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Management Experience of Some Central Banks in the Region and the World on the Equity of Commercial Banks



Quality of reporting information of commercial banks

Input factors include reports from commercial banks and information collected from other sources, which are important bases for management work. The faster, more accurately, and more conveniently input factors are processed, the higher the quality of management work will be.

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When the reports of commercial banks are inaccurate, do not reflect the true state of the bank's operations, it is impossible to assess the trend of operations as well as risks. Poorly updated information negatively affects management efficiency, because the operation of commercial banks is continuous. Compliance and honesty in accounting will make the quality of information objective, and the organization that receives information quickly and abundantly will be a factor that increases the quality of management.

1.2.3.2. Subjective factors

Management policy

The central bank's management policies have a decisive influence on the management of commercial banks' equity. Through the use of regulations on legal capital, capital adequacy ratio (CAR), etc., the central bank regulates the management of banks' equity in accordance with the orientation and development goals of the banking system in each period.

Quality of human resources

A team of policy makers, supervisors and inspectors with high professional qualifications, experience and professional ethics is an important basis for improving the quality and effectiveness of management work. If this team is limited in capacity and quality, it will hinder, cause errors and confusion in the management process.

Facilities and technology

Facilities and technology used for management directly affect the quality of management of the Central Bank. Through data processing tools, component analysis, and trends from commercial banks' reporting data, the central bank can assess whether the implementation of issued policies is consistent with the system or not, thereby seeing the advantages, limitations, and taking measures.



appropriate remedies. On the other hand, through the use of technology in management, the central bank can manage and regulate the equity of commercial banks easily, saving time, costs and human resources.

1.2.4. Management experience of some central banks in the region and the world on the equity of commercial banks

In the QIS 5 survey, the Basel Committee divided the surveyed banks into two groups. Group 1 is banks with Tier 1 capital of 3 billion USD or more and operating in multiple industries and multinationals, and group 2 is banks with Tier 1 capital of less than 3 billion USD [2].

Figure 1.1: Status of application of Basel's RRTD assessment methods

for banks in group 1 [15]


Source: Chu Thi Huong Giang (2009) Applying Basel 2 Convention to the risk management system at Vietnamese commercial banks According to the survey results on the application of Basel 2 Convention methods in assessing credit risk, it is found that banks in the G10 group of countries mainly apply internal rating methods (in which banks in

Group 1 mainly applies advanced internal ranking methods).


Figure 1.2: Status of application of Basel's RRTD assessment methods



for banks in group 2 [15]


Source: Chu Thi Huong Giang (2009) Applying Basel 2 convention to risk management system at Vietnamese commercial banks Meanwhile, banks in group 2 belong to countries not in the

The G10 group mainly applies the simple method (standard method).

Thus, countries around the world today tend to apply Basel 2 to the management of commercial bank equity through the application of simple risk assessment methods. The advanced internal rating method is only applied in countries with large, multi-industry, multinational banks.

To have a more specific comparison of the management experience of some central banks in the world on the equity capital of commercial banks as well as the practical application of Basel 2 in ensuring capital safety and risk prevention in the banking system of countries, the thesis chooses countries including: the US, China and Singapore to analyze the management experience of central banks of these countries on the equity capital of commercial banks through the application of Basel 2 treaty.

1.2.4.1. Experience of the US Federal Reserve

The United States is the country with the largest and most developed financial system in the world. One of the important requirements for the US Federal Reserve (FED) is to develop a safe and sustainable banking system, because even a small fluctuation in the US banking system will affect the financial situation not only in the US but also the global financial market and each country. Therefore,



The FED's experience in applying Basel 2 in managing the equity of commercial banks creates the premise for other central banks to apply this Treaty in managing the equity of banks in the system [43].

Currently, a large number of US banks are operating as universal banks and some services that are heavily affected by operational risks are accounting for a large portion of total revenue. In addition, large-scale mergers and acquisitions in the banking and finance sector are on the rise as banks are gradually expanding their operations globally. Furthermore, although market transparency in the US is being implemented quite well, investors expect transparency to be improved so that market participants can grasp the risk level of commercial banks, thereby making accurate decisions for investment. In addition, the FED is planning to apply the advanced IRB method. This method brings high initiative to the applying organizations as well as the supervisory agencies by predicting and calculating risks under the supervision of the supervisory agencies. All of the above situations require the US to apply Basel 2 as an urgent matter. However, in the process of preparing for the application of Basel 2, a number of problems have arisen: the financial capacity of banks to ensure the requirements set forth by Basel 2; the unevenness in the scale of US financial banks, etc. have required the FED and supervisory agencies to develop a reasonable implementation roadmap that is effective for the domestic banking system.

Therefore, in 2003, the US regulatory agency proposed a phased approach to Basel II. With this approach, the application would only be mandatory for large, multinational banks that meet the capital requirements: total consolidated assets of $250 billion and foreign branch operations of $10 billion. These banks would apply the enhanced IRB approach for credit risk and the AMA approach for operational risk to calculate the required capital reserves for these risks. Therefore, 11 US banks fall into this group. The next group, which includes large domestic banks, is encouraged to implement the approach.



advanced method but not mandatory. The remaining group of banks continue to follow the existing principles (according to Basel 1) in assessing risks unless they meet the conditions to be able to access the advanced method, then they are considered for implementation. Thus, by applying only two methods, advanced IRB and AMA, in calculating credit risk and operational risk, the US reduces the confusion in choosing different methods, avoiding credit institutions deliberately choosing the method that brings the lowest cost of capital. However, this has put some banks in an unfavorable competitive position. In 2006, Citigroup, JPMorgan Chase, Wachovia and WAMU requested to choose the SA method because applying SA in measuring risks is simpler and less costly than the advanced IRB method. Therefore, the implementation of Basel 2 in the US was delayed by two years compared to other countries. On July 20, 2007, the FED issued its final decision on the implementation of Basel 2.

