UNIVERSITY OF LANGUAGES & INTERNATIONAL STUDIES – VNU

Faculty of Language Education and Professional Development

**🙦🕮🙤**
COURSE: The Economics of Money, Banking, and Financial Markets

TOPIC: BASEL II PROJECT

Lecturer: Le Thuy Anh
Class: SNHU.21E4
Group: 4
Member: Nguyen Thi Hien
Chu Thi Thanh Thao
Mai Thuy Linh
Nguyen Thi Huong Giang
Nguyen Phuong Anh

May 21, 2023 1

 Table of Contents
A. WHAT IS IT? ..................................................................................................................................................................... 3
I. What is Basel?............................................................................................................................................................. 3
II. What are the 3 pillars of Basel II? ........................................................................................................................... 4
1. Minimum Capital Requirement .............................................................................................................................. 4
2. Supervisory Review and Role ................................................................................................................................. 4
3. Market Discipline and Disclosure ........................................................................................................................... 4
III. Pros and cons of Basel II......................................................................................................................................... 5
IV. Basel III vs. Basel IV .............................................................................................................................................. 6
1. Overview of Basel 3................................................................................................................................................ 6
2. Main Content .......................................................................................................................................................... 6
3. Deploying and implementing Basel III at Vietnamese commercial banks.............................................................. 7
4. Overview of Basel IV ............................................................................................................................................. 8
5. The key objectives of Basel IV ............................................................................................................................... 8
6. Some Problem ......................................................................................................................................................... 8
V. Comparison and Analysis of these 3 Basel. ................................................................................................................ 9
B. ROLE ............................................................................................................................................................................ 12
I. What is the role of Basel in Vietnam? ....................................................................................................................... 12
1. Regulatory Framework ......................................................................................................................................... 12
2. Capital Adequacy Standards ................................................................................................................................. 12
3. Risk Management ................................................................................................................................................. 12
4. Supervisory Cooperation....................................................................................................................................... 12
5. Capacity Building ................................................................................................................................................. 12
II. How is the application process done in Vietnam?................................................................................................. 13
III. What is the current status of Vietnamese banks in applying Basel? ..................................................................... 14
1. Minimum capital adequacy ratio........................................................................................................................... 14
2. Debt classification and provisioning for credit risks ............................................................................................. 14
3. Market risk and operational risk ........................................................................................................................... 14
4. Independent credit rating ...................................................................................................................................... 15
5. Monitoring activities ............................................................................................................................................. 15
6. Disclosure of information, market principles........................................................................................................ 16
7. Conclusion ............................................................................................................................................................ 16
C. REFERENCE ................................................................................................................................................................ 17

May 21, 2023 2

A. WHAT IS IT?
I. What is Basel?
The Basel Committee on Banking Supervision (BCBS) establishes global standards for banks'
prudential regulation and promotes cooperation among central banks and regulators. It consists of 45
members from 28 jurisdictions. Founded in 1974 by central banks and regulators from the G10
countries, including Switzerland, the BCBS aims to prevent bank failures. The Committee with
representatives from nations like the US, UK, Germany, and Japan, holds four annual meetings. The
Basel Accords (Basel I, II, and III) are banking regulation agreements developed by the BCBS. These
accords focus on capital sufficiency and risk management. Initially prioritizing financial stability and
supervision quality, the BCBS later emphasized overseeing the banking system and banks' capital
sufficiency.
 Basel I: The original Basel Accord, was published in 1988 and focused on the capital
sufficiency of financial institutions. The assets of financial institutions are divided into five risk
categories based on the capital adequacy risk: 0%, 10%, 20%, 50%, and 100%. This risk refers
to the possibility that a financial institution might suffer an unanticipated loss. Internationally
active banks are required by Basel I to hold Tier 1 and Tier 2 capital (capital against risk) equal
to at least 8% of their risk-weighted assets. This makes sure banks have enough capital on hand
to cover their debts.
 Basel II: The Revised Capital Framework, also known as Basel II, was the second Basel Accord
and functioned as an upgrade to the first one. It was primarily concerned with three topics:
minimum capital requirements, supervisory evaluation of an institution's capital adequacy and
internal assessment process, and the efficient use of disclosure as a tool to improve market
discipline and promote good banking practices, such as supervisory review. The three pillars are
these areas of emphasis taken as a whole.
 Basel III: The BCBS made the decision to modernize and enhance the Accords in the light of
the 2008 collapse of Lehman Brothers and the accompanying financial crisis. The BCBS
attributed the collapse to insufficient governance and risk management, unsuitable incentive
structures, and an overleveraged banking sector. A decision was made in November 2010
regarding the overall framework of the capital and liquidity reform package. The current name
for this agreement is Basel III.
 Basel IV: is the colloquial name for a collection of planned banking changes that build on the
Basel I, Basel II, and Basel III international banking agreements. It's also known as Basel 3.1.
Although its full acceptance is not anticipated to occur until 2025 and the stages of
implementation differ per country, it started to be implemented on January 1, 2023.

