Strengthening the Economic - Financial Information System, Legalizing the Provision of Information on Banking Activities and Financial Markets

The State budget, and thus, the State Bank cannot be independent because the cost of regulation and intervention activities must be approved or permitted by the Ministry of Finance. In order to be able to control the business activities of commercial banks according to Basel II, like central banks in other countries, the State Bank of Vietnam needs to have a sufficient financial position to be autonomous and independent in performing the tasks of directly supporting commercial banks and indirectly through intervention in the currency market. To solve this problem, the Law on the State Bank of Vietnam needs to be proposed to be amended, in the direction that it will be necessary to provide equity capital at a certain scale, at the same time, financial revenue and expenditure activities also need to be determined to ensure proactiveness in regulating and managing the market and operations of commercial banks. In other countries, the Central Bank is also always identified as the state's macro-management agency, but before being a state management agency, the Central Bank of these countries was a large bank, even an exceptionally large one, and only then can the Central Bank undertake the "mission" of being the bank of the Government and the bank of banks.

Regarding the implementation of KSRR application in commercial banks' operations according to Basel II as well as other international standards and practices in the future, it always requires a significant financial cost and this is a major challenge mentioned in Chapter 3 of the Thesis. It can be said that, with the current financial position of the State Bank, it is very difficult to invest in equipment, facilities, improve the information data system, improve the quality of human resources to improve the effectiveness and efficiency of inspection and supervision activities. In particular, Basel II control of the business operations of commercial banks includes the content of the level and capacity of QTRR of each commercial bank.

Third, improve capacity and responsibility in management and operation.

To implement and perform the role of a relatively independent central bank, the Government needs to develop and recommend to the National Assembly for approval legal regulations on the responsibilities of the SBV specifically for each functional unit to ensure that authority is linked to capacity and responsibility for management, inspection and supervision. The leadership, management and specialists of the SBV must be professionally selected and trained to ensure that they have professional qualifications and acquire practical experience in operating the SBV. On the other hand, it is necessary to develop a responsibility regime and sanctions to seriously handle the fulfillment of responsibilities of each manager and specialist of the SBV according to the assigned goals and tasks. The SBV's activities must be explained and demonstrated to be consistent with the development requirements of the socio-economy, in accordance with the law and effectively.

In order to publicly and transparently disclose all economic and financial information for management, operation and supervision, there should be legal regulations for the State Bank to report and publicize all aspects of its operations and results of implementing targets on mass media. Strengthening autonomy, transparency and publicity will clarify the role and operational efficiency of the State Bank, creating a basis for commercial banks to publicly and transparently disclose their business activities and risk management.

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4.3.1.2. Strengthening the economic and financial information system, legalizing the provision of information on banking activities and financial markets

As mentioned above, economic and financial information is not only a necessary factor but also extremely important for the operation and safety of the banking system in particular and the financial system in general. Inaccurate or "distorted" information will cause many difficulties for banking activities and make the financial market operate unhealthy, unstable, and can even lead to financial crisis.

Build and develop a team of staff to collect, process and provide appropriate information. Invest in developing facilities to be able to collect, process and provide necessary information to participants in the financial market in general and the currency market in particular.

The Government directs the Ministry of Planning and Investment and the General Statistics Office to coordinate more closely with the State Bank of Vietnam and the Ministry of Finance in calculating and announcing necessary economic and financial information to formulate macroeconomic policies, guide and indicate relevant information to the market. Along with regulations and requirements on providing complete, accurate, timely and transparent information, the Government also issues sanctions against market participants who violate the provision of false and asymmetric information that affects the development of the banking system and financial markets.

4.3.1.3. Support is needed for the State Bank and commercial banks to implement the Basel II application project.

It is recommended that the Government encourage and provide State support measures to the State Bank and Vietnamese commercial banks when implementing the Basel II application project, first of all, supporting the State Bank and commercial banks in implementing the project in the pilot phase until 2020. The project "Development of Vietnam's banking industry to 2010 and orientation to 2020". In fact, both the State Bank and Vietnamese commercial banks participating in the pilot project

Basel II application points all face many difficulties in terms of physical and financial facilities, processes, and regulations to ensure the implementation of activities in accordance with Basel II standards. On the one hand, the Government needs to support the SBV to develop a roadmap and specific plans for each group of banks following the experience of the US and China in classifying them into groups according to scale, especially with large scale and international operations, it is mandatory to apply risk management according to Basel II.

