24%
29.29% Mobilization (VND)
20.00% 21.38% 20.95%
Mobilization (USD)
17.62% 15.12%
10.00%

0.00%
2008 2009 2010

Source: SBV Annual Reports

In addition, the above facts also imply that formal currency mismatch of banks‟ assets
and liabilities and banks‟ vulnerability to ER risk declined. However, it would be too
optimistic to believe that risk was reduced on aggregate. Although some currency mismatch
had been removed from banks‟ balance sheets, the end result was that the currency mismatch
was simply transferred to the banks‟ borrowers. Currency mismatch, which is not reflected in
the banks‟ financial statements and not controlled by SBV, now was incurred by the corporate

8
Moody‟s raised their concern on the dependence of Vietnamese banks in cheap foreign-currency loans
from abroad, which make these banks become more vulnerable in case of having constraints in foreign-
currency capital access. See http://asianbankingandfinance.net/markets/more-news/banks-australia-nz-
korea-vietnam-most-exposed-euro-crisis-moodys accessed at 6:34 pm on June 6, 2012.
 27

sector. Many of the banks‟ borrowers did not hedge their ER risk or did not have
corresponding sources of dollar revenue. In addition, due to the effects of the global financial
crisis and European debt crisis, even net exporters may not have enough foreign-currency
income to guarantee for their financial obligations if they are negatively impacted by the
reduction of major markets‟ import demand. Therefore, in a context in which modern risk
management is not yet established in many banks, and bank supervision is still ineffective, the
risk of currency mismatch (both direct and indirect) is considerable in Vietnam (Camen,
2006).

To reduce currency risk, SBV promulgated Circular No. 03/2012/TT-NHNN to limit

foreign-currency credits to exporters or others who have cash inflows in foreign-currency for
overseas payments or imported goods and services. In addition, the promulgation of Circular
No. 07/2012/TT-NHNN providing for the total day-end foreign currency position (either
positive or negative) not exceeding twenty percent of bank owner‟s capital is another step to
tighten foreign-currency deposits and credits. Moreover, in an effort to limit foreign-currency
credit, reserve requirements on foreign-currency deposits were increased two percent (up to
eight percent for below twelve-month deposits and six percent for up to twelve-month
deposits).

However, when domestic-currency lending rates are very high, the reduction of
foreign-currency lending may tighten the capital constraints of the corporate sector, especially
small and medium sized firms. The foreign-currency credit growth rate decreased from
48.45% in 2010 to 18.7% in 2011 (estimated). This rate also decreased in 2011 in some listed
banks (Appendix VI, Figure 35). Meanwhile, the foreign-currency deposit growth rate of
many banks also significantly decreased (Appendix VI, Figure 36). The de-dollarization on
both sides of the banks‟ balance sheets is a result of the effort by SBV to limit dollar deposits
and credit. However, it is important to note that if the black market activities of foreign-
currency are not well-managed, foreign-currency lending and borrowing is just simply shifted
from the banking system to unofficial markets. In this case, currency risk is transferred from
 28

banks to the private sector, which is much more dangerous because it is not regulated by the
central bank.

3.2.4. Risk from Connected Lending

Capital contributions in Vietnamese banks are complex and raise potential problems
for the restructuring process. Cross-shareholdings among banks can be for short-term purposes
such as to exploit opportunities on the stock market (during the period before 2008) or to
increase charter capital as required by SBV. Banks also use this method to clear financial
statements and disguise real NPLs by means of transforming potential NPLs into equity
capital. However, via this relationship, financing for bank owners‟ enterprises can be easily
concealed and harder to detect by outsiders. Alliances among banks can help controlling
shareholders obtain cheap funding for their projects in real estate including building industrial
zones or even new residential areas and other projects requiring large amounts of start-up
capital. From Appendix VIII, a clear picture emerges, in which controlling shareholders invest
their money in banks and in exchange, banks finance their related companies under the forms
of equity capital, trust funds or buying medium or long-term bonds.

The trend of investment in the banking sector by large state corporations began in the
early of 2000s and increased until 2008. With the ambition to be a multi-sector corporation,
many SOEs have invested outside of their core sectors, including banking, which is the most
attractive investment (Figure 3.9). When banks joined hands with these corporations, they
obtained significant opportunities for both credit and deposit expansion because SOEs usually
maintain large working capital deposits at banks, and borrow large amounts for their projects.
Lending to these companies is also considered less risky than others due to the implicit
guarantee from government and therefore it reduces the banks‟ cost of funds. However, this
cooperation actually creates risks for both parties. SOEs invest money outside of their main
businesses with the hope of earning large profits. However, due to lack of expertise, they do
not know how to effectively manage risk, especially during times of macroeconomic
fluctuation. The unavoidable result is that they suffer large financial losses from the decline in
 29

value of previous investments. That is the reason they have been forced to withdraw capital
from outside sectors (especially in financial, banking and insurance sectors) to reduce losses.
On the other hand, the banks also take risks in their partnerships with SOEs. After obtaining a
controlling stake, SOEs usually appoint their own staff to some senior management positions
in the banks to increase control.9 Then these persons can affect the credit or investment
decisions of the bank.10 Due to the inefficiency in capital utilization of many SOEs, the NPLs
from this kind of customer will threaten the banks‟ financial condition. The dependence on the
funds of SOEs also places some banks in a difficult situation when these large shareholders
are forced to withdraw their investments in the banking sector. Some small banks (such as
BaoVietBank and PGBank) cannot find other shareholders with sufficient financial capacity to
increase capital to VND 3000 billion as required by SBV.

FIGURE 3.5. INVESTMENTS OUTSIDE THE MAIN BUSINESS OF

STATE CORPORATIONS
VND

12,000
10,000
8,000
6,000
4,000
2,000
-
2006 2007 2008 2009 2010

Securities Insurance Investment fund Banking Real Estate

Source: Ministry of Finance

9
For example, the case of ABB, its Vice Chairman, a BOM‟s member, a Committee of Supervisors‟
member, a Deputy General Director are persons of EVN, ABB‟s controlling shareholders (see Annual
Report 2010 of ABB).
10
For example, after being controlled by EVN, ABB committed to finance VND 2500 billion for
Distribution System Corporation and EVN NPT (transmission). In addition, ABB also invest in EVN‟s
related parties, namely EVN Finance (8.4%, equivalent to VND 210 billion), EVN International JSC
(1.2%, equivalent to VND 28.8 billion), PC3 Invest (4% equivalent to VND 24 billion), Phalai Thermal
Power JSC (see Appendix VIII).
 30

The investment of private, non-bank corporations into the banking sector is another
popular trend. From Appendix VIII, one can easily detect the wealthy individuals or large
corporations behind the banks as controlling shareholders. Similar to the SOEs, related
persons of such parties shall be appointed as members of the board of management (BOM),
the committee of supervisors, general director and other senior management positions.11
Instead of using available funds (mobilized from the securities market, issuing bonds, retained
earnings or other sources), these companies invest in banks as an indirect way to find a more
stable and long-term source of capital. Because they control the operations of banks, they hold
in their hands the right to grant credit to their related parties either under the form of corporate
bonds or loan agreements or equity capital.12 They can also take advantage of the portfolio
investments of banks to invest in their industry to enable them to maintain their dominant
position.13 In addition, owners of banks also use their related companies to maintain
ownership in banks and satisfy the requirement of capital increase. For example, company A
owned by owners of bank B issues bonds to (or borrows from) bank B and uses the money to
purchase bank B‟s shares. Although this increases the bank‟s charter capital, the owners of
bank B‟s real ownership percentage is not diluted. The increased capital in such a case is just
“virtual capital,” creating an unfair advantage for large shareholders (still controlling banks
with a smaller ownership percentage) while at the same time violating the rights of minority
11
For example, TCB has Masan, Eurowindow and their related parties as controlling shareholders. TCB‟s
Chairman, Vice Chairmen, other members of BOM, member of committee supervisor are persons of
Masan and Eurowindow. NAB is under the control of Ms. Tran Thi Huong and related parties. Ms. Tran
Thi Huong‟s son and daughter attended the management team of NAB. Large shareholders of SNB are
Mr. Tram Be (Vice Chairman) and his daughter (Deputy General Director) (see Appendix VIII).
12
For example, GPB has a strategic shareholder, PetroVietnam. GPB has invested in some of
PetroVietnam‟s subsidiaries, namely Global Petro Invest Corporation (GP-Invest): 9.88%, Vinashin
Mineral and Petro JSC: 10%, PetroVietnam Financial Investment Corporation: 5% and Global Petro and
Energy JSC: 11% (see Appendix VIII).

NVB has a controlling shareholder, Mr. Dang Thanh Tam (indirectly through his related parties). NVB
also holds bonds from that shareholder‟s related companies: Saigon Construction Corporation: VND 400
billion, Sai Gon Da Nang Investment Corporation: VND 1000 billion and Northwest Saigon City
Development Corporation: VND 300 billion (see Appendix VIII).
13
For example, STB holds shares of two companies (Bien Hoa Sugar (related to Thanh Thanh Cong
Group): 10.01% and Gia Lai Cane Sugar Thermoelectricity: 10.34%) in sugar industry which is mainly
controlled by the family of STB‟s Chairman (Thanh Thanh Cong Group) (see Appendix VIII).
 31

shareholders. This practice is also used to help banks‟ owners to own many banks
simultaneously.14 In addition, to increase ability to control, large shareholders can use pyramid
or cross-shareholdings to increase ownership and control rights in target banks. With holdings
below five percent (holdings of five percent or more are considered large shareholders),15
banks are not required to release information to the public and therefore the identity of such
investors and especially the ultimate owners is not revealed. In addition, only the total number
of related party transactions is made public without any details on specific terms and
conditions. Therefore, no one can know for sure whether the capital of banks is used wisely
and efficiently for the benefit of banks and whether the related transactions were taken at
arm‟s length. For example, the ratio of receivables (from related party transactions) to total
assets of NVB was 16 percent in 2011 (about USD 172 million) and the ratio for WEB was 18
percent in 2010 (about USD 90.3 million). Most related party‟s transactions are with Mr. Dang
Thanh Tam‟s related parties. This ratio is high compared to other banks in 2011 (STB: 2.6
percent, BVB: 1.77 percent, VCAP: 6.24 percent).16 When the NPLs of banks increase
sharply, it raises serious questions concerning the share of NPLs due to related party
transactions and what steps the banks have taken to solve with this problem.

With the purpose of developing into large financial groups, many banks have
established or invested not only in other banks but also in other sectors such as securities,
14
For example, Vietcapital is one of the controlling shareholders of VCAP. In 2011, VCAP hold bonds of
Vietcapital‟s related parties, namely: Vietcapital Securities: VND 300 billion (without collateral) and
Vietcapital Real Estate: VND 50 billion (without collateral) (see Appendix VIII).

Mr. Dang Thanh Tam and his related parties is the controlling shareholder of WEB. In 2010, WEB hold
bonds of Mr. Dang Thanh Tam‟s related parties, namely: KBC: VND 1500 billion (hold at maturity) and
Saigontel: VND 300 billion (hold at maturity) (see Appendix VIII).

In addition, banks can join hands with each other to satisfy the requirement of capital increase in Decree
No. 141/2006/ND-CP by investing in shares of each other or “rotating bonds”. For example, bank A
establishes an enterprise A1 (or use a related company) and bank B establishes an enterprise B1 (or use a
related company). Initially, A1 issues bonds to (or borrows from) bank B and B1 issues bonds to (or
borrows from) bank A. Then, A1 and B1 can use money from bonds (or loans) to invest in bank shares
of bank A and/or bank B.
15
Law on credit institutions 2010, Article 4.26.
16
Data for calculation are taken from banks‟ financial statements.
 32

insurance, real estate, tourism, hotels and other services. To overcome financial constraints,
banks choose cross-investment among related parties and create a holding company structure
as a cobweb-like network. This fact not only creates a conflict of interest between banks and
the companies that they have invested in, but also deterioration in the quality of capital that is
to function as a cushion during periods of crisis due to the dilution of real capital contributed
by bank shareholders. Therefore, the CAR and ratios calculated from total equity cannot be
used as effective measures of the loss-absorbing capacity of banks.

In addition, cross-ownership between banks and large corporations can create

oligopolies and reduce competition. With strong economic power, these interest groups can
lobby to dissuade the authorities from taking action that threatens their profitability. 17 The
public does not have information concerning the formal and informal relationships between
the real owners of banks and government officials mostly because the law does not force
banks to disclose this information. The lack of transparency makes it harder to prevent
corruption and collusion between businesses and government officials.

One of the main reasons for the practice of connected lending in Vietnam is moral
hazard. Large shareholders believe that the government will not allow their banks to fail under
any circumstances. Therefore, they use many methods to deploy banks‟ funds for their own
businesses without fear of bankruptcy. Another reason is the legal framework regarding
connected lending and cross-shareholding, which is not fully enforced. Regulations on these
issues have existed in Vietnam under accounting standard No. 26 (Decision No.

17
For example, although in the draft of Law on credit institutions 2010 prohibited banks own shares of
each other, the official version of this law exclude this regulation.

In the draft of circular regarding prudential ratios, SBV tried to regulate that each bank is only permitted
to invest in two banks (not more than five percent of the invested banks‟ charter capital). However, this
regulation was absent in the official circular.

In initial draft of Law on credit institutions 2010, SBV proposed that a corporate shareholder should not
be authorized to hold more than ten percent of the banks‟ charter capital. However, this proportion was
finally set at fifteen percent. In addition, SBV also proposed that commercial banks are prohibited from
holding shares of other credit institutions and lending to securities trading. However, this proposal was
not supported by the Standing Committee of the National Assembly.
 33

234/2003/QĐ-BTC and Circular No. 161/2007/TT-BTC), Ordinance on banks, credit

cooperatives and finance companies in 1990, Law on credit institutions in 1997, Decision No.
457/2005/QD-NHNN, Circular No. 13/2010/TT-NHNN, Law on credit institutions in 2010
and Circular No. 40/2011/TT-NHNN. In an effort to tighten banks‟ investment activities, SBV
will promulgate a new circular regulating banks‟ capital contributions and shares purchase in
subsidiaries and affiliates. This will include specific conditions and limitations on the level of
capital contributions and share purchases (based on equity and reserves, legal capital, total
assets, NPLs ratio, profits and prudential ratios)18 to restrict and control internal-lending
through banks‟ subsidiaries and affiliates. Although this draft still has some loopholes,19 it still
can be seen as a strong warning signal sent by SBV to restraining cross-shareholding and
cross-lending. In addition, the new regulation also seeks to keep banks within the bounds of
their main business. However, this draft is still in preparation and collecting comments from
the public.

