Perfecting the Organizational Model of the Inspection and Supervision Agency

Circular No. 36/2016/TT-NHNN dated December 30, 2016 regulating the procedures for specialized inspection of the banking sector; Circular No. 08/2017/TT-NHNN dated August 1, 2017 regulating the procedures for banking supervision; and continuing to review and complete regulations on risk management in banking activities; XHTCTD; regulations on safety ratios in banking activities in accordance with international practices and standards... In particular, in the coming time, the State Bank will continue to advise the Government to submit to the National Assembly amendments and supplements to the Law on Credit Institutions to complete legal regulations to prevent cross-ownership, abuse of governance, management rights, and major shareholder rights to manipulate operations.

4.2.5.2. Perfecting the organizational model of inspection and supervision agencies

The restructuring of the functions and tasks of a number of Departments and Bureaus of the State Bank into the Banking Inspection and Supervision Agency of the State Bank has ensured that the Banking Inspection and Supervision Agency will be the agency that fully implements a cycle of 4 stages: licensing, issuing regulations, conducting supervision (remote supervision and on-site inspection), sanctioning and revoking licenses. The restructuring of functions in the above direction aims to limit the shortcomings in separating these stages, creating a more comprehensive and in-depth picture of each commercial bank, ensuring consistency and improving the effectiveness of supervision activities.

In addition, it is necessary to strengthen the legal status and power of the National Financial Supervision Commission so that this Commission can effectively perform its supervisory tasks among specialized supervisory agencies. Continue to improve the organizational and operational model of the Banking Inspection and Supervision Agency; enhance coordination and information sharing between the State Bank and law enforcement agencies and competent authorities in banking inspection and supervision activities.

4.2.5.3. Innovation in inspection and supervision methods based on risk

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The State Bank has developed and implemented the CAMELS supervision method. As analyzed, the implementation of banking supervision according to the current CAMELS supervision method by the State Bank is assessed as suitable for the development level of the Vietnamese banking system at this stage.

The innovation of the supervision method of the State Bank of Vietnam requires a gradual implementation. The risk-based supervision method is a modern supervision method that many countries are applying. However, the risk-based supervision method requires the synchronous development of the financial market, the structure and management and control methods of commercial banks and the inspection and supervision activities of the State Bank.

SBV as well as the legal basis. Therefore, in the supervision process, it is necessary to gradually shift from the CAMELS method to risk-based supervision so that the banking system can develop in line with the general trend of the world. In addition, there needs to be a policy mechanism that specifically stipulates specific criteria to measure each type of risk, especially RRTD.

Innovate supervision work towards improving the effectiveness of micro-safety supervision and macro-safety supervision on the basis of deploying new risk supervision tools and methods associated with promoting the application of information technology. Supervision work must be closely linked to inspection, licensing and promulgation of regimes and policies;

Innovate inspection work in the direction of strengthening comprehensive inspection of credit institutions, legal entities, in accordance with the practical operations of credit institutions; combine inspection and supervision of compliance with policies and laws with inspection and supervision of risks in the operations of banking inspection subjects and banking supervision subjects, moving towards applying risk-based methods according to international practices and standards;

4.2.5.4. Unify monitoring content

The unified supervision content is reflected in the need for the SBV's CQTTGSNH to unify in developing reports related to supervision activities as well as unify the contents of each report for all relevant parties, ensuring that the remote supervision department and the on-site inspection department coordinate in developing supervision reports, ensuring understanding of commercial banks in cooperation and information provision.

The content of each monitoring report must be consistent with the monitoring method selected in each period. During the period when the State Bank implements the CAMELS monitoring method, the content of each monitoring report must be built according to the components of CAMELS, and when the State Bank gradually shifts to a risk-based monitoring method, the content of each monitoring report must also be consistent with each type of risk. Specifically, the content of the macro monitoring report, rating assessment report, early warning report, and pre-inspection report must be consistent.

Build a risk monitoring system in accordance with the risk management process of each commercial bank . In commercial banks, the Risk Council and the Risk Management Division will be primarily responsible for risk management. Therefore, the Risk Council and the Internal Control Board must build a risk monitoring system so that through this monitoring process, it can make decisions.

Assessments of new income risk opportunities for the bank and thereby advise on optimizing the bank's risk portfolio.

4.2.5.5. Perfecting the monitoring process

Process management and control is one of the tools that banks use to control and reduce operational risks arising from the bank's business activities and operations.

The monitoring process requires the combination of two main departments: remote monitoring and on-site inspection of the SBV's CQTTGSNH. The remote monitoring department and on-site inspection department need to coordinate activities and develop monitoring report products. A specific monitoring process also needs to be developed to specify the work steps, ensuring the rigor and effectiveness of the monitoring work.

Implementing risk-based inspection and supervision is a particularly important and decisive step in the inspection and supervision activities of the State Bank of Vietnam. To implement the risk-based inspection method, the State Bank of Vietnam must first develop a risk inspection and supervision process and complete the risk inspection handbook. The risk inspection handbook is a professional manual that helps inspectors study and apply when inspecting each specific business, especially in assessing the governance and management activities, internal control environment, management information systems, risk management systems of credit institutions, supporting assessment criteria on risk levels, risk trends and overall risks...