The Government allows for increased equitization at a higher level for state-owned commercial banks, helping these commercial banks have sufficient financial capacity to implement Basel II as well as creating favorable conditions to support Vietnamese commercial banks to modernize banking technology based on the application of IT.

4.3.1.4. Perfecting the organizational model to ensure effectiveness and efficiency in the operations of the State Bank

Lessons learned from the application of Basel II to KSRR in the operations of commercial banks in some countries around the world show that the organizational model of the SBV's SBV's SBV needs to be innovated in the direction of enhancing effectiveness and efficiency through clearly defining its authority and independence and objectivity in operations. Although it is a unit of the SBV, the SBV needs to have specific mechanisms to limit the impact of the Board of Governors and the pressures from economic targets.

- society to be able to objectively monitor and control the risk situation of commercial banks. On that basis, the State Bank of Vietnam is responsible for transparently implementing and publicizing the results of inspection and risk supervision of commercial banks, and only then can the effectiveness and efficiency of inspection, supervision and risk control be guaranteed.

4.3.1.5. Recommendations on inspection and supervision

One of the most important purposes of inspection and supervision of commercial banks' operations is risk management, ensuring that the risk level of commercial banks is within the allowable limit so as not to cause bank failure. The requirements of risk management in the business operations of commercial banks according to Basel II require not only assessing the level of risk but also accurately assessing the risk management capacity of commercial banks. Therefore, the State Bank of Vietnam needs to combine the use of quantitative and qualitative indicators to accurately reflect the nature and severity of risks in the operations of commercial banks. A credit risk can be reflected through the ratio of overdue debt or bad debt, but these ratios cannot indicate the level of credit loss of that commercial bank. This can only be resolved through determining the nature and level of risk by the State Bank of Vietnam. Furthermore,

The State Bank of Vietnam needs to develop a framework to measure the risk management capacity of commercial banks in accordance with international standards. On that basis, it is possible to classify and rank commercial banks according to their risk management capacity, which is the basis for controlling and determining the scale and scope of safe operations for each commercial bank. This is one of the important conditions requiring the State Bank of Vietnam to innovate the content and basis of inspection and supervision to meet the risk management requirements under Basel II.

4.3.1.6. Completeness, consistency and scientificity of the legal document system

In addition to the documents on the necessary legal basis for KSRR activities in the business activities of commercial banks according to Basel II, it also requires conditions on the completeness, consistency and scientificity of regulations on management, regulation of activities and safety assurance for the business activities of credit institutions. This is inevitable, because inspection and supervision activities need to be based on regulations and legal documents. However, in order to be able to KSRR according to Basel II principles and standards, the system of documents regulating business activities and safety assurance for commercial banks now needs to be standardized from the process of construction, promulgation and have content consistent with international standards in general and Basel II in particular. This requirement comes from both perspectives: (1) the system of documents regulating standards will create favorable conditions for the State Bank of Vietnam and ensure the objectivity and honesty of inspection and supervision conclusions; (2) help commercial banks easily perceive, apply and comply with regulations on management, regulation and safety assurance, meeting requirements on inspection and supervision content.

The State Bank's regulations on the operations of commercial banks implementing Basel II must be consistent with the Basel II implementation roadmap of these commercial banks. For example, the issuance of capital calculation rules according to the Basel II standard method is not only complicated but also very difficult to determine appropriate risk coefficients. Therefore, the State Bank needs to issue documents with scientific and practical bases on the application period or validity to create favorable conditions for commercial banks. Similarly, the establishment of safety ratios must determine the level of suitability with the level of domestic commercial banks and properly assess the level of impact on the system when applying the above standards to encourage commercial banks to actively and voluntarily apply Basel II.