18
Equity and reserves: the level of bank‟s capital contribution and share purchase at one subsidiaries,
affiliates is not more than fifteen percent of bank‟s equity and reserves. Legal capital: legal capital shall
be calculated by subtracting the amount of capital contribution and share purchase at subsidiaries,
affiliates from charter capital. Total assets: total assets of subsidiaries and affiliates are not higher than
forty five percent of bank‟ total assets (consolidated basis). NPLs ratio: To be permitted to invest in
subsidiaries, affiliates, banks must maintain NPLs ratio below three percent. Profits: banks had profits in
the previous year. Prudential ratios: prudential ratios are obeyed at least within six months before the
date of request. See the second draft of circular at http://www.vibonline.com.vn/Duthao/16/Du-thao-
Thong-tu-huong-dan-dieu-kien-ho-so-thu-tuc-va-trinh-tu-gop-von-mua-co-phan.aspx accessed at 9:54
pm on April 14, 2012.
19
Large banks have much more capital and assets than small banks. Scope of impact for large banks shall
be smaller than small banks. Therefore, limitations on percentage should be stricter for large banks
(definition of large banks must be clarified).
 34

CHAPTER 4. POLICY RECOMMENDATIONS

4.1. Resolution for NPLs

Vietnam currently has both decentralized and centralized asset management companies
(AMCs).20 However, due to the broad scope and the lack of sufficient capital and management
skills, the resulting operational efficiency is rather low (Mai Thảo, 2012a). In addition,
prerequisites for successful AMCs are missing in Vietnam. Therefore, substantial
modifications should be implemented to employ the advantage of both approaches (see
Appendix II: Literature on Resolution of Nonperforming Loans for a discussion of these
prerequisites).

Information on the operation of AMCs should be transparent and made public. An

appropriate incentive framework needs to be put in place as quickly as possible to improve
AMCs‟ operation, especially for decentralized AMCs. Necessary funding should be available
to deal with NPLs. Funds can be partly financed from Debt and Asset Trading Corporation
(DATC) to increase its charter capital. However, because of its status as an SOE, DATC
cannot effectively deal with NPLs from other SOEs. A centralized AMC funded by
government but managed by the private sector (including foreign advisors to improve human
capital and management efficiency) would have a stronger and more independent position in
negotiations with other SOEs. Therefore, government can establish competitive, privately
managed (with a mix of domestic and foreign management) specialized funds to hold NPLs.
These funds would participate directly in the workout process between banks and corporations
as potential equity investors in the restructured corporations. They would buy banks‟ loans and
swap claims for equity. The performance contracts whose payout depends on the valuation of
assets under management at a final, future date would be used to set the managers‟
compensation. Banks would provide some interest relief, longer maturities or new necessary
loans but not engage in any debt-equity swap (to reduce the burden of banks and break the bad
20
Centralized AMC is DATC, which was established by the Prime Minister in 2003 and began operation
in 2004 with the charter capital at VND 2000 billion, see http://www.datc.com.vn/tabid/56/Default.aspx
accessed at 1:21 pm on April 9, 2012.
 35

links between banks and corporations) (Claessens, Djankov and Klingebiel, 1999). Detailed
procedures and criteria for buying and selling NPLs (such as fair value rather than book value,
minimum size of debt) should also be transparent and supervised.

To reduce the level of NPLs, the CAR should be improved by increasing banks‟ capital
and/or reducing risk-weighted assets (Boudriga, Boulila, and Jellouli, 2009). Capital can be
increased by shareholders‟ contributions or recapitalization by government.21 Because of
weaknesses in corporate governance and monitoring bank operations, government should use
an ex-post recapitalization mechanism (such as a loss sharing rule by which a certain
percentage of the losses arising from corporate restructuring is incurred by government) that
links banks‟ recapitalization to corporate restructuring rather than ex-ante upfront scheme to
increase banks‟ capital by public funds. Although this mechanism may be longer than the
upfront scheme, it helps government avoid routinely injecting capital into insolvent banks
without having any improvement in governance and bank operations and reduces moral
hazard. Banks can only access new public funds if they show that they are well prepared for
operational restructuring.

The recapitalization scheme should consider three factors. First, the size of the
recapitalization scheme should be sufficient and avoid making additional injections of capital.
If capital injections are not sufficient, banks‟ incentives to facilitate corporate restructuring
can be limited and they continue waiting for the next injections. Second, the recapitalization
scheme should be implemented in a timely manner. Vietnamese banks are now being
recapitalized by increasing earnings via setting the ceiling of deposit rate. However, this flow
approach is not the right prescription because capital infusion will occur too slowly to protect
the banks from insolvency. Third, any capital injection should include conditions on the
disbursement of public funds. Conditions can include a repayment schedule (with penalties for

21
According to Claessens, Klingebiel and Laeven (2001), raising CAR during a systemic crisis will often
not be useful, as capital is negative, earnings are low or negative and new supply of capital is very
limited. The availability of fiscal resources should also be taken into account (experience from several
countries indicates that using government bonds to finance recapitalization is not always effective due to
the constraints on resources back up these bonds. The government‟s credibility, however, is a key issue).
 36

non-compliance) and/or financial and operational restructuring criteria that banks have to
satisfy to receive funds (Dado and Klingebiel, 2002).

Although loan classification based on the borrower‟s repayment capacity is set out in
Decision No. 493/2005/QD-NHNN (Article 7), the quality and uniformity of such
classifications are still limited and only some large banks are qualified to apply them due their
high costs, complexity and the absence of specific regulations (Văn Nguyễn, 2010). Current
loan provision (Decision No. 493/2005/QD-NHNN, Articles 6.4 and 7.6.2) is still based on
specific rates instead of the present value of future cash flow or collateral‟s fair value.22
Therefore, new legal documents replacing and correcting deficiencies of Decision No.
493/2005/QD-NHNN and other related legal documents are required to standardize loan
classification practices consistent with international standards. However, due to the existence
of asymmetric information, limitations in internal credit scoring systems and technology
(SBV, 2007), the application of these new standards must be implemented over time, and
requires capital investment and considerable effort on the part of the banks. Although marking
banks‟ assets to market and provisioning properly will decrease banks‟ capital positions in the
short-term. The ultimate benefits for the correction should be higher than the costs (Honohan
and Klingebiel, 2000).

The bankruptcy law should be revised to correct its limitations including specific
regulations on rights and obligations of lenders and borrowers, suitable regulations on time-
limits and specifying ambiguous terms. Bankruptcy procedures (especially for SOEs) need to
be stronger and quicker to reduce bankruptcy costs. For example, Claessens, Djankov and
Klingebiel (1999) recommend that auctions can replace negotiations in assessment of asset
prices to speed debt structuring and multiple stakeholders including employees are invited into
the ownership of restructured enterprises to reduce internal resistance. In addition, to
guarantee that the bankruptcy law can work in practice, the judicial system‟s activities and
22
According to Decision No. 493/2005/QD-NHNN, Article 8.3, collateral‟s value including non-listed
securities, movable, real estate and other collateral listed in the latest appraisal report agreed by financial
institutions and customers. This regulation has a gap that banks can collude with borrowers to increase
the value of collateral.
 37

workforce quality should also be improved. The regulated procedures must be transparent and
clarify penalties for non-compliance. The independence and accountability of banks‟
supervisory authorities should be stipulated in legal documents to reduce political interference
and enhance their performance (however, the power vested must be careful and accompanied
with other institution improvement because according to Barth et al. (2006) and Anderson
(2004) cited in Boudriga, Boulila, and Jellouli (2009), empowering official supervision and
regulation will lead to an increase in corrupt bank lending in countries with weak political
institutions and serve the interest of the banking industry and pressure groups rather than the
public interest).

Direct and indirect ownership links between banks and corporations should be limited.
Experiences from Hungary and Poland indicate that the introduction of new regulations (and
ensuring the enforcement), public recapitalization and foreign entry into the financial system
effectively prevents ownership links (Dado and Klingebiel, 2002). Regulations to ensure
security and prudential ratios including, among others, limitations in capital contribution and
transactions among banks and related parties are established in the Law on Credit Institutions
2010 and Circular No. 13/2010/TT-NHNN. However, achieving a thorough understanding of
the complicated relationships among those parties is really a very difficult task for
government, especially, if such parties are powerful interest groups. Therefore, by taking
advantage of the waves of restructuring, government can use public recapitalizations and
foreign entry as tools to dilute the ownership and diversify the shareholder base of problem
banks or even rather strong banks (if needed). Moreover, granting new loans to NPLs
borrowers (especially SOEs or other related parties owning shares of the banks) should be
limited or prohibited to break the links (see more in Part 4.4).

4.2. Resolution for Liquidity Risk

Prudential ratios in Vietnam still focus on CARs, while neglecting liquidity

requirements. In an effort to reduce liquidity pressure on banks, Circular No. 22/2011/TT-
BTC abolished regulations on the ratio of credit extension against the mobilized capital
 38

source. Although this action can help to create liquidity in the short-term, it should be revised
to ensure the stability of the banking system. Rather than mainly focusing on capital
requirements, SBV should set effective liquidity requirements (and a schedule for applying
them) which are suitable to the current situation of Vietnamese banks.23 The liquidity
requirement should include specific details about the composition of liquid assets that are still
highly liquid in different scenarios. In addition, the term and the sources of funding should be
required to be diversified to reduce the maturity mismatch and the instability of funding
sources (in which long-term liabilities and retail deposits, equity capital should be assigned
priority). Limitations on the leverage ratio should also be strengthened to restrict the rapid and
unsustainable growth of banks.

The “leaning against the wind” approach should be considered in liquidity risk
management (see Appendix III. Literature on Resolutions of Liquidity Risk). Liquidity
requirements need to be linked with capital requirements (adjusted CAR based on the
fluctuation of the liquidity situation in each period) and other prudential ratios. To restore
public confidence, banks themselves must change their operations from short-term to long-
term perspective and gradually increase the transparency of their operations. Efficient
monitoring mechanisms should also be carried out by SBV to maintain the discipline and
reduce the information asymmetries.

Due to the existence of information asymmetries, criteria for any bailout should be
tightened and set at market rates to reduce the probability of being exploited by intact banks.
The recent reaction of SBV has indicated that it is not always available to inject money into
illiquid banks (Minh Đức, 2012a). The signal sent by SBV stresses that it wants to establish
discipline for the banking system, especially for illiquid banks, which are usually dependent
on short-term funding and the implicit guarantee of government. In addition, due to the
important role of capital markets (securities and bond markets), good conditions should be

23
The Basel principles can be referred to when setting the requirements. However, because these
principles are designed for international banks and developed countries, some researchers believe that
emerging countries should set higher standards due to their higher macro and micro risk.
 39

created in these markets for long-term development to reduce the role of banks in allocating
long-term capital and providing liquidity, thereby reducing maturity mismatch risk.

Costs of operation should also be reduced to improve banks‟ efficiency and

competitive competence, thereby increasing banks‟ liquidity. The insurance paradigm seems a
promising solution to liquidity problems (see Appendix III. Literature on Resolutions of
Liquidity Risk). However, due to its newness, comprehensive (theoretical and empirical)
research regarding the pros and cons of this paradigm is still limited. Therefore, it cannot a
good choice for an emerging country like Vietnam at this time.

4.3. Resolution for Currency Risk

Although a floating ER can reduce the belief in the pegged ER and encourage banks
and firms to match dollar liabilities and assets to limit ER risk, the constraint of currency
mismatch makes it hard for Vietnam to choose a flexible ER regime (see Appendix IV.
Literature on Resolutions of Currency Risk). In addition, each ER regime has its own
drawbacks and is only suitable for specific circumstances. Therefore, it would be better for
Vietnam to improve its underlying institutions (fiscal, financial and monetary institutions)
before considering changing the ER regime. To build a sound monetary policy, SBV needs to
be independent in operating and establishing an inflation target rate. It should not be forced to
provide capital for making up the budget deficit or serving the economic growth. Private
sectors‟ expectations of government bailout should be reduced to avoid the negative impacts
of moral hazard.

As mentioned in Part 4.2, capital markets (especially equity and bond markets) have an
important role in mobilizing long-term and domestic-currency-denominated capital. Therefore,
the development of these markets should be high on the list of priorities. In addition, it is
important to note that although foreign-currency liabilities have a negative impact in case of
bad shocks, it reflects optimal risk management by creditors in the context of lacking domestic
monetary credibility. Therefore, to reorient creditors‟ optimal decisions, creditor-friendly
policies and laws to protect their rights (stable inflation, creditors‟ rights, post-default
 40

negotiation and litigation, and bankruptcy laws) should be promulgated and maintained. The
use of inflation-indexed bonds is also an acceptable idea and should be researched to apply.

Regulations regarding the quality of bank accounting and prudential ratios on currency
mismatch should be detailed and strengthened. Both direct and indirect mismatch should be
taken into account. The fact that banks borrow and lend in foreign currency cannot reduce
currency risk. It is just transferred from banks to their borrowers, especially those who are not
net exporters, the hedging practice should be effectively managed with the focus on risk
reduction rather than risk replacement. Currency risk management should be linked with
maturity risk management to be more effective in reducing the double mismatch. The new
method recommended by Ranciere et al., (2010b) seems to provide a better look of currency
mismatch (see Appendix IV. Literature on Resolutions of Currency Risk). Unfortunately, due
to the current situations in Vietnam where information asymmetries are so high, this method is
rather difficult to put into practice at least at this time. However, preparation steps should be
established from now on to create conditions to apply this method. In the meanwhile, the more
simplified version of this method, which is more suitable for Vietnamese banking system,
should be researched. In addition, a proper reserve regime at both SBV and banks needed to be
structured and balanced between the benefit and cost. Any authorities‟ effort to raise the
foreign-currency-lending rate and/or depress the foreign-currency-deposit rate should be
considered carefully regarding the interconnection among currency mismatch, capital
approach and growth for each specific circumstance.

4.4. Resolution for Connected Lending

Due to the lack of comprehensive research on connected lending in Vietnam, it is

difficult to judge whether the causes of connected lending are more consistent with the
information or looting view (see Appendix V. Literature on Resolutions of Connected Lending
for the analysis of these views). Research of Malesky and Taussig (2008) indicates that
connected lending is likely the result of an insecure legal framework in Vietnam. Without
sufficient protection, banks must depend on related contracts to reduce losses and enforce loan
 41

repayment. The fear of an insecure legal environment explains the reason why collateral is
more important than business prospects.24 However, in the context of poor corporate
governance and weak rule of laws as in other East Asia countries, together with the existence
of powerful interest groups and the analysis in Part 3.2.4, the looting view still has an
important role in consideration of connected lending in Vietnam.

