TPBank launched a project to calculate capital according to the Basel III internal rating method, raising its risk management and financial capabilities to a new level, on May 31.
The Bank has just held a launching ceremony for the Basel III Capital Calculation project based on the Internal Rating Method including both Basic and Advanced (FIRB & AIRB). Attending the event were representatives of the State Bank, the Department of Supervision of the Safety of the Credit Institutions System, and representatives of KPMG Company Limited - the project implementation partner.
The implementation of IRB not only helps banks optimize capital costs but also contributes to improving management capacity when applying 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. In parallel, it 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.
At the event, Mr. Le Trung Kien - Deputy Director of the Department of Supervision of the Safety of Credit Institutions System, highly appreciated the orientation and initiative of TPBank in implementing the Basel III project.
According to Mr. Kien, applying standards in the development of credit institutions, in addition to developing scale, technology is the foundation to maintain and ensure the safety of the banking system. This project with a short completion schedule as proposed will be a big challenge for TPBank, but when successful, it will create a new step forward in risk management, increasing long-term core values.
Mr. Le Trung Kien - Deputy Director of the Department of Supervision of the Safety of Credit Institutions System spoke at the event. Photo: TPBank
Basel refers to the banking supervision treaties issued by the Basel Committee on Banking Supervision with the aim of enhancing financial stability by improving the quality of banking supervision worldwide. In particular, Basel III sets out the requirements for capital and liquidity management. Higher standards require stricter capital requirements, along with the mandatory application of larger buffers to reduce operational risks. With the previous Standard Approach (SA), bank assets were assigned fixed risk weights, which were specified for each group of assets based on their respective risk levels. This helped banks ensure liquidity ratios, leverage and sufficient capital reserves to adapt to market fluctuations and withstand economic shocks.
"However, the possibility of having more capital reserves than necessary is a suboptimal point of this method because it directly affects the bank's profitability and profit," said a representative of TPBank.
Meanwhile, 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, thereby calculating capital requirements more accurately than the simple risk weight percentages prescribed by SA. Instead of applying a rigid risk weight as in the old method, estimating risk parameters through specific models helps to measure risk more accurately, reflecting the risk level of each customer/loan and providing opportunities for capital savings if the bank holds a good credit portfolio.
Representatives of TPBank and guests and partners at the launching ceremony of TPBank's Basel III capital calculation project. Photo: TPBank
In November 2021, TPBank announced the completion of all requirements of Basel III, IFRS 9 and comprehensively implemented it from the fourth quarter. At that time, TPBank was the first Vietnamese bank to be independently reviewed and recognized by a third party, KPMG Vietnam Co., Ltd., for this result. In 2022, when many banks in Vietnam were still applying Basel II, TPBank completed the implementation of Basel III, Basel III Reforms according to SA. By May this year, the bank continued to implement the Basel III Capital Calculation Project based on the internal rating method (FIRB & AIRB).
To perform IRB calculations, banks must meet data quality and model governance requirements. The data used to build IRB models must ensure completeness, integrity and relevance 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.
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, this bank has put into use advanced technologies such as AI algorithms, machine learning... to support the work of building and managing models.
According to the bank representative, to do this, the bank 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.
"TPBank's development orientation is to become one of the leading banks in complying with and applying international risk management standards in actual operations. We have enough foundation from technology, data and high-quality human resources to continue implementing capital calculation according to IRB this year," said Mr. Nguyen Hung, General Director of TPBank.
According to the bank representative, applying these advanced international standards requires a lot of effort, expense, and self-limitation of activities according to the strict requirements of the standards.
An Nhien
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