May 21, 2023 3

II. What are the 3 pillars of Basel II?
The pillars of Basel II framework are the Minimum Capital
Requirement, Supervisory Review and role, and Market Discipline
and Disclosure.
1. Minimum Capital Requirement
This pillar makes sure that the bank uses risk-weighted assets,
often known as assets that are calculated based on risk. Now, while
determining the capital need, the bank will take into account both
operational risk and credit risk related to the assets. According to
Basel II, the required minimum capital is 8% of the risk-weighted
assets.
The eligible regulatory capital of a bank was separated into
three categories by Basel II. A bank is permitted to include fewer subordinated securities in tiers that are
higher than it. Each tier serves as a minimum requirement for the overall regulatory capital and must be
of a specific minimum percentage.
The new tier 3 capital is known as tertiary capital. Many banks hold this type of capital to support
their market, commodities, and foreign exchange risks that they incur as a result of their trading activity.
Tier 3 capital is of significantly lesser quality than either tier 1 or tier 2, but it does contain a wider range
of loans than those two. Tier 3 capital was subsequently abolished in accordance with the Basel III
accords.

2. Supervisory Review and Role

Regulations are useless if the necessary oversight is not carried out. According to Basel II, the
supervisor's main responsibility is to make sure that the bank has adequate capital to cover the operational,
credit, and market risk of the assets it has invested in. So that capital doesn't fall below the targeted
threshold, the supervisor can intervene in everyday operations. As a result, the supervisor's review duties
should be highly strict, and they should always work to keep capital levels above the minimum.

3. Market Discipline and Disclosure

Markets today are quite well-regulated. Market participants who are well-informed about the
minimum capital requirements set by the banks exist. As a result, market participants will be able to
identify any bank that falls below the intended level of capital requirement thanks to the disclosures made
by the banks. Therefore, this aids in the decision-making of investors. Banks must make complete and
timely disclosures, according to Basel II.
a. Example
For any bank, meeting the minimum capital requirement is essential. The asset that the bank used to
own formed the basis for the one-time capital need. The risk associated with each asset varies. Therefore,
if we apply common sense, should the capital reserve held for default be the same for both assets if the
bank has both very risky and very safe assets? No. For riskier investments, it should be higher, while for
less risky assets, it should be lower. The standard, however, mandates that banks hold a minimum capital
reserve equal to 8% of their risk-weighted assets.
b. Effects

May 21, 2023 4

 The fundamental goal of Basel II is to increase the banking industry's level of caution when handling
extremely risky assets. Since the capital requirement is now based on risk-weighted assets, banks will
have to charge an additional spread when making loans to borrowers or companies with worse credit
ratings. As a result, Basel II's limitation on raising capital from riskier enterprises will now be greatly
increased. Depositors will begin to save more money instead of spending it as their confidence in the
banking industry grows. This will further boost the banking industry's capital base.
III. Pros and cons of Basel II.

PROS
 Improved risk management: Basel II provides a more comprehensive framework for
assessing and managing risks, which can help banks to better identify and manage
risks. This can lead to a more stable banking system and reduce the likelihood of
financial crises.
 Increased transparency: Basel II requires banks to disclose more information about
their risk management practices, which can increase transparency and improve market
discipline. This can help investors and other stakeholders to make more informed
decisions about the banks they invest in or do business with.
 Better alignment of capital with risk: Basel II requires banks to hold more capital
for riskier assets, which can help to align capital more closely with risk. This can make
the banking system more resilient to shocks and reduce the likelihood of bank failures.
 More risk-sensitive: Basel II is more risk-sensitive than its predecessor, which means
that it takes into account the specific risks that banks face. This can help to ensure that
banks hold adequate capital to cover their risks, which can make the banking system
more stable.
 Better international coordination: Basel II is a global framework that has been
adopted by many countries, which can help to ensure that banks are subject to
consistent regulatory standards. This can reduce the likelihood of regulatory arbitrage
and promote a level playing field for banks operating in different countries.
 More flexibility: Basel II allows banks to use internal models to calculate their capital
requirements, which can provide more flexibility than a one-size-fits-all approach. This
can allow banks to better tailor their risk management practices to their specific
business models and risk profiles.

CONS
 Increased complexity: Basel II is a more complex framework than its predecessor,
which can make it more difficult for banks to implement and for regulators to
supervise. This can lead to higher compliance costs and may make it harder for smaller
banks to compete with larger ones.
 Higher compliance costs: Basel II requires banks to invest in new systems and
processes to comply with the new requirements, which can be costly. This can be a
particular burden for smaller banks that may not have the resources to invest in these
systems.

May 21, 2023 5

  Potential for regulatory arbitrage: Basel II allows banks to use internal models to
calculate their capital requirements, which can create opportunities for regulatory
arbitrage if banks manipulate their models to reduce their capital requirements. This
can undermine the effectiveness of the framework and lead to a less stable banking
system.
 Procyclicality: Basel II can be procyclical, which means that it can exacerbate
economic cycles. This is because the framework requires banks to hold more capital
during economic downturns, which can reduce lending and exacerbate the downturn.
 Inadequate coverage of systemic risks: Basel II focuses primarily on the risks faced
by individual banks, rather than systemic risks that can affect the entire financial
system. This can make it less effective in preventing financial crises.
 Insufficient emphasis on liquidity risk: Basel II places relatively little emphasis on
liquidity risk, which can be a significant risk for banks. This can make the banking
system more vulnerable to liquidity crises.