Therefore, instead of trying to eliminate connected lending, the authorities should try
to enhance the benefits and restrict the costs when dealing with this issue. Particularly, reform
of the legal framework and corporate governance should be taken together to increase the
costs of looting. The regulation and accounting standards of related party transactions
(regarding arm‟s length basis, offset benefits, absolute limits and deducting from capital when
assessing capital adequacy or requiring collateralization) should be tightened. The internal
monitoring mechanism from unrelated directors and shareholders and the external monitoring
mechanism from supervisors should be strengthened. Rights of accessing information of
minority interests should be more detailed and protected by authorities. The judicial system
should also be improved to create better conditions for minority shareholders protecting their
legal rights.

In addition, the overlap of ownership and management increases the control rights of
controlling shareholders but harms the bank if such persons are not experts in banking
management or they use their rights to loot the bank. Therefore, the interlocking of senior
officials in banks and their controlling shareholders should be closely managed. More prudent
regulations on restricting the negative effects of such interlocking should be promulgated to
reduce conflicts of interest. More research on the ultimate owners of banks should be
implemented by SBV to have deeper understanding of Vietnamese banks‟ ownership
structures. In addition, to improve incentives of bankers, the carrot and stick approach of
Laeven (2001) can be an acceptable solution (see Appendix V. Literature on Resolutions of
Connected Lending). However, although the penalty contract can be easily implemented by

24
Huỳnh Thế Du (2004b) also indicates that collateral is an important factor of banks‟ credit granting
decision.
 42

government, the reward contract can be harder because it is implemented subjectively by the
bank itself and can have negative side effects (tunneling) if not well-managed. Therefore,
more research is needed to arrive at a final decision on this issue. In addition, foreign entry
should be permitted to participate in problem banks to improve the lending environment.
 43

CHAPTER 5. CONCLUSION

Vietnamese banking system has faced some extraordinary events, such as systematic
and serious violations of the deposit rate cap, rapid credit growth and major incidents of fraud.
All of these events have had a negative impact on the prestige of the banking system and
perceptions of the management capacity of SBV and reduced the public‟s confidence. In
general, Vietnamese banking system faces the following risks: risk from NPLs, liquidity risk,
currency risk and risks from connected lending. To reduce the negative impacts of these risks,
Vietnam should combine many resolutions to manage effectively such risks. The appropriate
incentive and legal framework, the improvement of underlying institutions (fiscal, financial
and monetary institutions) and the strong corporate governance are deemed prerequisite to
maintain the stability and the development of financial system. In addition, to prevent the risks
from moral hazard, government policies should not create the expectations of government
bailout or increase the banks‟ belief that they are “too big to fail” or “too many to fail”. Many
researches should be conducted in each kind of bank risk to have a more detailed look on how
to effectively deal with such risk. The combination of fully understanding of macro and micro
risks faced by banks can help the SBV and the Government to choose suitable approaches to
restructure the banking system successfully.
 44

REFERENCES

VIETNAMESE

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Việt Nam – Vấn đề đặt ra cho hệ thống giám sát tài chính”, Đề tài nhánh 3 thuộc đề tài
cấp Nhà nước mã số KX.01.19/06-10.

2. Lê Vân Anh (2008), “Khủng hoảng tài chính – mô hình lý thuyết và những nguy cơ
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Chương Trình Giảng Dạy Kinh Tế Fulbright.

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 57

APPENDIX I.
COMPARISON BETWEEN VIETNAMESE REGULATIONS AND
INTERNATIONAL STANDARDS ON NON-PERFORMING LOANS

Vietnamese regulations International Standards

NPLs are defined as loans in Groups 3, 4 Sound Practices for Loan Accounting and
and 5 (the NPLs classification pursuant to Disclosure (Basel Committee on Banking
either quantitative or qualitative method is Supervision, June, 2006)
the option of credit institutions) (Decision The Sound Practices provide common sound
No. 493/2005/QD-NHNN, Articles 2.6, 5, 6 practices for the establishment of loan loss
and 7): allowances (The Sound Practices, III(b), page 21):
Quantitative method (Article 6): “A bank should identify and recognise impairment
Group 3 (sub-standard): debts that are in a loan or a collectively assessed group of loans
overdue from 91 to 180 days and when it is probable that the bank will not be able
rescheduled debts that are rescheduled for to collect, or there is no longer reasonable
the first times; assurance that the bank will collect, all amounts
Group 4 (doubtful): debts that are overdue due according to the contractual terms of the loan
from 181 to 360 days; rescheduled debts agreement. The impairment should be recognised
that are overdue less than 90 days according by reducing the carrying amount of the loan(s)
to the first rescheduled terms; rescheduled through an allowance or charge-off and charging
debts that are rescheduled for the second the income statement in the period in which the
times; and impairment occurs.”
Group 5 (loss): debts that are overdue more
than 360 days; rescheduled debts that are International Monetary Fund (IMF), The
overdue more than 90 days according to the Compilation Guide for Financial Soundness
first rescheduled terms; rescheduled debts Indicators
that are rescheduled for the second times are The Guide provides guidance for identifying
overdue according to the second NPLs (The Compilation Guide, Appendix II, page
 58

rescheduled terms; rescheduled debts that 183):

are rescheduled for the third times and debts “Loans are nonperforming when payments of
that are subject to rescheduling principal and interest are past due by three months
arrangements as directed by the (90 days) or more, or interest payments
Government. corresponding to three months (90 days) or more
If there are reasons to doubt the borrower‟s have been capitalized (reinvested into the
ability to service loan obligations, the credit principal amount), refinanced, or rolled over (that
institutions can decide to classify such loans is, payment has been delayed by agreement). In
into higher risk debt groups corresponding addition, NPLs should also include those loans
to their risk levels. with payments less than 90 days past due that are
Qualitative method (Article 7): recognized as nonperforming under national
This method is based on the credit supervisory guidance that is, evidence exists to
institution‟s internal credit ranking system classify a loan as nonperforming even in the
and provisioning policy as approved by the absence of a 90-day past due payment, such as if
SBV: the debtor files for bankruptcy. After a loan is
Group 3 (sub-standard): debts that the classified as nonperforming, it (and/or any
borrower is not able to pay the principal and replacement loan(s)) should remain so classified
interest in a timely manner and loss of until written off or payments of interest and/or
principal and interest is possible; principal are received on this or subsequent loans
Group 4 (doubtful): debts in relation to that replace the original loan. Replacement loans
which the loss of principal and interest is include loans arising from rescheduling or
highly possible; and refinancing the original loan(s) and/or loans
Group 5 (loss): debts that are uncollectible. provided to make payments on the original loan.”
By using this method, banks are actively in
assessing financial capacity of borrowers International Accounting Standard 39 (IAS
and classifying NPLs accordingly. 39):
Therefore, loans to high-risk borrowers will Financial Instruments: Recognition and
be classified as high-risk loans without Measurement
waiting until the occurrence of nonpayment. According to IAS 39, an entity shall assess at the
59

end of each reporting period whether there is any

objective evidence that a financial asset or group
of financial assets measured at amortised cost is
impaired (IAS 39, A969):
“A financial asset or a group of financial assets is
impaired and impairment losses are incurred if,
and only if, there is objective evidence of
impairment as a result of one or more events that
occurred after the initial recognition of the asset (a
„loss event‟) and that loss event (or events) has an
impact on the estimated future cash flows of the
financial asset or group of financial assets that can
be reliably estimated. It may not be possible to
identify a single, discrete event that caused the
impairment. Rather the combined effect of several
events may have caused the impairment. Losses
expected as a result of future events, no matter
how likely, are not recognised. Objective evidence
that a financial asset or group of assets is impaired
includes observable data that comes to the
attention of the holder of the asset about the
following loss events:
(a) significant financial difficulty of the issuer or
obligor;
(b) a breach of contract, such as a default or
delinquency in interest or principal payments;
(c) the lender, for economic or legal reasons
relating to the borrower‟s financial difficulty,
granting to the borrower a concession that the
60

lender would not otherwise consider;

(d) it becoming probable that the borrower will
enter bankruptcy or other financial reorganisation;
(e) the disappearance of an active market for that
financial asset because of financial difficulties; or
(f) observable data indicating that there is a
measurable decrease in the estimated future cash
flows from a group of financial assets since the
initial recognition of those assets, although the
decrease cannot yet be identified with the
individual financial assets in the group, including:
(i) adverse changes in the payment status of
borrowers in the group (e.g. an increased
number of delayed payments or an increased
number of credit card borrowers who have
reached their credit limit and are paying the
minimum monthly amount); or
(ii) national or local economic conditions that
correlate with defaults on the assets in the
group (eg an increase in the unemployment
rate in the geographical area of the borrowers,
a decrease in property prices for mortgages in
the relevant area, a decrease in oil prices for
loan assets to oil producers, or adverse
changes in industry conditions that affect the
borrowers in the group).”
 61

APPENDIX II.
LITERATURE ON RESOLUTIONS OF NONPERFORMING LOANS

One of the most important tasks of successful and speedy bank restructuring is to
properly manage and dispose of impaired assets. Successful asset management policies can
accelerate the resolution of NPLs and promote corporate restructuring by providing suitable
incentives (Klingebiel, 2000). To resolve NPLs in the financial system, either flow or stock
approaches can be applied.25 However, if banking distress is systemic and includes the need to
restructure viable banks, the liquidation of unviable banks and the treatment of NPLs, then the
stock approach is more necessary. To deal with NPLs, AMCs have been extensively used by
governments, especially after the East Asian financial crises (Claessens, Djankov and
Klingebiel, 1999).

AMCs usually focus on two main functions: asset disposal and corporate restructuring.
According to Klingebiel (2000), these companies can be effectively used if several
preconditions are satisfied. First, the purpose of establishing AMCs should be limited to
resolving insolvent and inviable financial institutions and selling off their assets.26 Second,
bank assets should be liquefiable, for example real estate (assuming a reasonably robust
property market), commercial real estate loans and secured loans. The management of the
AMC must be professional and politically independent. Bankruptcy and foreclosure laws must
25
The application of either flow or stock approaches to resolve banking distress and NPLs depends on the
degree of distress and the extent of the official safety net. The flow approach allows banks to strengthen
their capital base over time through increasing bank profits (recapitalization on a flow basis) and
explicitly addresses the stock of NPLs. Therefore, the flow approach is only successful when banking
distress is limited or non-systemic. This approach also ends up taxing either depositors and/or
performing borrowers, and banks could be recapitalized by earnings. This explains for the reason that
interest rate spreads would have to rise. However, this is also a risky approach because decapitalized
banks are encouraged to gamble for resurrection as in the US savings and loan crisis (Klingebiel, 2000).
With the ceiling of deposit rate, it seems that Vietnam is mainly following flow approach to resolve
banking distress.
26
However, in the case of Sweden, an AMC was used for corporate restructuring and gained success on
managing its portfolio because the assets acquired were mainly real estate, which are easier to
restructure and only accounted for a small part of the banking system‟s assets. This helped to reduce
political pressures and enhanced independence in its operations (Klingebiel, 2000).
 62

be sufficiently well developed to enable the AMC to liquidate NPLs. Other preconditions
include the presence of skilled managers, appropriate funding, reliable information and
management systems, and transparent operations and processes (Klingebiel, 2000 and
Claessens, Klingebiel and Laeven, 2001). In addition, the quality of the institutional
framework will determine the success or failure of this approach (Claessens and Laeven,
2001).

AMCs can be established by each bank (as an internal workout unit or “bad bank”
which is a bank subsidiary and separately capitalized) to deal with its own NPLs (the
decentralized approach) or by government to a centrally managed AMC (the centralized
approach). The advantage of the decentralized approach is that banks have loan files and some
institutional knowledge of the borrowers, and therefore, they are in a better position to resolve
the NPLs than a centralized AMC. In addition, when the impaired assets are still on the banks‟
balance sheets, banks will have greater incentive to keep the assets in good condition, to
maximize the recovery value and improve credit-granting procedures to avoid future losses.
They can also quickly provide new loans for debt restructuring. However, this approach
requires banks to have sufficient skills and resources to deal with their NPLs. The main risk
associated with this kind of AMC is that it can be used as “window-dressing” if transfer prices
do not reflect the true value of transferred assets. Therefore, an adequate incentive framework
should also exist to encourage banks and corporations to engage actively in corporate
restructuring. Components of an adequate incentive framework include: (i) banks’ capital
position and their ability to withstand losses (banks are well capitalized as their CAR is
beyond eight percent and NPLs are below five percent); (ii) accounting framework (loan
classification is based on the borrower‟s repayment capacity, loan provisioning is based on the
present value of future cash flow or collateral‟s fair value, interest accrual regulations
requiring the recognition of overbooking of interest income when a loan is classified as an
NPL, up to 90 days) (Claessens, Djankov and Klingebiel, 1999); (iii) legal framework27 (the

27
According to Boudriga, Boulila, and Jellouli (2009), the effective way to reduce credit risk exposure is
through enhancing the legal system, strengthening institutions and improving transparency and
democracy. All regulatory and supervisory devices either have a counterproductive impact on NPLs or
 63

bankruptcy system provides an effective mechanism to discipline borrowers and force them to
have sound preparations for restructuring, the judicial system effectively enforces creditor
rights and bankruptcy regulations); (iv) ownership links between banks and corporations
(direct and indirect ownership links between banks and corporations are limited to avoid a
situation in which both creditor and debtor are the same party).28 The speed of incentive
framework improvement is important to facilitate corporate restructuring (Dado and
Klingebiel, 2002).

The centralized approach, on the other hand, will benefit from economies of scale due
to the concentration of skills and resources in one public agency. Securitization could also be
used to exploit the advantages of a large pool of assets. Because the ownership of collateral is
centralized, management that is more effective can be provided and more pressure put on
debtors. Moreover, with a large amount of capital in hand, centralized AMCs can help banks
clear their balance sheets by quickly buying NPLs. Links between banks and corporates,
especially connected parties, are also broken and therefore the probability of collecting on
those loans should be higher. With uniform workout practices, monitoring and supervision
should become easier. In addition, centralized AMCs can also be given special legal powers to
facilitate loan recovery and bank structuring. However, this approach also has some
drawbacks.