4.3.2. Recommendations for Vietnamese Commercial Banks

In general, to build an effective risk management system according to Basel II standards, Vietnamese commercial banks have a lot of work to do in the coming time, focusing on the following contents:

Continue to closely follow and comply with legal documents and regulations of the State Bank of Vietnam on building and strengthening the risk management system in banks, including some prominent documents and regulations such as Circular No. 02/2013/TT-NHNN; Circular No. 36/2014/TT-NHNN; Circular No. 44/2011/TT-NHNN; Circular No. 49/2014/TT-NHNN...

In the strategies and policies of each bank related to risk management activities, it is necessary to redefine the objectives as well as the awareness of the importance of risk management activities in the bank, considering it an indispensable part of each bank's business activities, not a compliance task. In particular, in ensuring the capital safety ratio (CAR), banks need to redefine the purpose as serving the management work (ie arranging capital to compensate for possible losses due to risks), not just serving the purpose of compliance with the regulations of the State Bank of Vietnam.

It is necessary to be more proactive in building a risk management system in banks, including proactively applying the State Bank's regulations related to risk management, as well as proactively researching and applying the Basel II Committee's risk management standards/principles such as 16 principles on credit risk management; 10 principles on interest rate risk management; 7 principles on non-interest rate risk management; 17 principles of BIS on liquidity risk management...

Build a culture of risk management within the entire bank, and ensure compliance with approved risk management regulations.

Improve the quality of risk measurement activities in the Vietnamese commercial banking system through the application of advanced risk measurement models. From the measurement experience in the risk management process of banks around the world, Vietnamese banks can consider applying advanced models to risk measurement such as: internal XHTD model for RRTD; duration model, sensitivity coefficient model (FS), value of loss VaR model for interest rate risk; create detailed tables of maturity of financial instruments, cash flow tables for liquidity risk, etc.

Standardizing staff and improving information technology quality During the research process, the author surveyed bank staff

(2017) on understanding the Basel Accord, 7% clearly understood this Accord, while 70% had heard of it but did not know much, usually only grasping a few simple standards such as equity capital requirements, CAR ratio, etc. Therefore, commercial banks need to create conditions for officers and employees to improve their knowledge and experience. In addition, banking technology needs to be upgraded and constantly improved to update

Update advanced measurement and risk management methods such as Basel II credit measurement model, duration model, VaR model...

Building and perfecting information systems. Banks now need to build information security and network safety systems combined with research and establishment of data transmission lines, linking with the national information network to create a proactive position for banks. Banks need to connect and share information with each other, on the basis of support from the State Bank, to build a comprehensive "data warehouse", in order to provide accurate information sources for relevant professional departments.

Develop specific methods and roadmaps to apply Basel II internally for each bank, ensuring compliance with the roadmap set by the State Bank of Vietnam, as well as being consistent with the conditions and financial capacity of each commercial bank.

4.3.2.1. Recommendations on minimum capital adequacy

It is necessary to implement sustainable capital growth for commercial banks. Accordingly, commercial banks need to proactively implement solutions to increase capital levels such as: 1) Developing a strategy to increase capital along with reasonable use of capital such as issuing shares or convertible bonds into shares; 2) Considering selecting domestic and foreign strategic shareholders who are commercial banks that have applied Basel II to cooperate, share, learn and transfer experience and management technology; 3) Needing a strategic vision in balancing the interests between large shareholders and small shareholders to create prestige and trust of investors; 4) Researching bank merger and acquisition plans to have effective preparation when playing the role of either an acquiring bank or an acquired bank.

Commercial banks need to research and build models and specialized departments for risks. Then, banks will consider risk management as a bank activity and be more proactive in risk management. A general risk council needs to be built and have specialized management councils/departments with members for each different risk item. In addition, it is necessary to build effective risk management coordination regulations between those management councils/departments, in order to make synchronous, accurate and effective management decisions.

4.3.2.2. For credit risk management activities

In the work of credit risk management, commercial banks need to determine credit limits for customers, regularly review loans, and evaluate changes in customers' credit ratings. Determine credit limits for each specific industry or economic sector, for each region and product to control risk.