IV. Basel III vs. Basel IV

1. Overview of Basel 3
Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking
Supervision in response to the financial crisis of 2007-09. The measures aim to strengthen the
regulation, supervision and risk management of banks.
If the main goal of Basel I and Basel II is to improve the quality and stability of the banking system
and promote the application of international practices, Basel III aims to overcome limitations in capital
regulations, improve high and tighten risk management. As a result, commercial banks can improve
their ability to respond and free themselves from the financial crisis.
2. Main Content
a. Some key features and requirement
 Capital Requirements: Banks are required to maintain higher levels of capital to absorb potential
losses and reduce the risk of insolvency. Basel III introduced stricter definitions of capital and
increased minimum capital ratios.
 Liquidity Standards: Banks are required to hold sufficient liquid assets to withstand short-term
liquidity stress. Basel III introduced the Liquidity Coverage Ratio (LCR) and the Net Stable
Funding Ratio (NSFR) as measures to ensure banks maintain adequate liquidity buffers.
 Leverage Ratio: In addition to risk-based capital ratios, Basel III introduced a leverage ratio to
limit the excessive buildup of leverage in the banking system. The leverage ratio measures a bank's
capital in relation to its total exposure.
 Counterparty Credit Risk: Basel III revised the framework for measuring and managing
counterparty credit risk, particularly for derivatives and other financial instruments. It introduced
stricter requirements for capital and collateral.
 Systemically Important Banks: Basel III introduced additional requirements for systemically
important banks, also known as global systemically important banks (G-SIBs). These banks are
subject to higher capital buffers and more stringent risk management standards.

May 21, 2023 6

  Risk Management and Disclosure: Basel III emphasizes the need for effective risk management
practices, stress testing, and comprehensive disclosures to enhance transparency and market
discipline.
Basel III has been gradually implemented by various countries since its introduction in 2010, with a final
deadline set for full implementation by 2023. The regulations aim to promote a more resilient and stable
banking system by addressing key vulnerabilities and strengthening risk management practices.
3. Deploying and implementing Basel III at Vietnamese commercial banks
For Basel III, there are currently no regulations that require the entire application of this standard for
banks in Vietnam. However, some commercial banks have also pioneered the implementation of Basel
III because compliance with Basel standards is important for banks in the current context when the SBV
will give priority to credit approval for banks. banks have abundant levels of equity, high capital
adequacy ratio (CAR), good risk management capacity (shown by the implementation of Basel II, Basel
III, IFRS 9...). Not only that, this also helps the bank improve its credit rating and enhance its
competitiveness in the international market.
By the end of 2022, Moody's Investors Service has upgraded the ratings of 12 Vietnamese banks, all
of which are pioneers in risk management. This confirms that the reputation of many Vietnamese banks
in the international market is increasingly being consolidated and enhanced. According to the Vietnam
News Agency, the commercial banks updated with this ranking include: An Binh Joint Stock Commercial
Bank (ABBank), Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Joint
Stock Commercial Bank for Investment and Development of Vietnam (BIDV), LienVietPostBank,
Orient Commercial Joint Stock Bank (OCB), Saigon - Hanoi Commercial Joint Stock Bank (SHB),
SeABank, TPBank, Vietnam Bank for Agriculture and Rural Development (Agribank), VIB, Vietnam
Joint Stock Commercial Bank for Industry and Trade (VietinBank) and MSB. In which, 08 banks have
been upgraded to issuer ratings and long-term local and foreign currency deposits including:
Vietcombank, BIDV, OCB, SeABank, TPBank, Agribank, VIB and VietinBank; 07 banks were
upgraded in terms of counterparty risk in local and foreign currencies and counterparty risk assessment
including BIDV, Agribank, VietinBank, ABBank, LienVietPostBank, SHB and MSB.
b. Some barriers:
 The challenge of capital: To apply Basel III, banks must prepare an abundant amount of capital,
and accept a larger provision buffer to reduce operational risks.
 Lacking an accurate, reliable and regularly updated banking data center.
 A lack of a unified credit rating facility for the whole banking system.
 The barrier to the quality of human resources.
 The cost to apply Basel III is high and the financial capacity of Vietnamese commercial banks is
still limited.

c. Some recommendations
 Improve data quality of Vietnam National Credit Information Center (CIC). The
development of the national credit information database is a core, regular and continuous task
 Finalize the credit rating method. Currently, under the guidance of Basel III, an internal credit
rating system must be developed for each customer group with different specific risk
characteristics.
 Improve the efficiency of the internal audit system and supervision capacity. Requires the
internal audit department to have a comprehensive understanding of the entire banking operation,
legal and regulatory issues.