Due to its size (holding a large portion of banking system assets) and ownership
structure (state owned), the centralized AMC could come under considerable political
pressure. The centralized AMC also does not have as much information about borrowers as
individual banks, and therefore may not be able to recoup as much value from bad loans. In
addition, if the centralized AMC is not well-managed, its existence can undermine credit
discipline in the financial system, decrease asset values and create far more losses for the
entire system (Klingebiel, 2000, Honohan and Klingebiel, 2000 and Dado and Klingebiel,

do not significantly reduce credit risk exposure for countries with weak institutions, corrupt business
environment and undemocratic political institutions.
28
The complicated ownership links among banks, other financial intermediaries and corporations is one of
the reasons slowing down speed of restructuring in Japan (IMF, 1999 cited in Klingebiel, 2000).
 64

2002). The case of Indonesia can be an illustrative example for the weaknesses of this
approach. IBRA, a centralized agency, holds too many objectives and supervises the number
of banks equivalent to 36.4 percent of banking sector. Due to the lack of authority,
independence and political support, the effectiveness of this agency remains low. The recovery
rate is only about half of the targeted recovery rate. NPL levels are still high and likely come
back, although the bad (category 5) loans were transferred to IBRA. The real cost of banking
restructuring, therefore, is high and incurred by the taxpayer (Pangestu, 2003).

In addition, the key element influencing the final cost of bank restructuring is an
adequate legal framework (Waxman, 1998 cited in Klingebiel, 2000). Well-functioning legal
procedures and courts can create a suitable position for the creditors to bargain with debtors,
make claims on and manage impaired assets. To reduce unnecessary costs and maximize
returns for AMCs, they should have powers to access clear title and liquidate assets without
waiting for the borrower‟s consent (Klingebiel, 2000).

Experience from some countries also indicates that AMCs in developing countries find
it hard to achieve success due to several common factors. First, many AMCs received non-real
estate, SOE assets, politically connected assets that are usually more difficult to restructure for
a government agency.29 Second, while they were constrained by limitations in capital, these
AMCs had to receive a large amount of the banking system‟s assets and had higher transaction
costs due to receiving assets regardless of their size. Third, political pressures on AMCs‟
operations were usually larger in developing countries and lack of independence prevented
them from transferring assets quickly or managing them efficiently. Finally, they often lacked
appropriate funding or just received sporadic funding, which slowed the process of asset
disposal. The outsourcing of asset management to the private sector (including foreign
investment banks and advisors) could help limit political interference but is not politically
popular in developing countries (Klingebiel, 2000).

29
Mexico and Philippines: AMCs were not successful to perform their tasks because they must receive
politically motivated loans or fraudulent assets, which made these AMCs become susceptible to political
pressure and lack independence in restructuring decision (see Klingebiel, 2000).
 65

APPENDIX III.
LITERATURE ON RESOLUTIONS OF LIQUIDITY RISK

Nikolaou (2009) indicates that information asymmetries and the existence of

incomplete markets, which can lead to moral hazard and adverse selection, are the roots of
liquidity risk. There are the liquidity linkages among central bank liquidity (the ability of
central bank to provide required liquidity to the financial system), market liquidity (the ability
to trade an asset at short notice, low cost and fair price) and funding liquidity (the ability of
banks to meet their liabilities when they come due by raising funding at short notice from
depositors, the interbank market or the central bank). In normal times, these linkages can
create a virtuous circle. In turbulent times, they can destabilize the financial system. In times
of crisis, market liquidity and funding liquidity are strongly affected and exacerbated by
information asymmetries and incomplete markets. Although the central bank has an important
role in reducing the negative impact of these asymmetries through liquidity provision
mechanisms,30 the restructuring of the financial system based on greater transparency of
liquidity management practices, efficient monitoring mechanisms (such as interbank peer-
monitoring strategies) and effective regulations (such as effective regulation of funding ratios
and liquidity ratios) are required to reduce liquidity risks and distinguish between the illiquid
and insolvent banks. In addition, because banking systems in emerging countries incur higher
risks than developed countries, prudential regulations and liquidity requirements should be
more demanding than in advanced economies (Eichengreen and Rose, 1997 and Goldstein and
Turner, 1996).

30
The provision of liquidity support to banks is a double-edged sword. It can lead to the loss of monetary
control and subsequent inflation. The willingness of central banks (voluntary or forced by government
due to the lack of independence) to provide liquidity rather than close failed banks is a source of moral
hazard and undermines discipline and incentives for prudent management. Large-scale liquidity support
to bankrupt banks in Kenya (1992/93), Venezuela (1994), Indonesia, Korea, Thailand (1997) shows that
this is not a good choice to solve liquidity problems (Brownbridge, 1998 and Claessens, 1999).
 66

Banks make loans to borrowers, and these loans cannot be sold promptly at a high
price (asset services). They also issue demand deposits which can be withdrawn at any time
(liability services). The mismatch of liquidity (transformation services), therefore, is an
inherent characteristic of banks and leaves banks vulnerable to a bank run (Diamond, 2007a,
2007b, 1999, 1997, 1996; Diamond, and Rajan, 2005 and Diamond and Dybvig, 1983). Banks
should use diversified funding sources to help prevent runs, in which diversified should mean
“there is no commonly observed information source that is seen by a large number of the
diverse depositors” (incomplete common knowledge) or each funding source should have
different reactions to bad news which can lead to a bank run (Diamond, 2007b, 197). In
addition, the financial markets (especially long-term capital markets such as securities markets
and bond markets) should be encouraged to reduce the role of banks in allocating long-term
capital and providing liquidity. By improving access to financial markets through enhancing
disclosure and transparency, participation in markets and thus market liquidity will increase.
The banking system will shrink and hold a smaller stock of long-term loans than before,
thereby reducing the maturity mismatch. The banks‟ costs of operation should be reduced to
make liquidity cheaper and the market more liquid (Diamond, 1997 and Goldstein and Turner,
1996).

A cap on short-term debt should be imposed to prevent banks from taking on excessive
risk from maturity mismatches. In addition, due to asymmetric of information (the difficulty in
identifying distressed banks), the needed bailout should use market-driven interest rate policy
to determine the right agents for the purpose of such bailouts (Farhi and Tirole, 2011). The
lender of last resort should also send a strong signal to banks that it will not always be
available to bail out banks even when many banks fail at the same time (Diamond and Dybvig,
1983). Public bailouts should include a monetary bailout (keeping extremely low short-term
rates)31 and a fiscal bailout (recapitalization, liquidity support and asset purchases) to restore
banks‟ liquidity and solvency situation (Tirole, 2009).32

31
It is important to note that there are some costs associated with monetary bailout. It transfers resources
from depositors to banking sector (larger the wedge between marginal rate of substitution and marginal
rate of transformation) and corporate sector (lower lending rates). In addition, by lowering the overall
 67

Because the Basel capital requirements are not intended to manage systemic liquidity
risks, and even reasonable capital reserves are not a good buffer for funding problems, one
proposal is to adjust CAR to accord with liquidity conditions. If liquidity (measured by an
effective maturity mismatch, including the consideration of market liquidity of assets) falls
below the targeted level, the CAR will be set at a higher level and vice versa (Brunnermeier et
al., 2009; Goodhart, 2009 and Perotti and Suarez, 2009). However, higher bank capital ratios
alone are not a solution to the problem of bank liquidity risk.33 Although banks are limited in
leverage due to the constraint of capital requirements, they may still try to “lever up” using
riskier investment strategies (Perotti and Suarez, 2009).34 The source of financing also
important in helping banks to withstand liquidity crises. Core deposits (transaction deposits
and other insured deposits) and equity capital are more stable than wholesale sources of debt
financing (Cornett et al., 2010).35 Goldstein and Turner (1996) suggest that banks should be
encouraged to hold a large share of government bonds that can help them respond quickly and
cheaply to a liquidity shock rather than selling illiquid assets at forced sales. From the lessons
of the 2007 financial crisis and the fall of Northern Rock, Shin (2008) indicates that the
traditional capital buffer view of financial regulation (focusing on the riskiness of the assets) is

cost of capital, they can boost investment and incentives of risk-taking through maintaining an illiquid
balance sheet (Tirole, 2009).
32
Claessens (1999) mentions some kinds of support such as asset rehabilitation, equity purchase,
unrequited injections, and granting government loans.
33
The collapse of Northern Rock and Bear Stearns prove that profitability and capital have a small role in
reducing liquidity risk. These banks were well-capitalized and made profits before they failed (Barfield
and Venkat, 2009). Therefore, in an effort to strengthen liquidity regulations, Basel has released revised
principles (Basel III) regarding liquidity management (BIS 2010).
34
Diamond and Rajan (2000) indicate that although greater bank capital can be a buffer to protect banks
against bank runs, it also reduces liquidity creation and credit flow. Therefore, the regulators should be
aware of this tradeoff before requiring any increase of capital standards to reduce the probability of bank
failures (Gorton and Winton, 2000 cited in Cornett et al., 2010). However, Berger and Bouwman
(2009b) (cited in Cornett et al., 2010) find that although higher capital levels “crowd out” depositors and
reduce liquidity creation at smaller banks, such levels of capital not only absorb risk but also increase
liquidity creation at larger banks.
35
The failure of Northern Rock in 2007 stemmed not only from the high leverage built-up during the
boom times, and the use of short-term liabilities to finance long-term assets, but also reliance on short-
term funding provided by institutional investors (Shin, 2008).
 68

not enough to prevent liquidity shocks and recommends two specific proposals based on the
Pigouvian taxes approach (internalize the externalities). Firstly, liquidity regulation should
constrain the composition of assets because if a bank has sufficient liquid assets or stable
liabilities such as long-term debt, the bank will not be left vulnerable to a run.36 The liquidity
buffer effects distributed widely can help to eliminate the spillover effects of shocks.37
Secondly, a limit on the raw leverage ratio should be used to prevent the accumulation of
leverage during good times when funding sources are abundant. This can help to lower the
pressure of reducing leverage in the bust. In addition, to attract stable funding, banks should
restore public confidence through greater transparency and communication with the public.
Due to the interconnection between liquidity risk and many other risk types, risk management
should base on an integrated view and a longer-term perspective (Barfield and Venkat, 2009).

In addition, some researchers prefer the insurance paradigm (liquidity insurance

arrangement) to the traditional banking paradigm (the central bank as the lender-of-last-
resort). A mandatory liquidity charge would be paid by banks continuously during good times
to a fund (an Emergency Liquidity Insurance Fund) which would provide emergency liquidity
during a crisis.38 The charge would work like Pigouvian taxes on pollution to discourage bank

36
Short-term debt increases the rollover risk and thereby reduces the stability of funding sources. This is
one of the causes of the Bear Stearns and Lehman Brothers‟ collapses (Gopalan et al., 2011). “The
disciplining effect of short-term debt is weakened when it is needed more” (excessive risk-taking in
good times) and „strengthened when it is needed less” (excessive liquidation in turbulent times)
(Eisenbach, 2010, 22).

However, there is a cost-benefit tradeoff. Holding liquid assets is costly for banks because they must
forgo higher returns earned on non-liquid assets (Goldstein and Turner, 1996).

In addition, the experience in Latin America indicates that the quality of liquid assets decides the
effectiveness of liquidity requirements. For example, in a crisis in terms of foreign reserve assets,
domestic currency denominated liquid assets turn out to be illiquid (Suarez and Weisbrod, 1996).
37
Cifuentes et al. (2004) indicate that in some circumstances, liquidity requirements may prevent systemic
effects more effectively than capital buffers. Liquidity requirements help to internalize some of the
externalities generated by the negative impact of a falling market. Calomiris, and Powell (2001) mention
that liquidity requirements not only reduce portfolio risk and ensures systemic liquidity but also decrease
regulatory costs.
38
Nonbank private sector insurers can support the price discovery (Goodhart, 2009).
 69

strategies that can create systemic risk or negative externalities. The greater the maturity
mismatch between assets and liabilities, the higher the charge that would have to be paid. The
fact that the lower cost of short-term funding (especially in wholesale funding) is lower than
the long-term funding implies that banks are exposed to potential refinancing problems during
crises. The charge, therefore, would be countercyclical and could reduce incentives of banks to
utilize short-term funding by making exploitation much more expensive (a way of properly
internalizing the potential damage). In addition, the charge can be seen as a prepayment for
emergency support, which is politically more acceptable than current bailouts. The insurance
scheme would include a contingent injection of capital and liquidity only in systemic crises
and may be accompanied by prudential clauses (dividend suspensions or constraints on
management). Such insurance could prevents wasteful self-insurance of each bank and
encourage ex-post market participation (lightening the adverse selection effect) by reducing
the banks‟ expectations of liquidity dry-up and the hoarding of non-productive but liquid
assets (Perotti and Suarez, 2009; Malherbe, 2009 and Goodhart, 2009).39

39
The crisis started in 2007 in the US is the latest well-known example of a freeze in the interbank market
due to the expectation of a liquidity dry-up and hoarding of liquid assets (Allen and Carletti, 2008).
 70

APPENDIX IV.
LITERATURE ON RESOLUTIONS OF CURRENCY RISK

Because banks borrow foreign currency and use it to lend both in domestic and foreign
currencies, banks suffer a currency mismatch (liabilities are greater than assets in the same
currencies).40 Such a mismatch can be masked as long as the continued capital inflows still
supports the ER (Allen et al., 2002). Due to the mismatch, the government is forced to
stabilize the domestic currency even at the expense of larger interest-rate movements to avoid
an increase in the debt payment burden (adverse balance-sheet effects) (Chamon and
Hausmann, 2002; Ganapolsky, 2003 and Burger and Warnock, 2006). This limits the scope of
monetary policy, the working of the ER mechanism and increases reliance on polices that are
more directly targeted at banks (Jeanne and Wyplosz, 2003 and Goldstein and Turner, 2004).

There are two views on the links between ER regimes and currency mismatches. The
majority view is that a fixed ER increases currency mismatches because the belief in the
pegged ER creates a false sense of security that discourages banks and firms from hedging
their dollar liabilities.41 A floating ER can reduce such beliefs and encourage banks and firms
to match dollar liabilities and assets to limit ER risk (Burnside et al., 2000; Mishkin, 1996;

40
According to Goldstein and Turner (2004), the origin of currency mismatch is the weaknesses of
emerging economies‟ policies and institutions, including: (i) inadequate incentives to hedge against
currency risk (fixed ER regime and poorly designed official safety nets), (ii) national macroeconomic
polices‟ shortcomings (poor inflation record), (iii) inadequate public information, (iv) poor credit
assessment in extending foreign-currency-denominated loans, (v) poorly designed regulatory regime on
banks‟ exposure to ER changes, (vi) ill-advised debt management policies (excessive dependence on
foreign-currency-indexed debt rather than inflation--indexed debt) and (vii) underdeveloped bond
markets, unavailability of hedging instruments and barriers to the entry of foreign-owned banks.