1.2.4.2. Experience of the People's Bank of China

Basel 2 is widely recognized as the future direction of risk management. The implementation of Basel 2 will promote the development of banking supervision technology, improve the effectiveness of market discipline, and enhance the security of the international banking system. Although the People's Bank of China does not require Chinese banks to implement Basel 2 immediately, it still has profound implications for the country's banking system [5], [43].

First , Enhance competitive advantage. By applying Basel 2, Chinese banks will enhance their competitive advantage because when applying risk management methods, banks will enhance their reputation, ensure liquidity and stability of equity, thereby attracting more capital flows from outside.

Second , keep up with the progress and development of the international financial market. Basel 2 is an international standard used by banking supervisors and banks in assessing capital adequacy and risk prevention. If China does not adopt Basel 2, it will not be able to keep up with the progress and development of the international financial market, and may fall into a disadvantageous situation in terms of competition and cooperation.



Third , maintain consistency in market economic policies. Basel 2 reflects the basic principles of a market economy. In China, since 1978, with the reform and opening up of the market, the country's economy has developed remarkably. When applying Basel 2, developed countries can evaluate China's direction in the market economic approach. Besides, this also shows China's investment in transforming the centrally planned economy into a market economy. If Basel 2 is not implemented, it will affect the consistency and image of China's economic policies and its contribution to the progress of globalization.

Fourth , reduce the gap in experience and technology. Basel 2 represents a new technological trend in risk management. Failure to implement it will lead to a new technological barrier between China and international finance. China will lose a great opportunity to shorten the knowledge gap in risk management knowledge and experience.

Fifth , Seize support from the IMF and the World Bank. Without Basel II, China will not be in a favorable position to receive economic aid and low-interest loans from the IMF and the World Bank. Because the capital adequacy and risk prevention of the Chinese banking system are not highly regarded.

In the process of applying Basel 2 in the management of equity capital of commercial banks, the People's Bank of China has assigned the authority to develop a roadmap for applying Basel 2, implement, monitor and evaluate the implementation effectiveness to the China Banking Regulatory Commission (CBRC).

In February 2004, the CBRC issued the “Capital Adequacy Management of Commercial Banks” regulation. This regulation sets out the CAR measurement method based on Basel 1 and applies pillars 2 and 3 of Basel 2. Banks in China are required to establish a capital adequacy management system and meet the minimum capital adequacy requirement of 8%. The CBRC closely and continuously monitors banks’ compliance with this regulation and supports banks in improving their capital formation mechanisms. In 2007, the CBRC issued the Guidelines on the Implementation of Basel 2 in the Banking Sector.



with the principles in implementing Basel 2:

A. Banks of different sizes will have different capital requirements. Small and medium-sized banks will apply capital regulations appropriate to their size and business complexity to minimize the cost of capital compliance. For large-sized banks, applying Basel 2 not only helps to enhance competitiveness but also serves long-term development goals.

B. The implementation of Basel II is gradual. Since major commercial banks in China are not uniform in the development of their internal rating systems, quantitative risk measurement models, and organizational processes for risk management, the timeframes in which they can meet the requirements for Basel II implementation will vary. Therefore, CBRC encourages banks to improve their risk management systems and apply risk-sensitive capital measurement methods, and allows banks to apply Basel II with different timeframes. This will ensure the effectiveness of Basel II implementation.

C. Banks are allowed to meet the requirements of Basel 2 step by step. Because Basel 2 sets out many conditions for banks in using risk-sensitive capital measurement methods, including many aspects such as asset classification, quantitative risk measurement, policy processes and risk management organization... However, this is a long-term process and the conditions are met gradually. Therefore, banks must rely on their own situation to develop plans to meet Basel 2 conditions in each specific stage.

CBRC classifies commercial banks into 2 groups, meeting different capital requirements: Banks that must apply Basel 2 (Basel banks): large banks,

branches in countries and regions, with many international operations.

Other banks: Will comply with current capital regulations but may voluntarily adopt Basel 2.

Applicable time frame:

Banks in the group that must apply Basel 2: start implementing from the end of



2010. If the minimum requirements of Basel 2 are not met by then, implementation may be postponed but not later than 2013.

Other banks must comply with the provisions required under the revised capital regulations from the end of 2010.

The guidance also sets out clear timelines for Basel 2 implementation:

A. Before the end of 2008, CBRC will continue to issue regulations to supervise the implementation of Basel II and amend the capital regulation requirements by taking public comments into account.

B. CBRC will conduct a qualitative impact study on QIS in 2009.

to assess the impact of Basel 2 on banks' capital adequacy.

C. Banks in the group required to apply Basel 2 will start implementation by the end of 2010. If by then, banks do not meet the minimum requirements set by CBRC, implementation may be delayed until 2013 with CBRC approval.

D. Any bank planning to adopt Basel 2 needs to submit a formal application to the CBRC at least six months before adoption. The CBRC will start accepting such applications from early 2010.

E. Other banks may propose an application to implement Basel 2 after 2011, with the same procedures as Basel 2 banks do.

F. Other banks will need to comply with the capital regulation requirements starting in late 2010. If Basel 2 banks do not implement Basel 2 by then, they will still be subject to the capital regulations.

Measures to promote Basel 2 implementation:

2007 and 2008 are the first stages of preparation, during which banks need to focus on the following tasks:

- Prepare carefully before applying. This work requires high professionalism and requires large input resources. Accordingly, the Board of Directors and the Board of Management of banks in the group that must apply Basel 2 must highly promote the implementation of Basel 2 and establish a working group headed by a member of the Executive Board.

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