May 21, 2023 7

  Improve the quality of human resources. Develop a strategy for training and fostering medium
and long-term human resources capable of taking the lead in developing Vietnam's commercial
banking system in the coming time.
 Raise capital as required by Basel III. Small and medium sized banks are struggling to meet
and keep Basel II criteria, so it is difficult to move towards Basel III regulations. Therefore,
commercial banks should pay attention to improving business performance, increasing profit after
tax, increasing capital buffer, especially focusing on capital adequacy ratio and credit risk
handling.
4. Overview of Basel IV
Basel IV is a set of proposed reforms to the Basel Committee on Banking Supervision's (BCBS)
regulatory framework for banks. The reforms aim to build on the Basel III framework and enhance the
regulation, supervision, and risk management of banks.
The implementation of Basel 4 was initially scheduled to begin on January 1, 2022, with the
gradual transition of the output floor to January 1, 2027. In March 2020, in response to the pandemic,
BCBS postponed the Basel 4 implementation deadline by 12 months, from January 1, 2022 to January 1,
2023.
5. The key objectives of Basel IV
As Basel III awaited its final implementation deadline, the BCBS continued to tweak its provisions.
In parts of the financial community, those proposals have come to be known by the unofficial name of
Basel IV. However, William Coen, then-secretary general of the Basel Committee, said in a 2016 speech
that he didn’t believe the changes were substantial enough to merit their own Roman numeral.
Whether it is merely the final phase of Basel III or a "Basel" in its own right, Basel IV began
implementation on Jan. 1, 2023.1 Its principal goal, the committee says, is to "restore credibility in the
calculation of RWAs and improve the comparability of banks' capital ratios."
Toward that end, it proposes a number of changes, some highly technical. They include:
 Improving the earlier accords' standardized approaches for credit risk, credit valuation adjustment
(CVA) risk, and operational risk.
 Constraining the use of the internal model approaches used by some banks to calculate their capital
requirements.
 Introducing a leverage ratio buffer to further limit the leverage of global systemically important
banks (banks considered so large and important that their failure could endanger the world
financial system).
 Replacing the existing Basel II output floor with a more risk-sensitive floor.
While Basel IV began implementation on Jan. 1, 2023, banks will have five years to fully comply.
6. Some Problem
 It is possible that the implementation date will move again, but this will be due to the legislative
or regulatory process rather than a dilution of intent. The regulators have admitted that it has been
challenging to land final policy and, based on typical timelines, it may simply not be practicable
to implement until 2024 or later.
 It is also possible that the legislative and regulatory proposals will result in different approaches
in different regions.
 Early indications suggest that the European Commission will indeed stick to the “single stack”
but will look for other ways to keep capital increases below 10%, such as applying the
requirements at the highest level of consolidation.

May 21, 2023 8

  In the US, with a new Vice Chair for Supervision due to be appointed in October, it is possible
that previous references to maintaining capital neutrality may ultimately give way to a harder line.

→ Basel IV is still in the proposal stage, and its implementation will depend on the decisions of national
regulators and the progress of international coordination. It is worth noting that Basel IV is a more complex and
comprehensive framework than Basel III and could require significant adjustments to banks' risk management
and capital planning processes.

V. Comparison and Analysis of these 3 Basel.

1. Comparison of Basel I, Basel II and Basel III:

Basel II Basel III Basel IV

Capital Basel II introduced the
Requirements: concept of risk-weighted
assets (RWAs) to calculate
capital requirements. It
allowed banks to use internal
models to assess credit and
operational risks. The
minimum capital requirement
was determined based on
RWAs.
Basel III raised the minimum
capital requirements and
introduced the Common Equity
Tier 1 (CET1) capital ratio, which
required banks to hold more
common equity capital. It also
implemented buffers such as the
capital conservation buffer and
countercyclical capital buffer.
Basel IV aims to improve
risk sensitivity in capital
requirements. It plans to
refine the calculation of
RWAs to address
concerns about variability
and model risk. Changes
may be made to the
standardized approach
and internal ratings-based
(IRB) approach for credit
risk calculation.

Liquidity Basel II had limited focus on
Requirements: liquidity risk management and
did not include specific
liquidity requirements.
Basel III introduced liquidity
requirements to address liquidity
risk. It introduced the Liquidity
Coverage Ratio (LCR), which
mandates banks to hold sufficient
high-quality liquid assets to cover
net cash outflows over a 30-day
stress period. It also introduced
the Net Stable Funding Ratio
(NSFR) to ensure banks have
stable funding sources over a one-
year horizon.
Basel IV is not expected
to bring significant
changes to liquidity
requirements as it
primarily focuses on
refining risk sensitivity
and improving risk
measurement.

Leverage Ratio: Basel II did not have a specific Basel III introduced a non-risk-
leverage ratio requirement. based leverage ratio as a
supplementary measure. Banks are
required to maintain a minimum
leverage ratio of 3%, calculated as
Tier 1 capital divided by total
exposure.
Changes made to the
leverage ratio framework
include refinements to the
leverage ratio exposure
measure and introduction
of a new leverage ratio
buffer for G-SIBs:
+ Refinements to the
leverage ratio exposure
measure.