In addition, currency mismatch may derive from original sin and banks‟ weaknesses including
undercapitalization, weak risk management, inadequate prudential supervision, moral hazard (exploiting
low-interest-rate foreign-currency loans) (Eichengreen et al., 2003b and Goldstein, 1998 cited in
Eichengreen et al., 2003b).
41
The lack of hedging exchange risk could also come from institutional factors (Ganapolsky, 2003).
 71

Obstfeld, 1998; Cowan et al., 2005, and Rajan and Bird, 2001).42 On the contrary, the minority
view argues that greater flexibility may not lower currency mismatches. Greater ER flexibility
may potentially increase the attractiveness of foreign-currency-denominated deposits (deposit
dollarization) while foreign-currency-denominated credit (credit dollarization) might not
increase correspondingly or even fall. This leads banks to choose foreign-currency instead of
the domestic-currency results in larger currency mismatches. Banks, therefore, face a greater
need to hedge the increasing mismatches (Eichengreen and Hausmann, 1999, Arteta, 2005).43

In another perspective, Calvo and Mishkin (2003) indicate that liability dollarization
makes it more difficult to choose a floating ER regime because any currency devaluation
would increase the value of the foreign-currency-denominated debts.44. However, a hard peg is
also not a good choice because it creates incentives for government, banks and firms to borrow
foreign funds and encourages unhedged foreign-currency-denominated liabilities. Therefore,
instead of focusing on which ER regime should be chosen, emerging countries should improve
their underlying institutions (fiscal, financial and monetary institutions) and promulgate
additional regulations to limit the amount of currency substitution and liability dollarization
and help the economy more resilient in response to sudden changes (Calvo and Mishkin, 2003
and Goldstein and Turner, 1996).45 The quality of banking system regulation should also be

42
Allen et al., (2002) indicate that the inflexible ER regime seems to have contributed to the large
currency mismatches in Korea, Thailand, Indonesia, Turkey, Russia, Argentina, Uruguay and Brazil
(1998).

Chang and Velasco (2006, 150) stress that “if equilibria with both fixed rates and floating rates coexist,
the latter is Pareto superior”.
43
Banks may hedge the currency mismatch by purchasing dollar-denominated securities, conducting off-
balance sheet transactions or buying insurance in forward markets (Arteta, 2005).
44
Chang and Velasco (2006) stress that currency mismatch has a large role in the “fear of floating” in
many emerging countries. In addition, Ize and Levy-Yeyati (1998) stress that in heavily dollarized
economies, the increase in ER volatility can increase the inflation rate. Therefore, ER policy may not be
a useful tool to reverse dollarization.
45
Floating ER regime without any improvement in institutions cannot reduce currency mismatches or
develop capital markets because the foreign and domestic investors are not willing to take risk from
local currency (Allen et al., 2002).
 72

improved, especially the quality of balance sheets (more detailed information on the size,
maturity and currency composition of the assets and liabilities) (Allen et al., 2002).

In addition, Cowan and Do (2003) indicate that foreign-currency debt has a

disciplining effect on overly expansive monetary authorities. Therefore, the need of the central
bank to build credibility is an important element in sound monetary policy. They also
recommend optimal tax schemes on dollar-debt to reduce short-term distortions caused by
excess levels of dollarized liabilities. However, Ize and Levy-Yeyati (1998) argue that
although the increase in the tax wedge in favor of the domestic currency through increasing
the intermediation spread raises the dollar-lending rate and depresses the dollar-deposit rate,
and thereby reducing dollarization on both sides of banks‟ balance sheet, it can cause capital
flight, thereby reducing loanable funds, raising the average lending rate and depressing the
role of banks in financial intermediation.46

Because foreign-currency-denominated debts can generate pressure on official

reserves, emerging countries should hold sufficient international reserves to reduce the
countries‟ vulnerability to the currency crises (Goldstein and Turner, 2004, 1996 and Allen et
al., 2002).47 In addition, the maturity mismatch also arises in foreign currency (borrower‟s
short–term foreign-currency debts exceed liquid foreign-currency assets although in aggregate,
foreign-currency debts match foreign-currency assets). This becomes more dangerous when
the authorities are limited in acting as a lender of last resort in foreign currency. Therefore,
regulations of currency mismatch should be linked to the management of maturity mismatch
to avoid double mismatch.

Besides, simply requiring banks to match the currency composition of their assets and
liabilities may increase foreign-currency risk on other sectors‟ balance sheets (the corporate
46
Similarly, a tight monetary policy that attempts to reduce dollarization by increasing domestic interest
rate in favor of home deposits can encourage the credit dollarization to exploit the foreign-currency-
denominated loans, which are much lower rate than domestic-currency-denominated loans (Ize and
Levy-Yeyati, 1998).
47
However, because yield on reserves is usually less than the cost of funds, large reserve holdings may
also create costs (Eichengreen et al., 2003b).
 73

sector, the household sector or the government). Moreover, the hedge of currency risk should
be carefully managed because if not conducted properly, the risk is only transferred from one
sector to others. If government is the part of private hedge, the mismatch is only transferred
from banks to government and this creates expectations of government intervention and
encourages risk-taking behavior. A range of prudential regulations could be used to lower
foreign-currency exposure, such as higher reserve requirements for foreign-currency
liabilities, especially short-term borrowing, to reduce the attractiveness of foreign-currency
deposits and increase banks‟ liquid assets (Allen et al., 2002).

Sound monetary, fiscal policy and improvements in government quality can help to
reverse domestic dollarization. Any forced measures to de-dollarize (such as punitive reserve
requirements and mandatory holding periods) without improving government quality can
result to capital flight and bank credit reduction or increasing the unofficial dollarization
(Honig, 2002 and Reinhart, Rogoff and Savastano, 2003 cited in Honig, 2005). In addition, to
reduce foreign borrowing, domestic capital markets (such as equity and local-currency bond
markets) should be developed as a source of funding capital by maintaining low-level inflation
(creditor-friendly policies), improving policy performance and strengthening institutions (such
as strong creditor rights) (creditor-friendly laws).48 When domestic investors are protected
from the threat of inflation and have strong creditor rights, they are more willing to deposit in
domestic currency and invest in long-term domestic-currency-denominated bonds (more
developed domestic investor bases) (Jeanne, 2003 and Warnock and Burger, 2003 cited in
Honig, 2005; Burger and Warnock, 2006; Allen et al., 2002 and Claessens et al., 2003).
Inflation-indexed bonds can also be used to reduce the risk from inflation. Hedging

48
Due to the constraint of the phenomenon “original sin”, emerging countries cannot borrow abroad by
their own currency. Good domestic policies and institutions should not be sufficient to overcome
original sin (Goldstein and Turner, 2004). Countries incur “original sin” are those where central bank
care more about ER movements than interest rate movements (Chamon and Hausmann, 2002).
Therefore, the effectiveness of monetary policy is limited and interest rates are more volatile and pro-
cyclical. These countries usually have lower credit ratings and are difficult to access international capital
markets (Eichengreen et al., 2003a). A sound currency (through price stability) can help countries to
raise capital in domestic currency (Mishkin, 1996).
 74

instruments should be encouraged to limit currency risk and accounting rules should be
updated to accurately reflect the risk (Goldstein and Turner, 2004 and Calvo et al., 2003).

In addition, policymakers should have a comprehensive understanding of creditors‟

incentives in order to have a proper reaction. In their research, Torre and Schmukler (2004)
indicate that in a high-systemic-risk environment, currency (and maturity) mismatches are
creditors‟ risk-coping mechanisms. The short-term foreign-currency-denominated loans can
help hedge against price (interest and ER) risk at the expense of price-induced default risk
(probability of default). Using the foreign-currency can also help the creditors reduce dilution
risk (risk from the incentives of government to liquefy domestic liabilities through surprise
inflation). In countries where institutional infrastructure for post-default negotiation and
litigation is weak, foreign-currency-denominated loans seem offer more protection to lenders
than domestic-currency-denominated loans (a higher recovery value over available assets
because foreign-currency claims would not lose purchasing power over time).49 Therefore, if
the underlying causes (volatile macroeconomic policy, deficient creditor rights and weak
institutions including collateral repossession processes and bankruptcy proceedings) are not
addressed, the mismatches cannot be solved and risks are simply replaced rather than
reduced.50 The risks from moral hazard (expectations of government bailout due to creditors‟
belief they are “too big to fail” or “too many to fail”) should be reduced to avoid having
default risk being under-priced.

From another view, Ranciere et al., (2010a, 2010b) argue that although currency
mismatch exposes the economy to systemic risk, it has an important role in growth.51 They
find that there is a positive link between currency mismatch and growth in some emerging
49
Foreign-currency claim in a foreign jurisdiction is even more effective coping mechanism because the
creditor rights systems and other contract enforcement institutional frameworks in foreign jurisdiction
should be better than the home jurisdiction (Torre and Schmukler, 2004).
50
Tirole (2002, 31) indicates that “borrowers and lenders have no individual incentives to internalize the
impact of their private financing arrangement on country incentives; the resulting inefficiency is born by
the country itself”.
51
Eichengreen et al. 2002 also stress that economic and financial development will be slowed if countries
attempt to minimize currency risk.
 75

European economies. Currency mismatch reduce borrowing constraints for those who are the
most credit constrained (especially small firms and the non-tradable sectors).52 The policy
implication here is that if currency mismatch is limited when it is too low, investment and
growth could be hurt due to the financial constraints. However, excessive currency mismatch
could lead to a systemic crisis in case of serious devaluation. Therefore, to assess systemic
risk, direct and indirect (or de-facto) mismatches should be controlled. To avoid excessive
risk-taking from foreign-currency borrowing, the underlying incentives for the risk-taking
such as bailout guarantees should be eliminated.53 In addition, they stress that two traditional
methods to measure currency mismatches (net national debt or debt service requirements to
the net exports of a country and foreign-currency-denominated liabilities to foreign-currency-
denominated assets of the banking sector) fail to reflect sectoral imbalances and accurate
currency mismatches. They recommend a new, de-facto currency mismatch measure, which is
the ratio of foreign-currency-denominated net unhedged liabilities to total bank assets. They
also note that even loans to borrowers with foreign-currency income may still have risk if in
time of crisis, borrowers‟ foreign-income is strongly affected due to the reduction of export
demand.

52
However, large increases in currency mismatch in some relatively financially developed countries such
as Poland or the Czech Republic will not go with faster growth (Ranciere et al., 2010a).
53
If incentives for currency mismatch are still remained, banks would always find ways to overcome
regulations. Before the crisis, emerging Europe countries satisfied the required prudential regulations in
currency mismatch, however, many borrowers were not hedged. Although the authorities then imposed
stricter prudential regulations, reserve requirements, direct restrictions on banks‟ foreign-currency
borrowing, amount of foreign currency loans or total credit extended, banks still find other ways to
overcome such restriction. They helped their borrowers borrow directly from abroad with a letter of
guarantee. In nature, there is no difference in banks‟ responsibility in those cases (Ranciere et al.,
2010a).

Tornell and Westermann (2003) indicate that systemic bailout guarantees generate incentives for
borrowing in foreign currency to take on insolvency risk and the prevalence of currency mismatch is the
optimal response to the existence of such guarantee,
 76

APPENDIX V.
LITERATURE ON RESOLUTIONS OF CONNECTED LENDING

Connected lending (or insider/related lending)54 occurs in both developed and

developing countries with positive and negative effects. There are three schools of thought
related to this issue, including the information view, the looting view and the in-between view.

According to the information view, close ties between banks and borrowers (related
parties) will help to overcome the problem of asymmetric information (adverse selection) and
create mechanisms to monitor borrowers (moral hazard). Therefore, it should be less risky
than lending to outsiders. The cases of the United States, Germany, Japan (keiretsu groups)
and Mexico (1876-1911) demonstrate the value of connected lending in improving credit
efficiency during periods of rapid growth (Gerschenkron, 1962; Aoki, Patrick and Sheard,
1994; and Hoshi, Kashyap, Scharfstein, 1991 cited in La Porta et al., 2002; Lamoreaux, 1994;
Calomiris 1995; Fohlin, 1998 cited in Cull et al., 2006 and Kroszner and Strahan, 2001).
Access to inside information and profound knowledge about particular industries gives banks
a better perspective on borrowers‟ risks and the ex-ante risk characteristics of investments and
can enable banks to force borrowers to be more prudent in their investment decisions ex post.
In addition, due to cross-shareholdings between banks and firms, incentives for pursuing better
policies for one side at the expense of the other side can be reduced (La Porta et al., 2002 and
Laeven, 2001). Bankers do not use connected loans as a mechanism to loot their banks and the
terms of related loan are based on an arm‟s length relationship. Therefore, the connection
between connected lending and looting or misallocation of capital does not exist. Because
connected lending arises from the limitations of bankers in assessing risks and enforcing
contracts, any effort to completely prohibit connected lending may cause the curtailment of

54
Connected lending refers to loans extended to banks‟ related parties (Goldstein and Turner, 1996).
“Related parties can include, inter alia, the bank‟s subsidiaries and affiliates, and any party that the bank
exerts control over or that exerts control over the bank. It may also include the bank‟s major
shareholders, directors, senior management and key staff, their direct and related interests, and their
close family members as well as corresponding persons in affiliated companies” (Basel, 2006a, 21).
 77

private lending and the shift of bank assets into corporate and government securities and loans
to states or states related entities. However, under this view there are three crucial conditions
that must be in place to ensure that bankers make connected loans effectively: a high capital-
asset ratio (about three times higher than the levels recommended by Basel); substantial equity
shares owned by bank directors (to create incentives to monitor each other); and depositors
and outsiders having money at risk (to create incentives to monitor bank managers) (Maurer
and Haber, 2005).

