On the afternoon of May 31, TPBank held the Kick-off Ceremony of the Basel III Capital Calculation Project based on internal rating methods including both basic and advanced (FIRB & AIRB).
Opportunity to save capital, overcome the rigid disadvantages of the old method
The Basel Accords refer to the banking supervision treaties issued by the Basel Committee on Banking Supervision with the aim of enhancing financial stability through improving the quality of banking supervision worldwide.
In particular, Basel III sets out key requirements for capital and liquidity management. Higher standards require more stringent capital requirements, along with the mandatory application of larger buffers to reduce operational risks.
Under the previous standard approach (SA), bank assets were assigned fixed risk weights, which were specified for each different asset group based on their respective risk levels.
This helps banks ensure liquidity, leverage and sufficient capital reserves to adapt to market fluctuations and withstand economic shocks. However, the possibility of holding more capital than necessary is a suboptimal point of this method because it directly affects the bank's profitability and profit.
Meanwhile, the IRB allows banks to use their own internal risk management models and practices to self-assess the risk components and risk levels of their asset portfolios and thereby calculate more accurate capital requirements than the simple risk weight percentages prescribed by the SA.
Instead of applying a rigid risk weight as in the old method, estimating risk parameters through specific models helps to measure risks more accurately, reflecting the risk level of each customer/loan more closely and providing opportunities to save capital if the bank holds a good credit portfolio.
Good foundation in the past and a leap in the future
In November 2021, TPBank announced the completion of all Basel III and IFRS 9 requirements and comprehensive implementation from the fourth quarter. At that time, TPBank was the first bank in the market to have a third party, KPMG Vietnam Co., Ltd., conduct an independent review and recognize this result.
In 2022, while many banks in Vietnam are still applying Basel II, TPBank has completed the implementation of Basel III and Basel III Reforms according to SA. And by May 2023, TPBank will continue to implement the Basel III Capital Calculation Project based on the internal rating method (FIRB & AIRB).
To perform IRB calculations, the Bank must meet a series of stringent requirements on data quality and model governance.
The data used to build IRB models must ensure completeness, integrity and validity at the same time with a minimum length of 5-7 years, so banks need to invest resources to collect data, build and manage datamarts with a very large volume of data, at the same time, the large number of models that need to be built, monitored and tested also requires banks to have a strong model governance framework with a team of highly qualified personnel.
Experience in overcoming each “obstacle” in the past is an advantage for TPBank to be ready to continue implementing more advanced methods.
The data collection and construction of models for assessing expected credit losses according to IFRS-9 have been previously audited by an independent third party - Ernst & Young Malaysia - showing that the quantitative models in the internal measurement system are of good quality, creating a favorable foundation for TPBank to continue researching, implementing, building and calibrating PD, LGD, EAD models according to IRB - Basel III.
In addition, TPBank has applied advanced technologies such as AI algorithms, machine learning, etc. to support model building and management.
To do all this, TPBank must sacrifice short-term profits to solve the problem of large investment costs, especially investment in information technology systems, data processing, application of advanced algorithms as well as costs for recruiting, training and maintaining high-quality personnel to meet the bank's requirements.
Mr. Nguyen Hung, General Director of TPBank shared: “ TPBank's development orientation is to become one of the leading banks in complying with and applying international risk management standards to the Bank's actual operations.
We have done very well in the past, and now TPBank has enough foundation from technology, data and high-quality human resources to continue implementing capital calculation according to IRB this year.
Applying these advanced international standards requires the Bank to spend a lot of effort, cost, and limit its activities according to the strict requirements of the standards, but TPBank will firmly overcome economic shocks to move towards a professional, transparent and healthy bank, ensuring sustainable development .
Mr. Le Trung Kien - Deputy Director of the Department of Credit Institution System Safety Supervision.
Speaking at the program, Mr. Le Trung Kien - Deputy Director of the Department of Supervision of the Safety of the Credit Institutions System, highly appreciated the correct orientation as well as the initiative of TPBank when implementing the Basel III project: " We all clearly see the role of applying standards in developing the credit institution system, in addition to developing scale and technology. This is the foundation to maintain and ensure the safety of the banking system.
With the existing foundation, plus the advice of KPMG, I believe that implementing this Project with a short-term target completion roadmap as set out will be a big challenge for TPBank, but when successful, the Project will create a new step forward in risk management, increasing long-term core values for TPBank in the future .
IRB Applications – the Way Forward
The implementation of IRB not only helps the bank optimize capital costs but also contributes to improving management capacity when the Bank applies IRB results to business operations.
One of the most prominent applications of IRB is in credit management activities such as: determining limits, pricing loans, measuring efficiency; along with that is proactive portfolio management according to risk levels, risk-adjusted profits and the bank's appetite for each specific risk portfolio, thereby contributing to capital allocation decisions and effective capital planning/strategy.
In addition to these applications, TPBank will continue to research and apply IRB results in the implementation of upcoming projects to further improve the Bank's risk management capacity.
Currently, although there is no legal framework for applying capital calculation according to IRB, the management agency has directed credit institutions to pilot the implementation of Basel according to IRB as one of the goals of the banking industry by the end of 2025. TPBank is one of the first banks in the system to research and implement this method.
The project implementation will help the bank optimize capital costs, enhance IRB applications in business operations and portfolio management... thereby improving TPBank's risk and financial management capacity, safety and sustainability, contributing to strengthening customer confidence and TPBank's position in the market.
Bao Anh
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