Orientation on Capital Safety Regulations of Vietnamese Commercial Banks

statistically significant (p-value less than 0.05 and positive beta coefficient). This result is consistent with the studies of Ahmad et al. (2008); Büyüksalvarci & Abdioğlu (2011); Dreca (2013); Shaddady & Moore (2015). However, this result is contrary to the research results of Le Thanh Tam and Nguyen Dieu Linh. According to the research of Le Thanh Tam and Nguyen Dieu Linh, CAR and credit risk provision ratio have an inverse relationship, while the research of Thuy & Chi (2015) shows that CAR and credit risk provision ratio have a positive relationship but are not statistically significant.

Credit risk reserve is a fund used to compensate for losses when credit risks occur. The provision for credit risk according to regulations is a measure required by the management agency for commercial banks to compensate for losses when risks occur, so it is one of the measures to ensure safety and soundness in the operations of commercial banks. Separate risk reserve depends on the division of debt groups of the bank. When loans are divided into debt groups appropriate to the risk level of the loan, credit risk reserve has the best ability to compensate when risks occur.

According to the current CAR calculation method in Vietnam, credit risk provisions have a direct impact on determining the CAR of Vietnamese commercial banks. Specifically, general provisions are included in additional capital and specific provisions are deducted from risk-bearing assets. Therefore, when the credit risk provision ratio increases, the numerator and denominator of CAR calculation will increase. Thus, an increase in the credit risk provision ratio increases the bank's CAR.

(v) Impact of leverage on capital adequacy

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LEV – Leverage ratio is negatively correlated with CAR and is statistically significant (p-value less than 0.05 and negative beta coefficient). This result is consistent with the studies of Ahmad et al. (2008); Büyüksalvarci & Abdioğlu (2011); Bateni et al. (2014); Shaddady & Moore (2015). Studies on the impact of leverage ratio on CAR of Vietnamese commercial banks by Thuy & Chi (2015); Truong Thi Hoai Linh (2016); Le Thanh Tam and Nguyen Dieu Linh (2017) also showed that for commercial banks with high leverage ratio (using a lot of debt capital), capital safety will be reduced.

The more debt banks mobilize while equity does not increase correspondingly, the greater the risk for shareholders, increasing the risk of capital insecurity. When deposit mobilization and borrowing increase, the liquidity of banks increases but leads to an increase in the risk of insolvency. When the risk increases, shareholders will demand an increase in the rate of return, making it difficult for banks with high debt capital ratios to mobilize new capital due to high equity costs. This means that banks with high leverage have low capital adequacy ratios.

(vi) Impact of liquidity on capital adequacy

LIQ – Liquid assets ratio is positively correlated with CAR and is statistically significant (p-value less than 0.01 and beta coefficient is positive). This research result is consistent with the research results of Berger & Bouwman (2009); Aktas et al. (2015); Anamika Singh et al (2016); Truong Thi Hoai Linh (2016).

Liquidity is one of the indicators reflecting the financial health of a bank. When liquidity is high, the bank faces less liquidity risk and its operations are safer. Therefore, when the ratio of liquid assets increases, it increases the capital safety of commercial banks.

(vii) Impact of bad debt sold to VAMC on capital safety

VAMC - Bad debt sold to VAMC is positively correlated with CAR and is statistically significant (p-value less than 0.01 and beta coefficient is positive). In the process of restructuring the Vietnamese banking system, ensuring safety and soundness in the operation of the banking system, the State Bank has proposed a series of solutions, one of which is to establish the Asset Management Company of credit institutions - VAMC. VAMC plays a role in reducing the burden of bad debt on the balance sheet of banks, by purchasing bad debt from banks with a bad debt ratio of over 3%. Thanks to that, the denominator for calculating CAR

- total credit risk-adjusted assets decreased and CAR increased.

(viii) Impact of bank size on capital adequacy

SIZE – Bank size is negatively correlated with CAR and is statistically significant (p-value less than 0.05 and beta coefficient is negative). This means that large banks tend to keep CAR at low levels. Most theoretical views and empirical studies show that bank size is negatively correlated with CAR. Because large commercial banks tend to diversify their operations, have experience in risk management, and are able to raise capital at cheaper costs. Kleff & Weber (2003) also assert that large banks can maintain less capital due to their advantage in securing their capital requirements from external sources relatively easily. They also argue that capital requirements of large banks are lower because they have larger investment opportunities and their portfolios are diversified to a large extent.

Bank size is negatively correlated with CAR and this is consistent with the theory of capital structure, the trade-off theory of capital structure. That is, as size increases, banks will have easier access to markets with lower transaction costs.

Therefore, they often maintain a lower CAR (Brown & Octavia, 2009). In fact, large-scale Vietnamese commercial banks such as: Vietnam Bank for Agriculture and Rural Development; Vietnam Joint Stock Commercial Bank for Industry and Trade; Vietnam Joint Stock Commercial Bank for Foreign Trade... are the largest banks in the Vietnamese banking system and the capital ratio of these banks is often close to the minimum capital safety ratio, lower than the average capital safety ratio of the industry.