According to the looting view, connected lending results in a diversion of resources

from minority shareholders and depositors (and taxpayers if there is deposit insurance),
decreases diversifications of portfolios, reduces the efficiency of capital allocation and
destabilizes the financial system. This view is supported by the idea of looting and tunneling
and the revisionist view of the benefits of keiretsu in Japan (Akerlof and Romer, 1993;
Johnson et al. 2000; Morck and Nakamura 1999; Kang and Stulz, 1997 cited in La Porta et al.,
2002). When deposit insurance is in place and banks believe that they have a government
guarantee, the banks‟ controllers (state institutions, state enterprises, private enterprises and
individuals) have an incentive to take excessive risks or extend loans to their related parties at
favorable terms (lower rates, less collateral, large loan volume and long-term debt55) as long as
their share of profits from such actions is higher than their share in bank profits. This incentive
is stronger in an economic crisis. While such practices benefit the borrowers, it may push the
lender into bankruptcy because the related parties default on their loans when the economy
fails and their equity value in the bank is low.56 The related parties also have less incentive

55
In countries with poor corporate governance and inefficient bankruptcy laws, banks prefer short-term
loans to gain a degree of control, maintain a stronger bargaining position when renewing the loans and
reduce the probability of default (Diamond, 1991b; Rajan, 1992 and Diamond and Rajan, 2001 cited in
Charumilind et al., 2003). Therefore, by holding cross-ownership in banks and corporate sector,
controlling shareholders can easily access long-term loans at a lower cost than normal.
56
For the Mexico case, “after controlling for borrower and loan characteristics, related borrowers are 33%-
35% more likely to default than unrelated ones.” (La Porta et al., 2002, 3). In Russia, insider lending
accounted for ninety percent of all credit and “insider lending has saddled the banks with large amounts
of overdue debt” (Laeven, 2001, 5). Therefore, bank finds it more difficult to reimburse depositors and
continue its normal operation (Cull et al., 2006).
 78

than unrelated parties to repay loans on time because they can simply rollover bad debts. This
kind of self-dealing is a costly form of moral hazard and a large feature of banking in many
developing countries with poor corporate governance and weak enforcement of regulations
and laws (especially the implementation of bankruptcy laws) such as in Spain, Argentina
Bangladesh, Brazil, Chile, Mexico, Russia, South Korea, Malaysia, Thailand and Indonesia
(La Porta et al., 2002; Laeven, 2001; Charumilind et al., 2003; and Lindgren et al., 1996 and
Sheng, 1996 cited in Goldstein and Turner, 1996).

According to the in-between view, whether connected lending is good (reducing

information and contract enforcement costs) or bad (banking instability, widespread tunneling
and the misallocation of capital) depends on the institutional context of the specific country.
Connected lending is positive for financial development when the rule of law and institutions
of corporate governance are strong. The fear of being punished prevents bank insiders from
looting their banks, while the financial system still enjoys the good effects of connected
lending such as the reduction of information asymmetries and monitoring costs. Strong
institutions of corporate governance can reduce the NPLs rate and improve profitability even
in countries having weak rule of law. Conversely, in the environment of weak corporate
governance, unsound laws and regulations, and severe corruption, the bank insiders do not pay
much attention to obey laws and try to expropriate other unrelated parties (Cull et al., 2006).57

To manage connected lending effectively, the specific regulation of this issue,

reporting requirements and investor protection (including more scrutiny of self-dealing
transactions and directors‟ liability in bankruptcy) should be tightened and be made explicit.
Supervision should also be strengthened (La Porta et al., 2002). Due to the low probability of
detection in countries with poor banking regulations and a weak legal framework, Laeven
(2001) claims that bank regulations to limit bank exposure to related parties is not sufficient.
Instead, he proposes two potential contracts to provide proper incentives for bank managers
including a penalty contract (a very high penalty on the bank managers if detected) and an

57
Connected lending is more popular in places where cross-ownership between banks and non-financial
firms is widely permitted and restrictions on the bank ownership by the related parties or single owner
are loose (Cull et al., 2006).
 79

equity incentive scheme (payoff linked to the value of the bank‟s equity). This method can be
seen as the carrot and stick approach and may well be used as a package. However, such
instruments may not be effective in places where there is poor enforcement of contracts and
the link between managerial behavior and the value of shares is not strong.

In addition, information on any transaction (including potential conflicts) between

banks and related parties should be made public at low cost. The contract enforceability
should be improved and minority shareholder rights should be protected (for example,
requiring approval of disinterested shareholders if needed) (Laeven, 2001 and Djankov et al.,
2005). The combination of punishing bankers that exploit their position and effective
protection of shareholder rights raises the costs of exploiting conflicts and helps the United
States reduce the side effects of connected lending (Kroszner and Strahan, 2001). The
accounting and legal framework should permit supervisions to verify connected-lending
exposure (Goldstein and Turner, 1996).

Moreover, in a closely linked environment, connected lending is hard to detect and

prevent. Indirect ways, therefore, should be used to deal with this problem including using
foreign investors. By encouraging foreign entry as unbiased and unrelated lenders, the
authorities can gradually improve the lending environment and contract enforcement
(Grigorian, 2003). The interlocking of directors and auditors between banks and non-banking
companies also has a negative effect on bank performance, especially for small banks and
should be restricted (Okazaki et al., 2005). Any transaction in favor of any related parties must
be offset by another equivalent benefit (OECD, 2004). Basel also proposes some
recommendations for reducing related parties exposures (Principle 11) such as requirements
on extending loans on an arm‟s length basis, tightening the approval and monitoring
mechanism (including internal mechanism from unrelated shareholders or directors and
external mechanism from supervisors), establishing absolute limits on categories of such loans
and deducting such exposures from capital when assessing capital adequacy or requiring
collateralization (Basel 2006a, 2006b, 2000, 1997).
 80

In addition, one of the deep causes of the bad side of connected lending is the
separation of ownership (cash-flow rights) and control (voting rights). Such separation
increases the ability and incentives of controlling shareholders to expropriate minority
shareholders and accelerate the agency problem between the controlling and minority
shareholders (Claessens et al., 1999 and La Porta et al., 1998a). Claessens, et al. (2000)
investigates data from nine East Asian countries (Hong Kong, Indonesia, Japan, South Korea,
Malaysia, Philippines, Singapore, Taiwan and Thailand) and finds that control is enhanced in
these countries through pyramid structures (a chain of companies), cross-holdings and
managerial appointments, in which voting rights often exceed cash-flow rights.58 Therefore,
control can be achieved even with holdings less than an absolute majority share of the stock
and only with 20 percent of the stock in hand (La Porta et al., 1999 cited in Claessens, et al.,
2000). In addition, research of Claessens, et al. (2000) indicates that a relatively small number
of families control most East Asian economies and they can have a strong effect on the
government‟s economic policy by lobbying government officials and providing special
treatment to family members of senior government members. The control of these powerful
groups is one of the impediments to the reform of the legal system and the improvement of
minority rights.59 In addition, the direct participation of government officials and/or their
related parties can create conflicts between public and private interests, leading to crony
capitalism. Therefore, to reduce such concentration of rights, good accounting standards and
shareholder protection measures (in both laws and enforcement) should be used (La Porta et
al., 1998b). In addition, the shareholders should have the right to receive the needed
information and have the power to act (voting and litigation) on such information (Djankov et
al., 2005).

58
The ratio of cash-flow to control rights in Japan, Indonesia, Singapore, and Thailand is 0.602, 0.784,
0.794, and 0.941 respectively. (Claessens, et al., 1999, 3).
59
This is supported by La Porta et al. (1998b). The concentration of ownership in the largest public
companies is negatively related to investor protections. In addition, according to Morck et al. (2010),
national banking systems are dominant by tycoons and business families correlate with worse economy-
level outcomes: less efficient capital allocation, more NPL, more frequent bank crises, greater macro
vitality, slower income and productivity growth rates.
 81

APPENDIX VI. FIGURES

FIGURES REGARDING NONPERFORMING LOANS

FIGURE 1. NPL TO TOTAL FIGURE 2. NPL GROWTH RATE

GROSS LOANS OF SOME LISTED OVER THE PERIOD OF 2008-2011
BANKS
OF LISTED BANKS
7.00%
1800%
6.00%
1600%
5.00% 2007 1400%
4.00% 1200% 2008
2008
1000%
3.00% 2009 2009
800%
2010 600% 2010
2.00%
2011 400% 2011
1.00%
200%
0.00% 0%
VCB
STB

ACB

HBB
MBB
EIB
CTG

SHB
NVB

-200%

FIGURE 3. NPL OF SOME LISTED FIGURE 4. NPL STRUCTURE OF

VND million BANKS SOME LISTED BANKS

6,000,000 100%
90%
5,000,000 80%
4,000,000 70%
60%
3,000,000 50%
40%
2,000,000 30%
1,000,000 20%
10%
- 0%
07 10 08 11 09 07 10 08 11 09 07 10 08 11 09 07 09 11 08 10 07 09 11 08 10 07 09 11 08 10 07 09 11 08 10 07 09 11
CTG VCB STB EIB ACB MBB HBB SHB NVB CTG VCB STB EIB ACB MBB HBB SHB NVB

Substandard Doubtful Loss Substandard Doubtful Loss

 82

FIGURE 5. DEBTS STRUCTURE FIGURE 6. SPECIAL MENTION

OF SOME LISTED BANKS (2007- DEBTS GROWTH RATE IN 2008-
2010) 2011

100.00% 3500%

80.00% 3000%

2500%
60.00%
2008
2000%
40.00% 2009
1500%
2010
20.00%
1000% 2011
0.00% 500%
07 10 08 11 09 07 10 08 11 09 07 10 08 11 09
CTG VCB STB EIB ACB MBB HBB SHB NVB 0%
Current Special mention Substandard
-500%
Doubtful Loss

FIGURE 7. NPL TO TOTAL GROSS LOANS OF SOME NONLISTED

BANKS

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
TPB
OCB

SCB

ABB
FCB

BVB
BIDV

WEB
EAB

LVB

TNB

SEB

VCAP

KLB
Ocean
AGB

HDB

PGB
SGB
SNB
TCB

VAB

DAB
GPB

NAB

VPB

TRB
VIB

MDB
MHB

MSB

2007 2008 2009 2010 2011

 83

VND million FIGURE 8. NPL OF SOME NONLISTED BANKS

30,000,000

25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

-
7 10 8 11 9 8 11 9 9 9 7 9 8 9 8 7 10 9 9 8 7 10 9 7 10 10 10 9 8 7 7 8 7 10 9 9 8 7 10
BIDVAGB VIB EABHDBLVB
MDB
MHB
OCB
Ocean
PGBSGBSNBTCBTPBVABWEBTNB SCBDAB
GPBMSBNABSEB
ABB
FCBVPBVCAPBVB
TRBKLB

Substandard Doubtful Loss

FIGURE 9. NPL STRUCTURE OF SOME NONLISTED BANKS

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
7 9 11 8 7 9 7 9 8 10 9 11 9 9 7 9 9 7 9 7 9 8 10 9 8 10 8 10 8 10 7 9 8 10 9 7 9 9 10 9 11
BIDV VIB EAB HDB LVB MDB MHBOCBOceanPGB SGB SNB TCB TPB VAB WEB TNB SCB DABGPBNABVPB
VCAPBVB

Substandard Doubtful Loss

 84

FIGURE 10. DEBTS STRUCTURE OF SOME NONLISTED BANKS

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
7 9 11 8 7 9 7 9 8 10 9 11 9 9 7 9 9 7 9 7 9 8 10 9 8 10 8 10 8 10 7 9 8 10 9 7 9 9 10 9 11
BIDV VIB EAB HDB LVB MDB MHBOCBOceanPGB SGB SNB TCB TPB VAB WEB TNB SCB DABGPBNABVPB
VCAPBVB

Current Special mention Substandard Doubtful Loss

FIGURE 11. NPL NET OF FIGURE 12. NPL NET OF

PROVISIONS TO CAPITAL OF PROVISIONS TO CAPITAL OF
SOME LISTED BANKS SOME NONLISTED BANKS

70%
18%
60%
16%
14% 50%
12% 40%
10%
30%
8%
6% 20%
4% 10%
2%
0%
0%
MDB
MHB
VIB
EAB

LVB

TNB
WEB
Ocean
PGB
SGB
SNB
TCB
BIDV

SCB
HDB

TPB
VAB
OCB

CTG VCB STB EIB ACB MBB HBB SHB NVB

-2% -10%

2007 2008 2009 2010 2011 2007 2008 2009 2010

 85

FIGURE 13. PROVISION FOR FIGURE 14. PROVISION FOR

CREDIT LOSSES TO LOANS CREDIT LOSSES TO NPLS OF
GRANTED TO CUSTOMERS OF SOME LISTED BANKS
SOME LISTED BANKS
600%
4.00% 500%
3.50%
3.00% 400%
2.50% 300%
2.00%
1.50% 200%
1.00%
100%
0.50%
0.00% 0%

2006 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

FIGURE 15. PROVISION FOR FIGURE 16. PROVISION FOR

CREDIT LOSSES TO LOANS CREDIT LOSSES TO NPLS OF
GRANTED TO CUSTOMERS OF SOME NONLISTED BANKS
SOME NONLISTED BANKS
250%
3.00%
200%
2.50%

2.00% 150%

1.50%
100%
1.00%
50%
0.50%

0.00% 0%

2006 2007 2008 2009 2010 2007 2008 2009 2010

 86

FIGURES REGARDING LIQUIDITY RISKS

FIGURE 17. DEPOSITS FIGURE 18. LOANS STRUCTURE

STRUCTURE OF SOME LISTED OF SOME LISTED BANKS
BANKS
100%
100%

80% 80%

60%
60%

40%
40%
20%

20%
0%
9 10 11 9 1011 9 10 11 9 10 11 9 10 11 9 10 11 9 10 11 9 10 11
CTG VCB STB EIB ACB MBB HBB SHB
0%
9 10 11 9 10 11 9 10 11 9 10 11 9 10 11 9 10 11 9 10 11 9 10 11
More than 3 months overdue To 3 months overdue
CTG VCB STB EIB ACB MBB HBB SHB
To 1 month From 1-3 months

From 3-12 months From 1-5 years

To 1 month From 1-3 months More than 5 years

FIGURE 19. DEPOSITS FIGURE 20. LOANS STRUCTURE

STRUCTURE OF SOME LISTED OF SOME LISTED BANKS
BANKS
100%
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30% 30%

20% 20%

10% 10%

0% 0%
9 11 10 9 11 10 9 11 10 9 11 10 9 11 9 11 10 9 11 10 9 11 10 9 11 10 9 11
CTG VCB STB EIB ACB MBB HBB SHB NVB CTG VCB STB EIB ACB MBB HBB SHB NVB

Short-term Long-term Overdue Short-term Long-term

 87

FIGURE 21. DEPOSITS FROM FIGURE 22. DEPOSITS

CUSTOMERS TO LOANS STRUCTURE OF SOME
GRANTED TO CUSTOMERS OF NONLISTED BANKS
SOME LISTED BANKS
100%
200%
90%
180%
80%
160%
70%
140% 60%
120% 50%
100% 40%
80% 30%

60% 20%

40% 10%

20% 0%
8 10 9 9 10 9 8 10 9 10 8 10 10 9 9

0% EAB HDB MDB

OCB
OCEANSGB SNBTCB
TPBVAB WEBTNB SCB
CTG VCB STB EIB ACB MBB HBB SHB NVB
To 1 month From 1-3 months From 3-12 months
2007 2008 2009 2010 2011 From 1-5 years More than 5 years

