Early intervention to limit withdrawals like the SCB case

On the afternoon of June 10, Governor of the State Bank of Vietnam Nguyen Thi Hong explained and clarified a number of major issues that National Assembly deputies were concerned about when discussing the draft Law on Credit Institutions (amended).

The State Bank plays the role of “last resort”. One of the contents that delegates are interested in and comment on is the regulation that the State Bank can intervene early in some cases. That is when a bank is withdrawn in large numbers, leading to insolvency, or a credit institution cannot maintain its payment ratio and capital safety for 3 and 6 consecutive months, respectively, and has accumulated losses greater than 20% of the value of charter capital and reserve funds.

In these cases, the State Bank, the Deposit Insurance and other banks can provide special loans, without collateral, with an interest rate of 0%/year. The Governor said that this regulation was drafted based on practical difficulties in the restructuring of weak banks in recent times, as well as the practice from the mass withdrawal event of SCB in October 2022. In particular, the drafting committee referred to the experience of the collapse of banks around the world, most recently commercial banks in the US. "If credit institutions have worse developments and are at risk of insolvency, the level of management of the management agency will need to be stronger and through the early intervention process," Ms. Hong emphasized. In the early intervention process, the responsibility must first and foremost be the shareholders and owners of the bank. They must have a plan to overcome the difficulties and the management agency will impose restrictions on their operations, especially during this period when support solutions are needed. The current law stipulates early intervention measures but only for a period of 1 year, which is very short and does not stipulate support measures, so in practice it is very difficult to implement. Therefore, this draft law stipulates support measures, including support from the State Bank as the "last resort" lender. The bill also stipulates the mobilization of support resources from other credit institutions, deposit insurance and the Cooperative Bank. "The bill is designed to mobilize resources for support, thereby increasing the responsibility of credit institutions for the safety of the system in general and also reducing financial costs for the management agency in handling incidents of credit institutions," the Governor analyzed. Limiting manipulation and cross-ownership In addition, delegates were very interested in the regulation adjusting the reduction of shareholder ownership limits as well as the limit on credit granting to a customer with related persons. The Governor said that the draft law was designed in such a way to limit manipulation and cross-ownership in banking activities. "This is a request from competent authorities, the resolution of the National Assembly requires this. This is also one of the solutions to limit manipulation and cross-ownership," Ms. Hong emphasized. In addition, the drafting committee has adjusted in the direction of expanding related persons. However, to thoroughly implement these regulations, Ms. Hong said that along with the provisions in the law, there must be the issue of organization and implementation. Because in reality, there are cases where shareholders ask related persons to stand in their names, but the bank cannot grasp them. Therefore, to solve the cross-ownership situation, according to the Governor, requires many tools and solutions from many different agencies, including transparency of information databases. "With just this regulation, if shareholders implement it correctly, it will limit risks to banking activities, but to be thorough, it also requires synchronous solutions," said the Governor. Ms. Hong added that the investment needs of enterprises depend greatly on the banking system. Therefore, international organizations also warn that if investment needs continue to depend on the banking system, there will be potential risks. "When banks are affected, the domino will have a great impact on the economy. Therefore, in sync with the development of the banking industry, markets such as capital markets, securities, and corporate bonds need to be developed synchronously. Currently, the Government is having solutions to move towards that," said the Governor. Therefore, in the draft law, there is a mechanism to reduce this dependence ratio, customers and related parties who borrow more than 15% of their own capital. That is, credit institutions co-finance with each other. Because if a bank lends to a business with a very large capital demand, the level of credit risk concentration will be very large. Co-financing will be to share the risk for banks when the business encounters problems. In case the banks cannot co-finance, the Prime Minister will decide. "If the current regulations are left as they are, with the increasing capital demand and increasing charter capital, there may be potential risks," the Governor warned. She also committed to continue reviewing the regulations to make them suitable and ensure the principle of not affecting the production and business activities of businesses and people while still ensuring the safety of the banking system.

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