May 21, 2023 9


Systemically Basel II did not have specific
Important Banks requirements for systemically
(SIBs): important banks.
Risk Basel II emphasized risk
Measurement: measurement and management
through its three-pillar
framework. It allowed banks
to use internal models to
assess credit and operational
risks.
Operational Risk: Basel II introduced the
Advanced Measurement
Approaches (AMA) for
operational risk calculation,
enabling banks to use internal
models.
Basel III introduced additional
requirements for SIBs, including
higher capital and liquidity
buffers, enhanced risk
management standards, and
increased supervisory oversight.
Basel III enhanced risk
measurement and management
requirements. It introduced stricter
guidelines for credit risk, market
risk, and operational risk
measurement and management.
Basel III retained the AMA but
faced challenges with
inconsistencies and model risk.
There were discussions about
simplifying the approach.
+ Introduction of a new
leverage ratio buffer for
G-SIBs
Basel IV is not expected
to introduce significant
changes to SIB
requirements. The focus is
primarily on risk
sensitivity and improving
risk measurement for all
banks.
The final design of the
new Basel IV:
Standardized
Measurement Approach
(SMA) is less
conservative than
previous version
presented in the
consultation paper. This
means that the impact on
capital requirements will
be less severe. However,
extreme cases of capital
increase are still possible.
The new standardized
measurement approach
includes:
- Basic Indicator
Approach (BIA)
- The Standardized
Approach (TSA)
- Alternative Standardized
Approach (ASA)
It assumes that the
operational risk increases
in an increasing rate with
bank’s income and the
likelihood of incurring
operational risk losses
increases in the future if
the bank has higher
historical operational risk
losses.
May 21, 2023 10
2. Analysis of Basel I, Basel II and Basel III:
 Basel II, introduced in 2004, aimed to enhance the precision and uniformity of risk evaluation within
banks. It introduced a three-pillar approach consisting of minimum capital requirements, supervisory
review, and market discipline. Capital requirements were determined based on the risk-weighted value
of assets, with higher-risk assets requiring greater capital allocation. Supervisory review ensured banks
had internal processes for evaluating their overall risk profile and capital adequacy. Market discipline
emphasized transparency and accountability through the disclosure of pertinent information regarding
risk, capital adequacy, and risk management practices.

 Basel III, a response to the 2008 financial crisis, aimed to fortify the resilience of the banking sector. It
introduced various measures, including higher capital requirements, liquidity requirements, and leverage
ratios. It also established the Countercyclical Capital Buffer (CCyB), which mandated that banks
maintain sufficient capital during economic expansions to absorb potential losses during economic
downturns. Basel III implemented additional regulations for systemically important banks,
encompassing elevated capital and liquidity requirements and enhanced risk management standards.

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

In summary, Basel II aimed to refine risk assessment, Basel III aimed to strengthen the banking sector
and address Basel II's shortcomings, and Basel IV aims to enhance resilience and rectify some of the
limitations of Basel III. Each framework builds upon its predecessor, striving to foster financial stability
and diminish the probability of systemic crises within the banking sector.

May 21, 2023 11

B. ROLE
I. What is the role of Basel in Vietnam?
Basel has a huge influence on how Vietnam's banking and financial sector is shaped and developed.
The following are some significant facets of Basel's impact in Vietnam
1. Regulatory Framework
The Basel Accords (Basel I, Basel II, and Basel III) serve as standards for creating and putting
into effect banking laws in Vietnam. These agreements offer guidelines for capital sufficiency, risk
management, and regulatory control, which helps the Vietnamese banking sector remain stable and
resilient.
 Basel I: Basel I, which was first implemented in 1988, emphasized credit risk and defined
minimum capital requirements based on the risk weights given to different asset types.
 Basel II: Basel II, which was implemented in Vietnam in 2008, brought more advanced
methods for measuring and managing risk, such as operational, market, and credit risk. Its
objectives were to enhance risk management procedures and guarantee that banks have enough
capital to cover any losses.
 Basel III: Basel III was adopted in Vietnam in 2014, and it significantly improved the
standards for capital adequacy and added new regulatory mechanisms to combat systemic risks.
It placed a focus on improved risk governance, risk-based capital calculations, and greater
liquidity and leverage ratios.
2. Capital Adequacy Standards
Basel III imposed stricter capital adequacy standards in an effort to reduce risk and advance
financial stability. To make sure they have enough capital buffers to withstand any losses, Vietnamese
banks have been raising their capital rules in line with Basel III. This improves the banking industry's
overall resilience.
3. Risk Management
The Basel Standards place a strong emphasis on effective risk management procedures in banks.
Financial institutions in Vietnam are urged to implement Basel-compliant risk management systems.
This entails putting into place thorough risk assessment procedures, improving governance
frameworks, and setting up efficient risk monitoring and reporting systems.
Basel II and III mandate that banks create and execute internal capital adequacy assessment
processes (ICAAP).
Liquidity Risk: To increase banks' resistance to liquidity risks, Basel III established the Liquidity
Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).
Market Risk and Operational Risk: The Basel guidelines also address market risk and operational
risk management.
4. Supervisory Cooperation
For the purpose of addressing cross-border risks and issues, Basel encourages international
collaboration among banking supervisors. The financial authorities of Vietnam regularly
communicate with Basel and its member nations to share knowledge, lessons learned, and best
practices. This collaboration helps to strengthen Vietnam's inclusion into the international financial
system and improves the efficiency of banking supervision in that nation.
5. Capacity Building
These programs assist Vietnamese authorities in developing their knowledge in fields including
risk-based supervision, regulatory compliance, and frameworks for bank resolution.