FIGURE 23. LOANS STRUCTURE FIGURE 24. DEPOSITS

OF SOME NONLISTED BANKS STRUCTURE OF SOME
NONLISTED BANKS
100%
100%

80% 90%

80%
60%
70%

60%
40%
50%

20% 40%

30%

0% 20%
8 10 9 9 10 9 8 10 9 10 8 10 10 9 9
EAB HDBMDB
OCB
OCEANSGB SNBTCB
TPBVABWEBTNB SCB 10%

More than 3 months overdue To 3 months overdue 0%

8 10 9 8 10 10 10 8 10 9 8 10 8 9 9 8 8 10
To 1 month From 1-3 months
EAB HDB LVBMDB
MHB
OCB
OCEANSGB SNBTCB
TPBVABWEB
TNBSCB
From 3-12 months From 1-5 years

More than 5 years Short-term Long-term

 88

FIGURE 25. LOANS STRUCTURE OF SOME FIGURE 27. RATIO OF SHORT-TERM

NONLISTED BANKS CAPITAL SOURCE USED FOR MEDIUM-
TERM AND LONG-TERM LOAN OF LISTED
BANKS (CIRCULAR NO. 15/2009/TT-NHNN)
120%

100%
50%

80%
40%
60%
30%
40%
20%
20%
10%
0%
8 10 9 8 10 10 10 8 10 9 8 10 8 9 9 8 8 10
0%
EAB HDB LVBMDB
MHB
OCB
OCEANSGB SNBTCB
TPBVABWEBTNB SCB CTG VCB STB EIB ACB MBB HBB SHB NVB

-10%
Overdue Short-term Long-term
2009 2010 2011

FIGURE 26. DEPOSITS FROM CUSTOMERS TO LOANS GRANTED TO

CUSTOMERS OF SOME NONLISTED BANKS

250%

200%

150%

100%

50%

0%
Ocean

SCB

FCB
OCB

TPB

WEB

ABB

VCAP
BVB
BIDV

EAB

LVB

TNB

SEB

KLB
AGB
VIB

HDB

PGB
SGB
SNB
TCB

VAB

DAB
GPB

NAB

VPB

TRB
MDB
MHB

MSB

2006 2007 2008 2009 2010 2011

 89

FIGURE 28. RATIO OF SHORT-TERM FIGURE 29. RATIO OF SHORT-TERM CAPITAL

DEPOSITS USED FOR MEDIUM-TERM AND SOURCE USED FOR MEDIUM-TERM AND
LONG-TERM LOAN OF LISTED BANKS LONG-TERM LOAN OF NONLISTED BANKS
(CIRCULAR NO. 15/2009/TT-NHNN)
60%

40%
50%

30%
40%
20%

30% 10%

0%
20%
-10%

10%
-20%

-30%
0%
CTG VCB STB EIB ACB MBB HBB SHB NVB
-40%
-10%
-50%

-20% -60%

2009 2010 2011 2008 2009 2010

FIGURE 30. RATIO OF SHORT-TERM FIGURE 31. CORE LIQUID ASSET RATIO OF
DEPOSITS USED FOR MEDIUM-TERM AND SOME LISTED BANKS
LONG-TERM LOAN OF NONLISTED BANKS
40%
120%
35%
100%
30%
80%
25%
60%
20%
40%
15%
20%
10%
0%
5%
-20%
0%
-40% CTG VCB STB EIB ACB MBB HBB SHB NVB

2008 2009 2010 2008 2009 2010 2011

 90

FIGURE 32. CORE LIQUID ASSET TO FIGURE 33. CORE LIQUID ASSET
SHORT-TERM LIABILITIES OF RATIO OF SOME NONLISTED
SOME LISTED BANKS BANKS

60% 70%

60%
50%

50%
40%
40%

30%
30%

20% 20%

10% 10%

0%
0%
CTG VCB STB EIB ACB MBB HBB SHB NVB

2008 2009 2010 2011 2008 2009 2010

FIGURE 34. CORE LIQUID ASSET TO

SHORT-TERM LIABILITIES OF
SOME NONLISTED BANKS

80%

70%

60%

50%

40%

30%

20%

10%

0%

2008 2009 2010

 91

FIGURES REGARDING CURRENCY RISK

FIGURE 35. FOREIGN-CURRENCY FIGURE 36. FOREIGN-CURRENCY

CREDIT GROWTH RATE OF SOME DEPOSIT GROWTH RATE OF SOME
LISTED BANKS (2009-2011) LISTED BANKS (2009-2011)

180% 100%
160%
80%
140%

120%
60%
100%
80% 40%

60%
20%
40%
20%
0%
0% CTG VCB STB EIB ACB MBB SHB NVB
CTG VCB STB EIB ACB MBB SHB NVB
-20% -20%

2009 2010 2011 2009 2010 2011

FIGURE 37. FOREIGN-CURRENCY FIGURE 38. FOREIGN-CURRENCY

CREDITS TO FOREIGN-CURRENCY CREDITS TO FOREIGN-CURRENCY
DEPOSITS OF SOME LISTED BANKS DEPOSITS OF SOME NONLISTED
BANKS

180% 250%

160%
200%
140%

120%
150%
100%

80% 100%

60%
50%
40%

20%
0%
0%
CTG VCB STB EIB ACB MBB HBB SHB NVB

2008 2009 2010 2011 2008 2009 2010

 92

FIGURE 39. FOREIGN-CURRENCY FIGURE 40. FOREIGN-CURRENCY

LOANS TO TOTAL LOANS OF SOME LOANS TO FOREIGN-CURRENCY
LISTED BANKS LIABILITIES OF SOME LISTED
BANKS
40%
80%
35%
70%
30%
60%
25% 50%
20% 40%

15% 30%

10% 20%
10%
5%
0%
0%
CTG VCB STB EIB ACB MBB HBB SHB NVB
2008 2009 2010 2011 2008 2009 2010 2011

FIGURE 41. FOREIGN-CURRENCY FIGURE 42. FOREIGN-CURRENCY

LOANS TO TOTAL LOANS OF SOME LOANS TO FOREIGN-CURRENCY
NONLISTED BANKS LIABILITIES OF SOME
NONLISTED BANKS
20%
18% 200%
16% 180%
14% 160%
12% 140%
10% 120%
100%
8%
80%
6% 60%
4% 40%
2% 20%
0% 0%

2008 2009 2010 2008 2009 2010

 93

APPENDIX VII. CONNECTED RELATIONSHIP AND LENDING60

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
ABB EAB ABLand: 10% AnBinh Maybank: 20% Investing in:
1.
(indirectly Securities Vietnam Electricity (EVN): 25.37% EVN Finance (8.4%, equivalent to
via (ABS) PetroVietnam Finance Corporation VND 210 billion), EVN International
subsidiaries) AnBinh Fund (PVFC) JSC (1.2%, equivalent to VND 28.8
Management Ha Noi Export-Import Company billion), PC3 Invest (4% equivalent to
(Geleximco): 8.29% VND 24 billion), Phalai Thermal
Power JSC.
Committing to finance VND 2500
billion for Distribution System
Corporation and EVN NPT
(transmission).
ACB DAB: 11% ACB Securities: Connaught Investor Ltd.: 7.26%
2.
[EIB: 1.04% 100% Dragon Financial Holdings Limited:
VAB, STB ACB Fund 6.81%
TCB, KLB] Management: Standard Chartered Apr Ltd.: 8.77%
100% (via Standard Chartered Bank (Hong Kong)
subsidiaries) Ltd.: 6.23%
Nguyen Duc Kien and Dang Ngoc Lan

60
Information on this Appendix is taken from Annual Reports and Financial Statements of banks, CafeF and other available sources from internet. However, due to
the data unavailability, such information may be out of date, revised or incorrect. Therefore, the information hereof should be better to use for reference purposes
only.
61
Notes include some important information including: (i) large shareholders or managers‟ companies, (ii) credits granted to or investments in related parties and
Vinashin, and (iii) other important issues.
 94

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
(wife): 7.86%
ACBA (ACB Asset Management
Company): 3.63%
Tran Mong Hung and Tran Hung Huy
(son): 4.83%
AGB Vinasiam Agribank Agriculture
3.
Bank Securities Joint Bank Insurance
– Stock JSC (ABIC):
Corporation 47.81%
(Agriseco) (indirectly via
ALCO I: 6.5%
and ALCO II:
6.5%)62
BAB N/A N/A N/A N/A Thai Huong (General Director)
4.

BIDV VID-Public BIDV Tower JVC: BIDV BIDV Insurance Outstanding loans of Vinashin and
5.
(JVC): 50% 55.04% [BIDV lends Securities: Corporation: Vinashin‟s subsidiaries (including
Lao-Viet VND 387 billion] 88.12% 82.3% those transferred to PetroVietnam and
Bank (JVC): Becamex BIDV-Vietnam Laos-Viet Vinalines): VND 6,663 billion
50% Infrastructure Partners Insurance: Holding Petroland‟s bonds (real
Vietnam- Development JSC: Investment 41.9% estate): VND 80 billion
Russia Bank 2.45% [BIDV holds Management JV Investing in:
(JVC): 50% bonds equal to VND C (BVIM): 50% PetroVietnam Construction JSC

62
See http://www.agribank.com.vn/31/1247/gioi-thieu/cac-cong-ty-truc-thuoc/cong-ty-co-phan-bao-hiem-ngan-hang-nong-nghiep--abic-/2011/11/4577/lich-su-
phat-trien.aspx accessed at 10:41 pm on April 16, 2012.
 95

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
117 billion] (PVC): 8.09%
BIDV Expressway Ngohan JSC (wire production):
Development 10.93% [BIDV holds bonds equal to
Company (BEDC): VND 111 billion]
25% Northern Electricity Development and
Investment JSC No. 2 (Nedi2)
(member of Vinaconex): 11.24%
[BIDV holds bonds equal to VND 17
billion ]
Vietnam Aircraft Leasing Company
(VALC): 27.6% [BIDV lends VND
1985 billion]
BVB Bao Viet Group: 52% Holding Hoa Phat Group‟s bonds
6.
Vinamilk: 8% (building materials, steel, real estate):
CMC Group: 9.9% VND 100 billion
HIPT Group: 4.8% Holding Vinaconex‟s bonds (real
Ky Dong Steel: 4% estate, construction, services): VND
100 billion
Holding Long Hau JSC‟s bonds (real
estate, industrial zone): VND 20
billion
Lending Bao Viet Fund Management
(member of Bao Viet Group): VND
232 billion
 96

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
CTG Indovina JV South Quang Ngai Vietinbank Vietinbank The State Bank of Vietnam (SBV): Holding Vinashin‟s bond: VND 500
7.
Bank: 50% Urban Development Securities: Insurance: 80.31% billion
SGB: 9.14% Investment JSC: 50% 76.86% 100% International Finance Corporation
Vietinbank Capitalization Fund: 6.72%
Vietinbank Aviva: 50% International Finance Corporation (IFC):
Capital: 100% 3.28%
CTG Labor union: 2.16%
DAB DaiALand: 11% Dai Viet ACB: 11%
8.
Thu Duc House: Securities: 18% Tin Nghia Corp: 11.12%
2.94% Tin Nghia Petroleum (member of Tin
Nghia Corp): 3.5%
Dong Nai Lottery and General Services
Company Limited: 10%
BIDV: 4.5%
Thong Nhat JSC: 4%
Nguyen Duc Kien
EAB Saigon M&C Real DongA Global Phu Nhuan Construction and Housing
9.
Estate JSC: 6% Securities: Insurance Trading Company Ltd. (One Member)
Kinhdo Land JSC: 4% 100% Company: 11% (Real Estate): 2.38%
DongA Real Estate DongA Capital: Phu Nhuan Jewelry (PNJ) (Cao Thi
JSC: 11.01% 100% Ngoc Dung, Chairman (holding 10% of
Saigon Construction PNJ), is wife of Tran Phuong Binh,
and Real Estate General Director of EAB): 7.7%
Corporation (SCREC) The Administrative office of Hochiminh
(member of RESCO): City (Văn Phòng Thành Ủy in
 97

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
10.11% Vietnamese): 6.87%
DIC Group (member AnBinh Capital: 6.02%
of RESCO): 9.83% Son Tra Dien Ngoc JSC (real estate):
Sai Gon Cho Lon 3.62%
Investment and Real Ky Hoa Tourism & Trading Co., Ltd.
Estate JSC (member (tourism, real estate): 3.55%
of RESCO): 1.25% Ninh Thinh Ltd.: 3.4%
Real Estate 10 JSC
(RES10) (member of
RESCO): 1%
Real Estate 9 JSC
(RES9) (member of
RESCO): 2.5%
EIB STB: 10.6% EximLand: 10.99% Rong Viet AAA Insurance: Sumitomo Mitsui Banking Corporation: Holding Vinashin‟s bond: VND 250
10.
VCAP [EIB lends VND 675 Securities: 8.78% 15% billion
(GDB): billion] 10.86% [EIB Nha Rong VOF Investment Limited: 5.02% Holding Tan Van Hung‟s bonds (real
0.87% SDI: 10% lends VND 134 Insurance: Saigon Jewelry Company (SJC): 2.07% estate): VND 900 billion
HBB: 0.15% Saigon Exim: 11% billion] 9.45% Nguyen Duc Kien Holding VID Hung Yen‟s bonds (real
SGB: 0.03% Vietnam Forestry ACB estate, industrial zone, member of VID
Property and Land Group): VND 2000 billion
Business and
Investment JSC: 8%
 98

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
FCB Shing Da Corp. Ltd: 9.19% 2012: Merged with TNB and SCB
11.
Fu I Industrial Co Ltd: 9.19%
Hanh Phuc Exploitation JSC: 8.78%
He Duong Cement JSC: 8.92%

GPB Kinhdo Strategic Shareholder: PetroVietnam Investing in:

12.
Securities: 4.8% (PVN) Global Petro Invest Corporation (GP -
Global FPT: 5.84% Invest): 9.88%
Petroleum Fund Ta Ba Long (Chairman) and related Vinashin Mineral and Petro JSC: 10%
Management parties: 13.763% PetroVietnam Financial
JSC: 11% Doan Van An (Vice Chairman) and Investment Corporation: 5%
related parties: 9.46% Global Petro and Energy JSC: 11%
Ho Van Khuyen: 3.9%
Pham Xuan Manh (member of
Supervisory Committee): 3.35%
HBB Dong Xuan JSC: 10% HBB Securities: Vien Dong Deutsche Bank: 10% Holding Vinashin‟s bond: VND 600
13.
Bao Viet Hotel and 100% Assurance Nguyen Van Bang (Chairman) and billion
Tourism JSC: 10% Vietcombank Corporation: related parties (including Vuong Thi Investing in:
Cavico Vietnam Towe Partners Fund 1 3.86% Van, wife): 10.48% Binh An Seafood JSC: 10%
r JSC: 9% (VPF1): 5%
Energy Growth Fund:
Construction JSC: 10%
8.43% Vietcapital
 99

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
Lilama Land: 10% Healthcare
Fund: 10%

HDB VCB: 0.84% HCM City Hochiminh City Nguyen Thi Phuong Thao (Vice Nguyen Thi Phuong Thao (Vice
14.
CTG: 0.15% Infrastructure Securities Chairman) and Nguyen Thanh Hung Chairman): Sovico Holdings (real
VIETCAP Investment jsc: 2.68% Corporation: (husband): 6% estate: Phu Long; tourism: Furama
(GDB): ThuDuc Housing 8.49% resort; energy; finance: HDBank and
0.42% Development JSC: VietFund PVFC Capital), Vietjet Air. Many
5.28% Management: senior managers of HDBank come
City Housing 3.41% from Sovico Holdings.
Development Real Phu Gia
Estate Business JSC Securities: 11%
(HDReal) : 11% Viet Nam
Bac Trung Nam Alliance Fund
Housing Development Management:
JSC: 8.8% 9.9%
Cadif Investment JSC:
2.5%
KLB Nguyen Duc Kien
15.

