Banking Position Paper 2010

Recommendation: The Draft Circular on Mergers and Consolidations of CreditInstitution should be reviewed in conjunction with industry participants and externalexperts to ensure that the application process is straight-forward and the approvalprocess is centralized with the SBV to ensure that the consolidation process can becompleted rapidly in order to ensure stability in the banking system.4. Proposed Further Legal Capital IncreasesWe recognise the SBV’s efforts to address the need to clean up problem banks andencourage the sensible consolidation of the sector. While we agree with the objective,we also have serious concerns and issues with the implications for foreign bankbranches and foreign subsidiaries if the tool used to encourage consolidation is everhigher minimum capital requirements. In particular, we are concerned about discussedideas to extend the legal capital to VND5 trillion and VND10 trillion, by 2012 and 2015respectively, due to the following reasons:These are impossibly high levels coming in a very short period of time.The Vietnamese market is not sufficiently large to be able to prudently deploy andleverage such an influx of capital from both local and foreign banks, the latter ofwhich have only recently been established a presence in Vietnam per WTOcommitments.Based on modeling of the impact of such large capital increases, the result would befierce competition pressures, higher risk appetite and poor returns on capital. Therewill be many adverse impacts, especially on foreign banks, that are still in the initialphase of operations in Vietnam and thus need to have a careful roadmap of capitalincreases to ensure safety and soundness.Recommendation: We understand that this issue is still under discussion and we wishto be engaged in the dialogue about its impact on foreign financial institutions. Werecommend that tools and incentives be used to encourage consolidation of weak banksrather than setting ever higher minimum capital levels for all banks. We would like tosee a banking sector that encourages safe and sound competition, risk managementand use of capital, while allowing room for institutions of varying sizes.5. Foreign shareholdings in local banksDecree 69 states that the total foreign shareholding in a local Vietnamese bank shouldnot exceed 30% and that, within this limit, the maximum shareholding permitted to aninternational bank as a “strategic partner” is 15% (which can be increased to 20% withthe Prime Minister’s approval). The increase in maximum shareholdings is welcomeprogress on Vietnam’s WTO commitments. A roadmap for further deregulation of foreignshareholdings should be developed.Recommendation: There is need for clarity on scope and timing of further increases inshareholding as this would enable both the strategic partner and the local banks todevise more definitive plans. Such clarity will eventually lead to a much moreconstructive and planned approach for the banking sector in Vietnam.4