May 21, 2023 12

 Technical Support: Basel offers growing nations like Vietnam technical support to improve their
capacity for banking supervision.
Cross-Border Cooperation: Basel encourages cross-border collaboration among supervisory
agencies, making it easier to share information and work together to handle cross-border risks.
→ Overall, Basel's provision of internationally acknowledged norms and rules has a significant
impact on the development of Vietnam's banking and financial industry. Vietnam wants to enhance
its banking system, guarantee financial stability, and promote investor trust by following Basel's
recommendations.
II. How is the application process done in Vietnam?
The Basel standards, established by the Basel Committee on Banking Supervision, are a set of
international banking regulations that provide guidelines for banks' capital adequacy, risk management,
and liquidity. The implementation of Basel standards in Vietnam follows a regulatory framework set by
the State Bank of Vietnam (SBV), the country's central bank. Here's an overview of how the application
process for Basel standards is typically implemented in Vietnam:
 Regulatory Framework: The SBV issues regulations and guidelines that outline the
implementation of Basel standards in Vietnam. These regulations specify the requirements and
expectations for banks operating in the country.
 Adoption of Basel Standards: Vietnamese banks are expected to adopt and comply with the
Basel standards as mandated by the SBV. Banks are required to assess their capital adequacy, risk
management practices, and liquidity in accordance with the Basel principles.
 Reporting and Documentation: Banks need to maintain comprehensive documentation of their
risk management processes, capital calculations, and liquidity management systems. Regular
reporting to the SBV is necessary, providing information on capital ratios, risk exposures, and
other relevant indicators.
 On-site Inspections and Audits: The SBV conducts on-site inspections and audits to assess
banks' compliance with the Basel standards. During these inspections, the SBV examines banks'
risk management frameworks, internal control systems, capital adequacy, and liquidity
management practices.
 Capital Requirements: Banks in Vietnam are required to maintain minimum capital ratios as
specified by the SBV, in line with the Basel capital adequacy framework. The SBV may set
additional capital buffers or specific requirements based on the risk profiles and systemic
importance of banks.
 Supervisory Assessments: The SBV assesses banks' risk profiles, financial stability, and
compliance with the Basel standards through its supervisory processes. Based on these
assessments, the SBV may issue recommendations or impose corrective measures on banks to
ensure compliance.
 Capacity Building and Training: The SBV facilitates capacity building and training programs
for banks to enhance their understanding and implementation of Basel standards. These programs
aim to strengthen banks' risk management capabilities, internal controls, and compliance
frameworks.
It's important to note that the application process for Basel standards in Vietnam may evolve over
time, as the SBV updates its regulations and aligns with international best practices. Banks operating in
Vietnam should regularly monitor the regulatory updates from the SBV and ensure compliance with the
latest Basel standards and requirements.