Empirical results all show a negative correlation between bank size and CAR: Gropp & Heider (2007); Asarkaya & Özcan (2007); Ahmad et al. (2008); Mohamed Romdhane (2012); Dreca (2013); Bateni et al. (2014); Thuy & Chi (2015); Truong Thi Hoai Linh (2016); Le Thanh Tam and Nguyen Dieu Linh (2017).

(ix) Impact of interest rates on capital adequacy

INT – Lending interest rate is negatively correlated with CAR and is statistically significant (p-value less than 0.1 and beta coefficient is negative). This result is consistent with the studies of Boyd & De Nicolò (2005); Williams (2011); Mili et al.(2014).

High interest rates make bank management more difficult because the future value of assets and liabilities becomes uncertain. In addition, since bank assets are financed mainly by debt, fluctuations in interest rates increase the risk of insolvency. As a result of these changes, banks have to deal with a more unpredictable and competitive environment. Therefore, high interest rates reduce bank income due to the need to service more debt, so banks can keep CAR lower. High lending rates affect the ability of borrowers to repay loans, higher rates of customer defaults, and high lending risks increase the risk for banks. This will negatively impact the capital adequacy of banks.

Reality in Vietnam also shows that in the period of 2008-2011, high interest rates fluctuated constantly, banks competed in interest rates, seriously affecting the business performance of enterprises, a series of enterprises went bankrupt, could not pay debts to banks, the bad debt ratio of banks increased, threatening the health and safety of the Vietnamese banking system.

(x) Impact of exchange rate on capital safety

EXC – The exchange rate between VND and USD is negatively correlated with CAR and is statistically significant (p-value less than 0.1 and beta coefficient is negative). This result is consistent with the research results of Williams (2011); Mili et al. (2014). According to Williams (2011), the negative relationship between exchange rate and CAR implies that an increase in real exchange rate reduces foreign direct investment in the banking system and thus reduces the CAR coefficient. In addition, the stability of exchange rate and foreign exchange market shows that ensuring the health of the

purchase of domestic currency, limiting exchange rate risks for businesses. On the contrary, when the exchange rate increases, the domestic currency depreciates, businesses borrow capital from banks in foreign currency, bear more debt burden, affecting the ability of businesses to repay debts. Therefore, it creates risks for banks, reducing the capital safety of banks.

(xi) Impact of industry-wide capital adequacy on capital adequacy

ACAR- The average capital adequacy ratio of the industry has a positive impact on CAR (p-value less than 0.05 and positive beta coefficient). This result is consistent with the research results of Wong et al. (2005). In the view of bank managers, maintaining high capital levels is a signal that banks have good financial capacity. Especially when the market and rating agencies can base on the capital adequacy level of the bank compared to other banks to evaluate the financial strength of a bank. Banks can hold more capital than required as a signal to the market about the soundness and safety of the bank, as well as a signal that the bank is able to mobilize capital at lower interest rates for competitive reasons. High average CAR of the credit institution system will create pressure for commercial banks to also maintain high CAR.

CONCLUSION OF CHAPTER 4

In chapter 4, the thesis has built a research model, identified research variables and scales of research variables, and built research hypotheses. At the same time, the thesis conducts testing of hypotheses on factors affecting capital safety of Vietnamese commercial banks by regressing the research model according to the estimation method suitable for research data.

The results show that the capital safety of Vietnamese commercial banks (measured through the CAR variable) is positively correlated and statistically significant with factors such as: Capital safety ratio of the previous period; profitability; credit risk provision; liquidity; bad debt sold to VAMC; capital safety level of the whole industry. At the same time, the capital safety of Vietnamese commercial banks is negatively correlated and statistically significant with factors such as: bad debt; leverage; interest rate; exchange rate.

However, the factors: lending; Government ownership level and inflation rate have an impact on capital safety of Vietnamese commercial banks but are not statistically significant. At the same time, due to the problem of multicollinearity, it is impossible to consider the impact of economic growth rate and pressure of regulations on capital safety of Vietnamese commercial banks.

CHAPTER 5

SOME RECOMMENDATIONS ON FACTORS AFFECTING CAPITAL SAFETY OF VIETNAMESE COMMERCIAL BANKS

5.1. Orientation on capital safety regulations of Vietnamese commercial banks

Vietnamese commercial banks are increasingly asserting their important role in providing capital for the economy, being a safe savings channel for people, and at the same time providing banking services with many utilities, contributing to reducing the habit of paying in cash of organizations and individuals. Therefore, the development and operational efficiency of commercial banks play an important role not only for the banking system but also contributing to promoting the development of the economy.

The strategic orientation for the development of the Vietnamese banking system until 2030 is clearly stated by the Government in Decision No. 986/QD-TTg: “ The viewpoint of the Vietnamese Government is to develop the banking system to play a key role in the national financial system. The stability and development of the banking system is a prerequisite to ensure the stability and growth of the country's economy .”

Developing the Vietnamese banking system in the direction of ensuring transparency, safety, fair and equal competition in the operations of commercial banks. Moving towards a modern banking system, applying science and technology in service provision and banking management in accordance with international practices and standards.

