The State Bank of Vietnam (SBV) is rushing to complete the compilation of the draft circular on the safety ratios for banking operation, which will set limitations on a bank’s investments in other banks.

The new circular on the safety ratios for banking operation will gather the regulations on the same issue which are “scattered” in 4-5 different legal documents, while it will also update the new requirements in accordance with the 2010 Law on Credit Institutions which has been taking effects since January 1, 2011.

Regarding the a bank’s investments in other commercial banks, the draft circular allows every bank to make capital contribution to no more than two other commercial banks. The capital to be contributed must not be higher than five percent of the chartered capital of the targeted bank.

The attempting new regulation aims to prevent the possible capturing by the groups of shareholders with strong financial capability. Besides, the new regulation also aims to avoid the capital “running around from banks to others”.

The State Bank of Vietnam was once so worried about the capturing in banks that while submitting the draft law on credit institutions to the National Assembly, even suggested absolutely prohibiting banks to make investments in other banks.

To date, no limitation has been set on bank investments in other banks. Therefore, commercial banks still can make capital contribution to other banks with no restrictions. Especially, many banks have capital contributions to two and more banks.

The Bank for Foreign Trade of Vietnam (Vietcombank), for example, now has capital contributions to five other joint stock banks, in which it is holding 4-11 percent of stakes. Meanwhile, each of Eximbank and Asia Commercial Bank (ACB) is making investments in three other banks. Vietinbank has injected its capital in two other banks.

Especially, Gia Dinh Joint Stock Bank’s four shareholders are commercial banks.

“Another worrying problem is the “cross investment” among banks, like bank A contributes capital to bank B, while bank B injects money in bank C, but bank C invests in bank A. This makes the investments ineffective,” a member of the circular compilation team said.

However, the official admitted that it will be not easy for banks to withdraw the investment capital to reduce their ownership ratios at other banks to the allowed levels. Therefore, the circular will give the banks some more time to do this to ensure that the capital withdrawal will not cause any shakes on the market.

“The banks, which are holding more than five percent of stakes of other banks, can reduce the ownership ratios by selling some shares or refusing to buy more shares when banks issue additional shares to increase chartered capital,” he said.

“As for the banks, which now have capital contributions to more than two banks, we will also give them time to withdraw capital,” he added.

Nguyen Hoa Binh, Chair of Vietcombank, told VnExpress that the bank will obey the laws when the State Bank issues the legal document stipulating the capital contribution ratios to other banks. Binh said that Vietcombank will prioritize making capital contributions to two banks and it is considering withdrawing capital from the other three.

“If the State Bank gives us time to implement the capital withdrawal, it would be not difficult to carry out the plan which would not cause influences to bank operation,” Binh affirmed.

The circular on the safety ratios for banking operation should have been issued in 2010, so that the regulations could have been taking effects as of January 1, 2011, when the Law on Credit Institutions became valid. However, the State Bank decided to delay the legal document’s promulgation until the end of the first quarter of the year. However, to date, the central bank still cannot gather all suggestions relating to the document.

Besides the regulations on restricting the “cross-investments”, the draft circular also sets up stricter regulations on the capital contributions by shareholders, the lending to fund securities investments and trading. It also stipulates the proportions of short term capital used for long term lending, and stipulates the foreign currency and gold positions of banks.

Source: VNE