Vietnam’s banking sector must take radical steps to adopt international capital rules, reporting requirements and trading practices, says Francois Denimal at FIS.
Vietnam’s response to Covid-19 has been heralded as a global success story and an example other countries should follow, with a total of 268 confirmed cases and no deaths for a country of over 95 million people.
The country’s response has also been credited with stopping its economy from shrinking, while many economies in Asia have contracted by up to 10%. According to the latest economic predictions from the Asian Development Bank, Vietnam’s economy is set to grow by 4.8% in 2020 and rebound at a growth rate of 6.8% in 2021.
But to continue on this trajectory, Vietnam needs to attract more foreign investment. While the government is working on structural reforms that will help international firms enter the local market, such as the relaxation of foreign ownership rules, to truly make a difference Vietnam must shift gears and start adapting to international financial requirements and reporting standards.
Complying with the Basel Accords
The Basel Accords are a series of international banking regulations that were created by the Bank for International Settlements (BIS) to enhance bank capital and reduce market and operational risk within the global banking system. The first accord was issued in 1988, the second in 2004 and the third in 2010 to deal with the deficiencies identified during the 2008 global financial crisis.
While many countries are already fully compliant with the first two rulesets, and are in the process of complying with the third, Vietnam has been slow to implement both Basel I and II. In 2016, the State Bank of Vietnam (SBV) took steps to correct this, by setting a deadline of 1 January 2020 for 17 of the country’s leading banks to comply with the Basel II requirements. Despite the drive, in December 2019 the SBV made the decision to extend the deadline to 2023, as only 10 out of the 17 banks had met the required capital requirements on time.
Many commentators have stated that the smaller banks are finding it difficult to raise the additional capital due to restrictions on foreign ownership, currently limited to 30% of shareholdings, as well as nonperforming loans left over from the 2012 Vietnam banking crisis.
Clearly these are significant challenges that the industry will have to overcome quickly, but compliance with the Basel Accords is essential if foreign investors are to be convinced that their money will be safeguarded if held at domestic financial institutions within the country.
Implementing international reporting standards
The International Financial Reporting Standards, also known as IFRS, are focused on standardising financial reporting across the world to bring greater transparency, accountability, and efficiency to international financial markets. Currently, over 144 jurisdictions use the standards, but Vietnam is not one.
Last year, the Ministry of Finance announced a roadmap to prepare the financial and business communities to transition to the IFRS reporting regime. However, the first two stages of the roadmap are largely focused on helping businesses to make the necessary changes to adopt the standards.
The reporting standards will not become compulsory until 2025, by which time it will be several years after most other jurisdictions, and perhaps too late for Vietnam’s economy.
Banks and businesses across Vietnam should bolster efforts to start transitioning to IFRS straight away to avoid any slowdown in the economy due to any failure to comply.
Modernising trading practices
In addition to adopting the IFRS, Vietnamese banks will also need to make sure they start mirroring the trading practices and technologies that are commonplace in global financial centres, such as London, New York, Hong Kong and Singapore.
For example, many regulators require banks and brokerages to implement surveillance systems that monitor for market manipulation and fraudulent behaviour, to protect against abusive or illegal trading activities that put markets at risk.
Such systems do not currently exist in many banks in Vietnam, but it will be essential that they are introduced if foreign companies and investors are to have confidence and trust in their trading operations.
In addition, new technology infrastructures should be put in place that can support large transactions and trade volumes that will come with an influx of foreign capital and investment firms.
Plugging the knowledge gap
One of the main reasons why Vietnam has been slow to adopt international financial regulations and reporting standards is not due to a lack of understanding, but the shortage of experience available to actually implement complex regulatory projects.
To plug this knowledge gap, Vietnamese banks will need to go on a hiring spree and attract compliance experts from abroad who have successfully managed Basel implementation projects before. In addition, they should focus on upskilling their workforces to make sure they continue to remain compliant with the regulations once the transition has occurred.
On the tech side, systems will need to be introduced that can undertake the complex calculations that will be required to prove that the minimum capital requirements outlined in the Basel Accords have been met.
While Vietnam continues to be a shining light in a global economy that is potentially facing the biggest downturn since the Great Depression, its banking sector must take radical steps to adopt international financial regulations, reporting requirements and trading practices to continue on its meteoric rise.
The knowledge base to implement the required changes is still patchy, but the faster local firms can adopt them, the quicker they will be able to take advantage of the benefits compliance brings and propel Vietnam’s economic growth even further.
Francois Denimal is Managing Director, Capital Markets for APAC at FIS.