LVB LienViet Duong Cong Minh (Chairman) Duong Cong Minh: Chairman of Him
16.
Securities: 11% Saigon Trading Group (Satra) Lam Corporation (real estate)
Sourthern Airport Services Company
(Sasco)
MBB MBLand: 65.88% Thang Long Military VCB: 9.02% Investing in:
17.
 100

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
Viet Remax JSC: Securities: Insurance MSB: 7.27% Military Bank Asset Management
78.09% 61.85% Company Viettel Group: 19% Company: 100%
VietAsset JSC: 45% MB Capital: (MIC): 20% Saigon New Port (Tân Cảng): 4.69%
Long Thuan Loc JSC: 61.78% Vietnam Helicopter Corporation (VNH):
29.65% 5.94%
MDB EIB: 0.07% MSB: 10.49%
18.

MHB Mekong Housing MHB

19.
Building and Real Securities: 60%
Estate (MHBR): 11% Golden Lotus
An Giang Real Estate Securities: 5%
(ARES): 10%
Ngoc Phong JSC: 5%
Golden Lotus Urban
Development JSC:
11%
MSB MDB: VNPT LAND Matitime Bank Nha Rong VNPT: 12.53%
20.
10.16% Securities: 2% Insurance: Argribank Securities: 14.99%
MBB: APEC 0.73% Bao Viet Group: 0.85%
7.27% Securities: Vietnam Investment Development Group
7.62% (VID Group) (real estate)
Argribank Gemadept
Securities:
4.37%
 101

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
NAB Tran Thi Huong and family members Tran Thi Huong (Consultant): Hoan
21.
(Nguyen Quoc My, son and Nguyen Thi Cau Co. Ltd (Real Estate)
Xuan Loan, daughter): 31%
NVB Saigon Construction Navibank Sai Gon Binh Dinh Energy JSC (related Receivables from related parties
22.
Corporation (SCC) Securities: to Dang Thanh Tam): 9.95% transaction (mainly of Dang Thanh
Sai Gon Da Nang 10.56% Gemadept: 7% Tam and related parties) are more than
Investment Vietcapital The Vietnam National Textile and VND 3589 billion (USD 176 million)
Corporation Healthcare Garment Group (Vinatex): 11% equivalent to 16 percent of total assets
Northwest Saigon Fund: 3% Nguyen Thi Kim Thanh (wife of Dang in 2011.
City Development Thanh Tam): 5.75% Holding Saigon Construction
Corporation Dang Thanh Tam: 4.98% Corporation (SCC)‟s bonds (real
Saigon Investment Dang Quang Hanh (brother of Dang estate): VND 400 billion
(SGI): 11% Thanh Tam): 0.38% Holding Sai Gon Da Nang Investment
Nam Viet Land: 11% Nguyen Vinh Tho (brother-in-law of Corporation‟s bonds (real estate):
Can Gio Tourist City: Dang Thanh Tam): 0.86% VND 1000 billion
10% (buy shares of Holding Northwest Saigon City
Nguyen Thi Kim Development Corporation‟s bonds
Thanh, wife of Dang (real estate): VND 300 billion
Thanh Tam) Investing in:
Saigon – Quy Nhon Tourism JSC
(member of Saigontourist): 6.67%
Thac Mo Hydroelectric Plant: 1.64%
Saigon – Binh Thuan Power Plant
Development and Investment: 9%
 102

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
OCB VAB: BenThanhLand: 11% Orient Vien Dong
23.
0.25% Savico Securities: 11% Assurance
EIB: 0.03% Romana&Spa-Phan Thanh Viet Corporation:
EAB: 0.03% Thiet Fund 3.17%
ACB: 0.02% Grand Capital Management:
NAB: Ben Thanh JSC 10%
0.03% VIS Securities
OCEA Petrowaco Property Ocean PetroVietnam (PVN) Investing in:
24.
N JSC (Petrowaco): 10% Securities: 11% Ocean Group PetroVietnam Gas (VND 108.5
Hung Phu Residential billion)
JSC: 11% Vietnam Investment and Asset
Infrastructure Develop Trading JSC (PVFC Invest) (VND 63
ment Investment JSC billion)
(member of Ocean Oil-Rig of PetroVietnam Drilling &
Group) Well Services Corporation: 5%
PetroVietnam Construction Investment
Consultant JSC: 10%
Sai Gon Petroleum construction and
investment JSC: 2.86%
PetroVietnam Power Project
Consultant
JSC (PV POWER PCC): 10%
Hanoi Petroleum Construction JSC:
3.33%
Haiphong Petroleum Construction
 103

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
JSC: 10%
PetroVietnam premier recreation: 5%
PGB Vietnam National Petroleum Group: Investing in:
25.
(Petrolimex): 40% SSI Vision Fund (SSIVF): 1.76%
Saigon Securities (SSI): 9.98% Petrolimex Aviation Fuel JSC: 2.5%
Petrolimex Installation No. 3 JSC
SCB ACB Officetel Royal Tan Viet Viet Vinh Phu Financial 2012: Merged with TNB and FCB
26.
Garden: 11% Securities: 11% Investment Corporation (real estate):
Danang VAM: 2.21% 25.719%
Housing Investment Vietnam Trade
Development JSC: and Industry
10% Securities:
4.39%
SEB SEA Securities Vietcombank – Mobifone: 6% Investing in: the PetroVietnam Bio-
27.
Bao Minh Cardif Life PVGAS ethanol Company (PVB)
Securities Insurance: 12% Nguyen Thi Nga (Chairman)
SGB Saigonbank Ky Hoa Co. Ltd.: 22.63%
28.
Berjaya Saigon Petro Co.,Ltd.: 15.12%
Securities VCB: 6.63%
(SBB) CTG: 5.68%
Saigontourist Holding Company: 5.38%
Phu Nhuan Construction and Housing
Trading Company Ltd. (One Member)
(Real Estate): 17%
 104

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
SHB VCB: 0.09% SHB Land Saigon Hanoi SHB- Do Quang Hien (Chairman of SHB and
29.
STB: LILAMA-SHB Securities Vinacomin T&T Group): 4.36%
0.002% Invesment (SHS): 8.22% Insurance: 10% T&T Group: 6.88%
Construction JSC: Saigon – Hanoi Vienam National Coal – Mineral
11% Fund Industries Holding Corporation Limited
An Thinh Real Estate Management (Vinacomin): 9.34%
JSC (Ancom Group): Company Vietnam Rubber Group (VRG): 9.34%
10% (SHF): 10.4% BIM Group (real estate, services, owner
Gentraco Real Estate of Air Mekong): 4.98%
Investment JSC: 5% Saigon Hanoi Securities (SHS): 3.67%
Saigon – Hanoi Fund Management
Company: 0.046%
SNB Ngan Thuan Mien Nam Tram Be (SNB‟S Vice Chairman) and
30.
Construction Ltd.: Securities: 5% related parties: 17.5%
6.6% Becamex: 4.4601%
Truong Ty (SNB‟S BOM member and
Director of Van Thanh
Cushion):1.4797%
Diep Tan Dung (BOM member of SNB
and FCB): 0.819%
STB Dalat Real Estate Sacombank International Finance Corporation (IFC): Holding outstanding loans, debt
31.
Company: 5.97% Securities: 4.38% securities and other receivables of
10.95% Vietnam Dragon Fund Ltd: 1.95% related parties: VND 3700 billion
Dang Van Thanh (Chairman): 4.38%; (USD 177 billion) equivalent to 2.61
Dang Hong Anh: 3.81% , Thanh Thanh percent of total assets.
 105

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
Cong Group: 2.27%, Bourbon Tay Ninh: Investing in:
0.77%, Ninh Hoa Sugar (NHS): 0.23%, Bien Hoa Sugar (related to Thanh
Sacomreal: 1.78%: 13.24% Thanh Cong Group): 10.01%
Huynh Que Ha (Vice Chairman) (1.5%) Gia Lai Cane Sugar Thermoelectricity
and Chang Hen Jui (husband) (3.62%): JSC (SEC): 10.34%
5.12%
EIB: 10.6%
Saigon Exim (real estate) (related to
EIB): 5.17%
Nguyen Duc Kien
TCB VPB: 9.21% Techcom HSBC: 19.79%
32.
Securities: MSN (MASAN): 19.88%
100% Ho Hung Anh and related parties: 3.09%
Techcom Nguyen Dang Quang: 1.72%
Capital: 100% Nguyen Thieu Quang (Vice Chairman)
and related parties: 2.01%
Nguyen Canh Son and related parties:
3.23%
Vietnam Airlines Corporation: 2.76%
TNB Pham Van Hung (BOM member) and 2012: Merged with SCB and FCB
33.
related parties: 14.72% Pham Van Hung: related to Dragon
Hill Trading and Investment JSC (real
estate and tourism)
 106

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
TPB Vinare Invest (real DOJI (jewelry, gold and real estate):
34.
estate business): 10% 20%
FPT: 16.89%
MobiFone: 4.76%
SBI Ven Holdings Pte. Ltd : 4.9%
VINARE: 10%

TRB N/A N/A N/A N/A N/A N/A

35.

VAB Nam Long Apartment Vietcapital Hung Vuong The Administrative office of Hochiminh
36.
Development Healthcare Securities: 11% City (Văn Phòng Thành Ủy in
Company: 7% Fund: 10% Vietnamese): 12%
Tam Thong Real Viet Nam SJC: 6.75%
Estate JSC: 5% Alliance Fund EIB: 2.4%
Real Estate Service Management: Hochiminh City Investment Fund For
and Constructions 10% Urban Development: 1.3%
Corporation: 11% Truong Son Cu Chi Commercial and Industrial
Mien Dong JSC Securities: 5% Developing Investment JSC: 2.72%
Dat Xanh Group: 11%
 107

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
VCAP NAB: 3.51% Holding Vietcapital Securities‟ bond:
37.
(GDB) Tin Phat Investment, Service and Trade VND 300 billion (without collateral)
Ltd.: 12.2% Holding Vietcapital Real Estate‟s
SAIGONNIC (real estate): 13.62% bond: VND 50 billion (without
Hoa Lam Investment Development Corp. collateral)
(services, motor, automobile and real Holding Beta Securities‟s bond: VND
estate): 8.16% 250 billion (without collateral)
Vietcapital Holding Dai Phat Investment, Service
Beta Securities and Trade Ltd.‟s bond: VND 400
billion (without collateral)
VCB EIB: 8.19% Vietcombank Tower VCB Securities: Vietcombank – The State Bank Of Vietnam: 57.98% Investing in:
38.
SGB: 5.26% 198 Ltd: 70% 100% Cardif Life Mizuho Bank: 15% Vietcombank Financial Leasing
OCB: 5.06% VCB-Bonday Ben Vietcombank Fu Insurance: 45% Company: 100%
MBB: 11% Thanh: 52% nd Nha Rong Vietnam – Hong Kong Finance
VCB-Bonday: 16% Management: Insurance: Company: 100%
Vietcomreal: 11% 51% 3.73% Vietcombank Money: 75.13%
Vietnam VCB Partners 1: Petrolimex PetroVietnam Drilling & Well
Infrastructure Dev. 11% Insurance: Services Corporation: 2.56%
and Finance Inv JSC: Cement 10.04% Gentraco: 3.76%
1.5% Finance:
HCM City 10.91%
Infrastructure Inv.
JSC: 1.78%
Dia Oc Viet: 11%
 108

INVESTMENT SECTORS
NO. BANK SHAREHOLDERS NOTES61
BANKING REAL ESTATE SECURITIES INSURANCE
VIB VIBank – Ngo Gia Tu Post and Dang Khac Vy Investing in:
39.
Ltd. Telecommunicat Dang Van Son Vietnam Electricity Construction JSC:
ion Joint Stock 4.5%
Insurance PV2 Investment JSC: 3.25%
Corporation PetroVietnam Gas Shipping: 3.33%
(PTI): 5.14%
VPB Foreign Trade VPBANK Military Oversea Chinese Banking Corporation
40.
Development and Securities: Insurance Limited (OCBC): 14.88%
Investment Corp. of 100% (MIC): 7% TCB: 9.21%
HCM City (FIDECO): Ngo Chi Dung (Chairman): 4.48%
10.74% Bui Hai Quan (Vice Chairman): 1.55%
Dong Xuan JSC: 10%
VTB N/A N/A N/A N/A Nguyen Duc Kien N/A
41.

WEB STB: 0.06% Kinhbac City Nguyen Thi Kim Thanh (same name Receivables from related parties
42.
Development Holding with Dang Thanh Tam‟s wife): 9.97% transaction are more than VND 1710
Corporation (KBC): Sai Gon Binh Dinh Energy JSC (invested billion (USD 90.3 million) equivalent
1.52% by Saigon Quynhon Mining Corp): to 18 percent of total assets in 2010.
Saigon Quynhon 9.85% Holding KBC‟s bonds: VND 1500
Mining Corp: 4.37% Saigontel (member of Saigon Invest billion (hold at maturity)
Western Land JSC: Group): 9.41% Holding Saigontel‟s bonds: VND 300
5% billion (hold at maturity)
Investing in Hung Vuong University
of HCM city: 4.4% (related to Dang
Thanh Tam)
109