The process of conducting risk-based inspection and supervision should include the following steps:

1. Research and assess credit institution risks

2. Inspection planning

3. Establishment of inspection team and preparation of the team

4. Inspection activities

5. Report inspection results and issue Inspection Conclusion

6. Continuous monitoring of credit institutions

A risk-based inspection handbook should include the following basic contents:

The handbook must be developed in accordance with legal regulations, operational practices of credit institutions in Vietnam and reference to inspection handbooks of countries around the world, especially countries with similar socio-economic conditions to Vietnam. The handbook must have at least the following contents:

1. General theory of risk-based inspection

2. Specific instructions on each inspection content according to banking activities such as:

(i) Assess risk management capacity, risk level, risk trends for: management and operation activities; credit granting activities; foreign exchange trading activities; capital mobilization; securities investment; international payment; control, internal audit...

(ii) Inspect the implementation of safety ratios: capital safety coefficient; solvency; credit limit; ratio of short-term capital for medium and long-term lending; loan-to-mobilization ratio...

(iii) Assess the financial status of the inspected entity.

3. Guidance on assessing types of risks: credit risk, liquidity risk, market risk, compliance risk, operational risk, reputation risk, strategic risk; and calculating the overall risk level

4.2.5.6. Improve the quality of inspection and supervision staff

Human resource quality is one of the key tasks in the operational plan and strategy, aiming to improve competitiveness to meet the requirements of international integration. Especially in the work of liquidity risk management, the qualifications of bank staff do not stop at performing the assigned work, but this is a modern banking management practice, requiring new knowledge, requiring staff doing this work to proactively seek and research through domestic documents, especially need to refer to foreign documents, research and apply it to the operations of their own bank, based on the practical situation at the unit.

Therefore, it is necessary to improve the quality, quantity, capacity and ethics of the banking inspection and supervision team to meet the development speed of the financial and banking system in the new context. Inspectors and supervisors need to have adequate knowledge of risks in banking activities and risk management tools as well as professional expertise in banking supervision according to international standards. However, the staff doing inspection and supervision work is not professional, especially the SBV branches, who are mainly part-time and do not receive much training in supervision. The State Bank needs to develop a standard program for training, certification and assessment of staff, and training at branches needs to receive special attention from the beginning.

To improve the quality of inspection and supervision staff in commercial banks, the following tasks need to be performed:

Commercial banks need an experienced resident consultant to provide direct guidance and training to on-site inspectors and remote analysts. In addition, the State Bank needs to arrange for cooperation in training and education of inspectors abroad with clear objectives.

Identify groups of leaders and key staff to send for overseas training according to programs and content appropriate to the operations of each commercial bank.

Domestic training: Monitor the training program for all cadres and civil servants; provide advanced training for cadres who have received basic training. Periodically update and improve the system of teaching materials. It is necessary to assign tasks, clearly define authority and responsibility based on the job description of each specific position, determine the requirements for capacity, education and awareness for each job position and at the same time stipulate each maximum acceptable risk limit for each management level in the liquidity risk management system of commercial banks.

Building a team of good and specialized experts for each field of operation, each new product and service through many forms such as organizing short-term training courses, scientific seminars, cooperating and exchanging with banks with agency relationships or self-training at branches and regional training centers according to unified and standardized programs. Because risk management also affects the quality of all banking operations, if the staff is proficient in their work, the quality of banks' operations will be improved, risks will be minimized, and risk management will also be more favorable. Therefore, commercial banks need to regularly train and retrain to update changes in regimes, policies, and new professional knowledge for staff.

It is necessary to select and train qualified personnel who will be committed to the bank for a long time. Among the resources that need to be mobilized and prepared to implement Basel II, human resources are the most important factor, because without qualified human resources, modern database management systems and complex models cannot be used effectively. In addition, a Basel II project requires a long period of time, usually at least 5 years. Therefore, banks need to have a policy of recruiting high-quality personnel and committing to long-term work to implement the project.

Thus, it is necessary to build and train specialized bank supervisory officers and civil servants: Improving the capacity of supervisory officers and civil servants is a fundamental solution to improve the effectiveness of supervision of credit institutions.

It is implemented through personnel and civil service work such as recruitment, arrangement of personnel and civil servants, remuneration policies and other incentives, in which special attention is paid to training in knowledge, skills in professional operations, and new banking supervision methods according to international practices and standards [125].

4.2.5.7. Enhance information exchange between banking inspection and supervision agencies and financial agencies.

Strengthening information exchange between the SBV and domestic and foreign financial supervision agencies, including strengthening bilateral and multilateral international cooperation on banking supervision; building a mechanism for direct exchange of financial market supervision information between the SBV and the Ministry of Finance; between the SBV and the financial supervision agencies; enhancing understanding, experience exchange and policy dialogue between the banking inspection and supervision agency and domestic financial supervision agencies through the organization of forums, seminars and thematic conferences.

