Bank buyers of financially unstable institutions receive an incentive for maintaining a higher reserve ratio under a new policy
The State Bank of Vietnam (SBV) has recently announced a new policy aimed at releasing capital and increasing lending capacity for the economy. The policy involves reducing the reserve requirement ratio (RRR) by 50% for banks that participate in handling weak banks, such as Vietcombank, MB, VPBank, and HDBank.
This policy is expected to have significant benefits for the four banks, as they will see their RRR cut from 3% to 1.5% for deposits under 12 months and from 1% to 0.5% on deposits over 12 months. This reduction will free a substantial amount of capital, enabling greater loan creation. For instance, Vietcombank alone will release trillions of VND (hundreds of millions of USD) in capital.
The reduced RRR policy also acts as a form of monetary loosening, providing more affordable capital for the economy, which helps curb rising deposit rates and lending costs, facilitating easier access to finance. This policy is expected to encourage major banks to take on the responsibility of absorbing weak lenders, thereby stabilizing the banking system and maintaining financial stability in the medium term.
However, the policy carries risks related to increased exposure to bad debt if the performance of these acquiring banks is not carefully monitored. Experts recommend that the SBV implement strong oversight mechanisms akin to Basel II and Basel III stress tests to evaluate banks’ health post-acquisition and mitigate the risk of growing bad debt.
As of June 30 this year, Vietcombank, MB, VPBank, and HDBank had a total outstanding loan of nearly VNĐ3.8 quadrillion. The new circular does not specify the total outstanding loan of the banks that undertook the mandatory transfer of weak banks. The change in reserve requirement ratios for the four banks will release a significant amount of capital, contributing to opening up more credit space for the economy.
The weak banks that were transferred include CB, OceanBank, DongA Bank, and GPBank. The four banks account for about 25% of the total outstanding loans of the entire economy. The new circular reducing the reserve requirement ratio can be considered a form of loosening monetary policy by the SBV.
While the policy intends to ease liquidity, exchange rate pressures or interest rate fluctuations in the medium term might affect market stability, although such disruptions are expected to be limited according to experts. In summary, the policy's benefits focus on releasing capital for credit expansion and strengthening banking sector stability through incentivizing handling of weak banks, while its risks mainly revolve around increased credit risk and the necessity for enhanced regulatory oversight to prevent deterioration in asset quality.
[1] Nguyen The Minh, director of the Yuanta Securities research and development division for individual customers, suggests that the SBV needs to establish a strict monitoring mechanism to evaluate the performance of the banks after the acquisition to avoid the risk of increasing bad debt. [2] The reduction in the reserve requirement ratio is intended to provide more credit space for the economy. [3] The new policy applies to banks that undertake a mandatory transfer of weak banks. [4] The total outstanding loan of the banks that undertook the mandatory transfer of weak banks is not specified in the provided information. [5] Minh suggests that the SBV should implement a monitoring mechanism similar to the 'stress test' standards in Basel II and Basel III.
- The new policy implemented by the State Bank of Vietnam (SBV) will provide more credit space for the economy by reducing the reserve requirement ratio (RRR) for banks handling weak banks, as stated by Nguyen The Minh, director of the Yuanta Securities research and development division for individual customers.
- The reduction in the reserve requirement ratio is a form of monetary loosening, as it offers more affordable capital for the economy, facilitating easier access to finance and encouraging major banks to take on the responsibility of absorbing weak lenders, as mentioned in the text.
- The policy applies to banks that undertake a mandatory transfer of weak banks, such as the four banks (Vietcombank, MB, VPBank, and HDBank) mentioned in the text, and the weak banks transferred include CB, OceanBank, DongA Bank, and GPBank.
- The total outstanding loan of the banks that undertook the mandatory transfer of weak banks remains unspecified in the provided information.
- Despite the numerous benefits, Minh suggests that the SBV should establish a strict monitoring mechanism to evaluate the performance of the banks after the acquisition, similar to the 'stress test' standards in Basel II and Basel III, to mitigate the risk of increasing bad debt and maintain financial stability in the long term.