In addition, commercial banks also need to promptly deploy the construction of a credit risk management system to support credit risk management activities through:

Continue to build and innovate the internal credit risk management system of each commercial bank in a comprehensive manner, throughout the entire process from appraisal, approval, credit granting, credit records to the process of assessment, ranking, debt classification, risk provisioning, and use of provisions to handle risks; risk provisioning policy to manage the process of debt classification, provisioning, and use of provisions to handle risks; decentralization, authorization and determination of authority and responsibility of each department and individual throughout this process.

The internal customer relationship system is built in a unified and clear manner, ensuring that similar customers are managed similarly to the maximum extent possible.

Perfecting the organizational and personnel model. The quality of internal credit risk management depends largely on the organizational model and personnel of the commercial bank itself. Therefore, commercial banks need to perfect the organizational model in the direction of clearly separating the responsibilities between departments related to credit risk management and avoiding conflicts of interest; ensuring the independence and objectivity of internal credit risk management work. In addition, to meet the requirements and standards of credit risk management according to Basel II, officers implementing credit risk management must be specialized in their profession and have economic knowledge.

Perfecting the XHTD method. It is necessary to aim at building an internal XHTD system according to the basic or advanced internal approach (FIRB or AIRB) according to Basel II standards. Only then will XHTD truly be a useful risk mitigation tool and the basis for risk pricing of commercial banks.

Building a synchronous information technology infrastructure and database. The effectiveness of the XHTDNB system according to international practice depends on the synchronization of information technology infrastructure, database quality, as well as the ability to store multidimensional and historical data. To do so, in addition to strengthening state management of information transparency in banks, data entry from relevant departments (mainly bank branches) must be updated and stored fully and accurately.

Supervise the implementation and application of XHTD in credit activities. Accordingly, commercial banks need to periodically or suddenly check compliance with XHTD regulations, ensure the quality of input information, and limit errors from subjective or objective causes that distort the actual situation of customers.

4.3.2.3. For operational risk management activities

Thoroughly apply the 4 main issues and 10 golden principles of operational risk management according to the Basel Committee (Appendix 3). For commercial banks, all levels from the board of directors, management board, and all employees must be aware of the importance of risk.

operations. The board of directors should hire consultants to develop a suitable risk management framework for its bank and its business environment.

Regarding the RRTN governance structure, commercial banks need to establish and complete a separate risk management committee, of which RRTN governance is a part. The bank's risk monitoring apparatus needs to operate independently, not participate in the risk creation process, and have the function of risk management and supervision.

Raising awareness and concern of leaders at all levels, especially the Board of Directors as well as all employees in the bank about the role and importance of risk management. Accordingly, employees need to be trained to understand and participate in self-identifying operational risks. This will promote the building of a risk management system model and risk management culture in the bank. In addition, commercial banks can choose priority areas to set up risk control checkpoints.

Banks need to proactively establish mechanisms and processes for implementing operational risk management activities, including (1) establishing and perfecting the risk management framework; and (2) implementing the application of the risk management framework: 1) For the process of establishing and perfecting the risk management framework, commercial banks need to develop policies, organizational structures, processes and software solutions for risk management within commercial banks, in which the risk management organizational model applied by many commercial banks in the world is the 3-layer defense model; 2) For the process of implementing and applying the risk management framework, commercial banks carry out steps according to international practices to identify risk management in policies, regulations, processes and culture, working habits of staff within the bank. The important role in the risk management process is to collect past and present risk data of commercial banks from many sources, in order to measure risk through management tools such as VaR risk measurement model; Key Risk Indicator (KRI)...

Building a system of key risk measurement indicators (KRIs) and choosing a suitable cost of capital calculation method according to Basel II for each commercial bank. Although commercial banks are allowed to choose to apply the BIA, SIA or AMA method, in the future, the AMA method is necessary to match the complexity of modern banking activities that the Vietnamese banking system is aiming for.

Build a database of operational risks and use modern technology in analyzing and handling RRTN. Quickly build a guidance process to collect more loss information. If possible, optimize modern technology.

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