In addition to the above contents, it is necessary to complete the information infrastructure to support the supervision activities of the Banking Inspection and Supervision Agency for credit institutions: In parallel with completing the institutional framework, it is necessary to upgrade the technological infrastructure to improve the quality of inspection and supervision activities towards regional and international levels; including building a synchronous and advanced information technology infrastructure to serve the modernization of banking inspection and supervision technology, including hardware, application software and information technology staff. This is the basis and foundation for applying quantitative tools in banking supervision activities.

4.2.6. Deployment of KSRR tools and programs

4.2.6.1. Operational risk event collection and handling process

The process of collecting and handling operational risk events aims to uniformly regulate the methods, order and procedures for reporting operational risk events arising at commercial banks; individuals/units participating in the process; implementation steps; reporting thresholds and risk ratings of detected operational risk events... This process aims to identify and detect operational risks arising or existing in the system of commercial banks, thereby analyzing, evaluating, monitoring and controlling operational risks; providing useful information, methods for analyzing the causes of operational risk events arising in order to improve the control environment, reduce the frequency and impact of operational risk events. The content includes: 1) Responsibilities of individuals/units participating in the process; 2) Implementation principles: principles of recording operational risk events.

RRHD event; reporting principles; 3) Guidelines for classifying RRHD events, risk ranking; 4) Recording process steps.

4.2.6.2. Self-assessment of risk and audit closing process

In the coming time, commercial banks need to develop a risk self-assessment and control program to identify early, assess current and potential risks and have timely and effective risk control and mitigation measures. The results of risk self-assessment and control are the basis for banks to have measures to respond to operational risks, and better assess the ability to accept identified risks.

Periodically or when necessary, units carry out risk self-assessment and control programs according to the bank's regulations and instructions. Then, KSRR synthesizes the self-assessment results and reports to the Board of Directors, Risk Management Committee, and Executive Board.

The self-assessment and audit process uniformly stipulates the procedures and methods for carrying out the work of identifying, measuring, evaluating and reporting operational risks at commercial banks and the responsibilities of relevant parties for the purpose of: i) Ensuring the assessment of important operational risks that may occur during the unit's operations; ii) Ensuring that individuals involved in the operation of operations clearly understand the risks that may occur at the unit;

iii) Orientation for risk management, focusing on key areas with high risk levels; iiii) Building a database of risk categories for each unit with risk levels assessed by that unit.

4.2.6.3. Set up the QTRR tool to work for new products

QTRR for new products includes regulations and procedures to reflect criteria, new product definitions and approval authority hierarchy. Activities related to complex and important new products must be approved by the Board of Directors and/or Executive Board and/or Product Council.

Before conducting business activities related to new products, commercial banks must have a business plan for the new product. This plan must be based on analysis and assessment of risks related to the product. Analysis and assessment of risks must be expressed in writing and include at least the following information: 1) Developing and implementing inspection tools for capital calculation implementation according to Basel II as prescribed in Circular 41 (inspection tools) to support the inspection and supervision of capital calculation processes and results of banks; 2) Significant risks arising from the implementation of new products; 3) Impact of new product implementation and ability to withstand risks.

Risk management of commercial banks. Commercial banks only officially provide new products when ensuring the following requirements: i) Fully issue business processes related to new products; ii) Identify, measure, evaluate, monitor and control material risks arising from providing new products.

4.2.6.4. Set up operational QA tools for outsourcing activities

Commercial banks need to develop a process for managing outsourcing activities to control operational risks arising from outsourcing activities, including assessing the capacity of current and future outsourcing partners to ensure their rights. Relevant units are responsible for periodically reporting the results of reviewing outsourcing activities.

Provide monitoring tools to evaluate and monitor the progress of narrowing the gap (% gap) of banks (monitoring tools) for the pillars of Basel II and for the databases and information technology, etc. of banks; thereby providing appropriate solutions.

In addition, commercial banks need to issue other procedures such as: procedures for identifying, monitoring and reporting key risk indicators; procedures for managing and controlling regulations/processes;... to uniformly regulate procedures, sequence of steps... to implement risk management tools and programs.

4.2.6.5 Selection of ST model and ST inspection method of the State Bank's supervisory agency

The choice of ST model for Vietnam's banking system depends on the availability and quality of data. However, to have a more accurate and comprehensive assessment result, it is necessary to cross-check the methods with each other, and use macro ST. For example, it is necessary to compare the results of bottom-up and top-down methods to check or adjust the scenarios appropriately. For ST combining macroeconomics and finance, the data series must be available for a period of at least 1 to 2 economic cycles (about more than 15 years).

In the short term, ST for the financial system should be carried out for the domestic commercial banking system using the account balance method. Accordingly, hypothetical scenarios will be presented mainly based on "expert" factors combined with international practices and historical data in recent years instead of using estimation models from historical data over a period of at least 1-2 economic cycles. Specifically, the model should be applied as follows:

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