May 21, 2023 13

III. What is the current status of Vietnamese banks in applying Basel?
1. Minimum capital adequacy ratio
The minimal safety ratio is still 8% in Decision 457/2005/QD-NHNN promulgating rules, the same
as in Decision 297, but the calculating technique is practical and close to Basel I requirements. When
Decision 457 was published and put into effect, commercial banks' equity capital expanded quickly as a
result of the stock market's boom in 2006–2008, which made it easier for Vietnamese commercial banks
to raise capital by issuing stocks and bonds.
Circular 13/TT-NHNN, published by the State Bank in 2010 to replace Decision 457/2005/QD-
NHNN and raise the minimum capital adequacy ratio to 9% as part of a phased transition to Basel II,
replaced Decision 457. Though some banks haven't yet complied, the actual applicable average for the
whole system of commercial banks in Vietnam has guaranteed this amount.
The SBV's new capital adequacy ratio standards for commercial banks are typically met by large-
scale banks. The obligation to boost their own capital to assure safety, on the other hand, is actually
causing problems for tiny joint stock commercial banks. In response to this circumstance, the SBV
produced Circular 36/2014/TT-NHNN to replace Circular 13/2010/TT-NHNN. It took a more
comprehensive approach to Basel II's provisions, although it maintained the 9% capital adequacy ratio
as the minimum.
2. Debt classification and provisioning for credit risks
The Consolidation Document No. 22/2014/VBHN-NHNN is now being followed in the operation of
commercial banks for the categorization of debts, setting up, and usage of provisions to address credit
risks. Accordingly: Commercial banks use two different categorization systems for debts: They are
divided into five debt groups in accordance with Articles 6 (quantitative technique) and 7 (qualitative
method). If the qualitative method is applied, the debt classification and risk provisioning are based on
the internal credit rating system; the credit institution submits the risk provision policy to the SBV, which
is only done after the SBV approves it.
Commercial banks are required to make both particular and general provisions when it comes to the
provisioning rate. Specific provisions are given for debt categories 1 through 5, with corresponding
percentages of 0%, 5%, 20%, 50%, and 100%. By enabling commercial banks to select an internal credit
rating technique for debt categorization and provisioning and by establishing standards for debt
management and control, this legislation demonstrates how the SBV has gradually implemented Basel
II.
3. Market risk and operational risk
Market risk: banks have created a system for managing market risks, recognized several categories
of market risks in the trading book, assessed their willingness to take on market risks, and released market
risk limit frameworks. Despite doing capital calculations for market risk, testing VaR in hindsight, and
calculating particular market hazards and risks, banks have only initially analyzed VaR in the standard
market. Only a very small number of banks have created a stress test scenario using interest rate and
exchange rate shocks. When calculating the loss, the bank chooses the transaction date with the
historically most variable interest rate or exchange rate (including scenarios that were hard to anticipate
but never occurred—Black Swan).
Operational risk: Banks currently use either the basic index approach or the standardized method to
evaluate operational risk. In terms of needed capital and operational risk management, banks only
partially adhere to Basel II criteria. In essence, banks already have organizational and governance
structures in place to handle operational risks.

May 21, 2023 14

 However, there is still work to be done in terms of operational risk measurement techniques,
contingency planning, outsourcing operations, and the categorization and gathering of loss data by loss
event categories. The state of operational risk management in certain institutions today is still insufficient
despite the use of technology and automated procedures.
4. Independent credit rating
There are currently not enough independent credit rating companies operating in Vietnam, and the
quality of the information is poor. The main sources of credit rating data used by commercial banks are
Vietnam Corporate Credit Rating Joint Stock Company (CRV), Vietnam Credit Information and Rating
Company Limited (C&R), the Credit Information Center (CIC) of the State Bank of Vietnam, Vietnam
Report Joint Stock Company (Vietnam Report), and the internal credit rating systems of some banks,
which are only used for management purposes. internal risk management of the banks. As a result, due
to limited information or highly subjective elements, it may result in erroneous credit judgments or
inefficient credit management procedures. Most of the banks in Vietnam Few commercial banks have
developed and perfected internal credit rating systems in accordance with Basel II recommendations, and
the South continues to use this outdated method of measuring risk. Some Vietnamese commercial banks,
such as Sacombank, VietinBank, Vietcombank, BIDV, MB, and VPBank, have implemented corporate
credit rating systems.
5. Monitoring activities
It is the goal of supervision to not only make sure that banks have enough capital to cover all potential
business risks but also to motivate banks to create and implement effective risk management procedures.
The SBV does not work alone in the area of supervision; commercial banks also play a role.
The State Bank's inspection and supervision activities for commercial banks are based on the Law
on Credit Institutions 2010, Law No. 17/2017/QH14 amending and supplementing a number of its
articles, Decree No. 26/2014/ND-CP on the organization and operation of banking inspection and
supervision, and Circular No. 03/2015/TT-NHNN directing the implementation of a number of its
articles. The State Bank has evaluated the organizational structures, business operations, and
infrastructure that support banking inspection and supervision over the past few years. Commercial
banks are not required to publish guidelines for risk management and the internal capital adequacy
assessment procedure (ICAAP) under the Law on Credit Institutions. As a result, the State Bank of
Vietnam released Circular 13/2018/TT-NHNN on the internal control system of commercial banks in
order to adopt Basel II, incorporating rules on the risk management system and the evaluation process.
The internal capital in this circular is enough. This is the basic idea of Basel II as well as Pillar II.
Commercial banks' internal control and internal audit procedures are currently in accordance with
the guidelines of Circular No. 44/2011/TT-NHNN. So, internal control and risk management systems
were originally created and maintained by credit organizations. This is the first legal document from the
State Bank that governs the internal control and internal audit systems.
Commercial banks have to conform to the following requirements with the implementation of
Circular 13/2018/TT-NHNN: supervision of senior management (including supervision of the Board of
Directors, Board of Directors, parent bank, Supervisory Board, and Executive Board); risk management;
and internal capital adequacy assessment (ICAAP). This regulation is effective as of January 1, 2019,
and some banks will do so as of January 1, 2021. The internal capital adequacy assessment method, or
ICCAP, has, however, only been completed in part by the majority of Vietnamese commercial banks.