To achieve that, Vietnamese commercial banks must gradually improve their management and financial capacity, ensuring international standards and practices in banking operations. On the basis that "State-owned commercial banks play the role of the main force, leading in terms of market share, market regulation capacity and taking the lead in applying modern banking technology, advanced management capacity, proactively integrating internationally, actively participating in restructuring weak credit institutions under the direction of the State Bank" (Decision No. 986/QD-TTg).

Based on the viewpoints and goals of developing the NH system, specific tasks are set out.

for Vietnam's banking system by 2025, with a vision to 2030 as follows:

Firstly, HTNH ensures capital safety according to international standards on Basel II capital.

The goal is that by 2020, the Vietnamese banking system will basically ensure CAR according to Basel II standards, "in which at least 12-15 commercial banks will successfully apply Basel II standard methods or higher". At the same time, by 2025, commercial banks will have applied

Successful Basel II implementation by standard method and good governance quality will implement Basel II by advanced method.

Second, improve the financial capacity of commercial banks through increasing equity capital.

Enhance the financial capacity of commercial banks through increasing equity capital and improving the quality of equity capital to ensure charter capital and CAR requirements according to the Basel II implementation roadmap in Vietnam. State-owned commercial banks (except for the Vietnam Bank for Agriculture and Rural Development) must increase charter capital to ensure CAR according to the Basel II implementation roadmap in Vietnam but at the same time ensure the State's role in holding controlling shares. Encourage foreign investors to invest capital in Vietnamese commercial banks to contribute to increasing capital resources of Vietnamese commercial banks.

Third, improve the management capacity of commercial banks, especially risk management capacity.

Improve the management capacity of commercial banks in the direction of increasing responsibility, ensuring publicity and transparency in banking management activities. Increase access, learning, and utilization of management technology resources from foreign investors. Increase the application of information technology in the operation and management of commercial banks. In particular, apply modern information technology in risk analysis and prevention activities. At the same time, ensure information technology security issues, improve customer information confidentiality.

Improve management and administration capacity in the direction of ensuring transparency in the operations of credit institutions in accordance with the Basel II implementation roadmap in Vietnam: “Complete and apply the risk management system in accordance with the Basel Committee's standards and the Basel II implementation roadmap in Vietnam. At the same time, complete and apply regulations on banking governance in accordance with international practices, develop a team of banking management and business staff with high professional qualifications, awareness of compliance with the law, ethics and responsibility, transparency and accuracy of information on business strategies, possessing financial status, risk management structure and corporate governance in accordance with the law and in accordance with international practices.” ( Decision No. 986/QD-TTg).

Fourth, continue restructuring the banking system, thoroughly handling bad debts and weak commercial banks according to market mechanisms.

One of the key tasks of the Vietnam Banking System in the current period and in the coming time is to thoroughly handle bad debts and weak commercial banks. The goal is to reduce the bad debt ratio of the entire banking system to below 3%. Enhance the role of

VAMC in handling bad debts of Vietnamese commercial banks. Developing the market for buying and selling bad debts according to market principles.

Develop a set of criteria to classify and rank commercial banks, clearly identifying healthy commercial banks, weak commercial banks and commercial banks of importance to the banking system. At the same time, perfect standards, management and supervision mechanisms appropriate to each type of commercial bank.

Develop a mechanism to support designated commercial banks to take over the management of weak commercial banks and commercial banks participating in restructuring. Develop and apply an early warning system for risks to the banking system, develop scenarios and mechanisms for handling systemic crises and handling commercial banks with high potential risks, ensuring that the State Bank has the right to intervene in the operations of commercial banks with high risks to protect the safety of the banking system and the safety of people's deposits. Thoroughly handle cross-ownership between commercial banks, the abuse of management and operation rights, or the rights of major shareholders to manipulate the operations of commercial banks. At the same time, perfect legal regulations on mergers and consolidations of bankrupt commercial banks.

The State Bank encourages and creates the best conditions for large commercial banks to ensure safety and soundness; creates conditions for foreign investors to participate in the restructuring process of weak commercial banks. Promotes mergers and acquisitions on a voluntary basis and according to market mechanisms to contribute to improving the scale and management capacity of weak commercial banks.

At the same time, the State Bank also creates favorable conditions and encourages foreign credit institutions to conduct business in Vietnam, as well as supports Vietnamese commercial banks in handling difficulties, ensuring an equal competitive environment between Vietnamese commercial banks and foreign credit institutions.

Fifth, transparency and improvement of the quality of published information

Continue to strengthen the role of the National Credit Information Center - CIC to improve the quality of personal and business information, support credit institutions to access complete information to be able to provide banking services effectively and safely, properly implement the approved roadmap for CIC development project to 2015, with a vision to 2020, specifically increase investment to build information infrastructure so that CIC becomes a reliable information channel, helping the State Bank to implement policy planning and support credit institutions in preventing and limiting risks.

To make transparent and improve the quality of information published in the money market to improve the confidence of investors and depositors. To build an information system to manage the operations of the interbank money market to support the operations of the State Bank and

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