May 21, 2023 15

 6. Disclosure of information, market principles
According to Circular 35/2015/TT-NHNN, which specifies the statistical reporting regime applicable
to credit institutions, and branches of the State Bank of Vietnam; Circular 11/2018/TT-NHNN, which
amends and supplements a number of articles of Circular 35/2015/TT-NHNN effective October 1, 2018;
and other separate dispatches of the State Bank, banks are currently complying with the rules on
information disclosure and the statistical reporting regime of the State Bank. With regard to Basel II
requirements for pillar III (such as disclosure of qualitative and quantitative information on capital
adequacy, disclosure of risk levels, etc.), risk measurement techniques, announcing the internal
assessment process on capital adequacy, announcing criteria for determining materiality, etcThe Basel II
pilot banks still have a significant gap to close.
7. Conclusion
Basel II implementation for banks in emerging markets like Vietnam will be challenging, time-
consuming, and full of hurdles. However, the gradual application of Basel standards in Vietnam is
urgently needed to strengthen operational capacity, lower risks for commercial banks, and increase
competitiveness in the global financial market, providing the necessary framework for Vietnamese banks
to survive and grow in both domestic and international markets.

May 21, 2023 16

C. REFERENCE
1. The Basel Committee - overview. (2011, June 28). Access from: https://www.bis.org

2. Hiệp ước vốn Basel (Basel I và II) . ( 05/07/2010). Access from: https://www.sbv.gov.vn
3. Chen, J. (2022). Basel Accords: Purpose, Pillars, History, and Member Countries. Investopedia.
Access from: https://www.investopedia.com/terms/b/basel_accord.asp
4. Harper, D. R. (2022). Basel Accords Guard Against Financial Shocks. Investopedia. Access
from: https://www.investopedia.com/articles/07/basel2.asp
5. Trinidad, C. (2022). Basel II. Corporate Finance Institute. Access from:
https://corporatefinanceinstitute.com/resources/risk-management/basel-ii/
6. Basel III: international regulatory framework for banks. (2017, December 7). Access from:
https://www.bis.org/bcbs/basel3.htm
7. Basel III: Finalising post-crisis reforms. (2017, December 7). Access from:
https://www.bis.org/bcbs/publ/d424.htm
8. XuanTien. (2023, April 18). Danh sách các ngân hàng đạt chuẩn basel 3 hiện nay 2023 -
NganHangAZ.com. NganHangAZ.com - Thông tin Ngân hàng, Kinh tế, Tài chính, Kinh doanh và
Thị trường. Access from: https://nganhangaz.com/ngan-hang-dat-chuan-basel-3/
9. Implementation and evaluation of the Basel standards. (2017, March 14). Access from:
https://www.bis.org/bcbs/implementation.htm
10. Basel III: Quá trình thực hiện tại Việt Nam và một số khuyến nghị. (n.d.). Access from:
https://tapchinganhang.gov.vn/basel-iii-qua-trinh-thuc-hien-tai-viet-nam-va-mot-so-khuyen-
nghi.htm
11. Phan Thị Hoàng Yến (2019). Thực trạng áp dụng Basel tại Việt Nam, Access from:
https://thitruongtaichinhtiente.vn/thuc-trang-ap-dung-basel-tai-viet-nam-22800.html
12. Quỳnh Trang (2022). Chủ động tiến tới Basel III, Access from: https://thoibaonganhang.vn/chu-
dong-tien-toi-basel-iii-134586.html
13. Smith, R., & Adcock, M. (2021, October 27). Basel 4 – the final countdown? KPMG. Access
from: https://kpmg.com/xx/en/home/insights/2021/10/basel-4-this-time-its-final.html
14. Daugherty, G. (2023). What Basel IV Means for U.S. Banks. Investopedia.
https://www.investopedia.com/basel-iv-5218598
15. History of the Basel Committee. (2014, October 9). Access from:
https://www.bis.org/bcbs/history.html
16. Khuôn khổ pháp lý triển khai áp dụng chuẩn mực vốn Basel II trong ngành Ngân hàng Việt Nam
(27/08/2019). Access from: https://sbv.gov.vn/webcenter
17. Basel II ở Việt Nam: Thực trạng và giải pháp ( 20/02/2018). Access from: https://mof.gov.vn/
18. Thitruongtaichinhtiente.Vn. (2019, January 10). Thực trạng áp dụng Basel tại Việt Nam.
thitruongtaichinhtiente.vn. https://thitruongtaichinhtiente.vn/thuc-trang-ap-dung-basel-tai-viet-
nam-22800.html

May 21, 2023 17

19. VietNamNet News. (n.d.). Vietnamese banks prepare for Basel II standards. VietNamNet News.
https://vietnamnet.vn/en/vietnamese-banks-prepare-for-basel-ii-standards- .
20. Banks to soon complete Basel III international standards Monday, September 05, 2022 Access
from: https://link.gov.vn/GZSgTgCr
21. Thitruongtaichinhtiente.Vn. (2019b, January 10). Thực trạng áp dụng Basel tại Việt Nam.
thitruongtaichinhtiente.vn. https://thitruongtaichinhtiente.vn/thuc-trang-ap-dung-basel-tai-viet-
nam-22800.html

May 21, 2023 18