Thông tư 41/2016/TT-NHNN

Circular No. 41/2016/TT-NHNN dated December 30, 2016, prescribing prudential ratios for operations of banks and/or foreign bank branches

Nội dung toàn văn Circular 41/2016/TT-NHNN prescribing prudential ratios operations banks and or foreign bank branches


THE STATE BANK OF VIETNAM
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THE SOCIALIST REPUBLIC OF VIETNAM
Independence - Freedom - Happiness

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No. 41/2016/TT-NHNN

Hanoi, December 30, 2016

 

CIRCULAR

PRESCRIBING THE CAPITAL ADEQUACY RATIO FOR OPERATIONS OF BANKS AND/OR FOREIGN BANK BRANCHES

Pursuant to the Law on the State Bank of Vietnam No.46/2010/QH12 dated June 16, 2010;

Pursuant to the Law on Credit Institutions No. 47/2010/QH12 dated June 16, 2010;

Pursuant to the Government's Decree No. 156/2013/ND-CP dated November 11, 2013 on defining the functions, tasks, entitlements and organizational structure of the State Bank of Vietnam;

At the request of the Chief of Banking Inspection and Supervision Department;

The State Bank’s Governor hereby introduces the Circular prescribing prudential ratios for operations of banks and/or foreign bank branches.

Chapter I

GENERAL PROVISIONS

Article 1. Scope and subjects of application

1. This Circular deals with the capital adequacy ratio for operations of banks and/or foreign bank branches in Vietnam.

2. Subjects of application encompass:

a) Banks: State-owned commercial banks, joint-stock commercial banks, joint-venture banks and/or wholly foreign-owned banks;

b) Branches of foreign banks.

3. This Circular shall not apply to banks put under special control.

Article 2. Interpretation of terms

For the purposes of this Circular, the terms used herein is construed as follows:

1. Financial asset refers to any asset that is:

a) Cash;

b) An equity instrument of another entity;

c) Contractual right:

 (i) to receive cash or another financial asset from another entity; or     

 (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to banks and/or foreign bank branches;

d) a contract that will or may be settled in own equity instruments of banks.

2. Financial liability refers to any of the following contractual obligations:

a) which is statutory:

(i) to deliver cash or another financial asset from another entity;

(ii) to exchange financial assets or financial liabilities with another entity under conditions that are unfavorable to banks and/or foreign bank branches; or

b) a contract that will or may be settled in own equity instruments of banks.

3. Financial instrument refers to a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

4. Equity instrument refers to any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instrument with characteristics of liability issued by a bank encompasses preferred dividend stocks and other equity instruments which:

a) are redeemable in accordance with laws and ensure compliance with prudential limits or ratios after implementation as stated by laws;

b) may be used to offset losses without requiring a bank incurring such losses to cease its proprietary trading transactions;

c) are not subject to payment of preferred dividends and carry preferred dividends over to the next year in the event that such payment of preferred dividends results in losses in an income statement of a bank.

5. Subordinated debt refers to a debt that a creditor accepts an agreement to pay after other obligations are discharged, or for which a creditor gets and does not get other guarantees in case of the borrower's bankruptcy or dissolution.

6. Customer refers to a person or legal entity (inclusive of credit institutions or branches of foreign banks) that has credit or deposit relationships with banks and/or foreign bank branches, except partners referred to in Clause 7 of this Article.

7. Partner refers to a person or legal entity (inclusive of credit institutions or branches of foreign banks) that performs transactions referred to in Clause 4 Article 8 hereof with banks and/or foreign bank branches. 

8. Claims of banks and/or foreign bank branches include:

a) Credit extensions, comprised of lending entrustments and purchases with retained right of recourse against negotiable instruments and other securities, except buying forwards of negotiable instruments or other securities;  

b) Securities issued by another entity;

c) Contractual rights to receive cash or other financial assets from another entity in accordance with laws, except accounts referred to in Point a and b of this Clause;

9. Retail portfolio refers to the portfolio of loans offered to individual customers (exclusive of real estate secured loans referred to in Clause 10 of this Article, home mortgage loans referred to in Clause 11 of this Article, and securities loans) in which balances of credit facilities (already disbursed and not yet disbursed) of a customer must conform to both of the following requirements:

a) Do not exceed VND 8 billion;

b) Do not exceed 0.2% of total exposure of all retail portfolios (already disbursed and not yet disbursed) of banks and/or foreign bank branches.

10. Real estate secured loan refers to a loan taken out by persons or legal entities to buy real property, execute a real property project, and secured on that real property or real property project to be formed from that loan in accordance with laws on secured transactions.

11. Home mortgage loan refers to a loan in which the individual borrower pledges his/her property as collateral to purchase home provided the following conditions are met:

a) Source of financing for debt payment is not derived from leasing of the home formed from that loan;

b) Home must be completely built in accordance with a home purchase agreement;

c) The bank or foreign bank branch is fully vested legal right to the home put up as collateral in the event that its customer fails to pay his/her debt obligations in accordance with laws on secured transactions;

d) The home formed from this type of mortgage loan must be independently valued (by a third party or a division separate from the credit approval department of a bank or foreign bank branch) in a discreet manner (appraised value is not greater than market value of that home at a specified loan approval date) in accordance with regulations of the bank and foreign bank branch.

12. Specialized lending refers to a credit line used for execution of projects and investment in machinery, equipment or purchase of goods, and meeting the following criteria:

a) The borrowing customer is a legal entity established only to execute projects, operate machinery or equipment and trade in goods created from capital derived from loan capital, and not to engage in any other business;

b) This type of loan is secured on projects, machinery, equipment and goods created from loan capital and all of sources of financing for debt repayment are derived from business activities, operation of such projects, machinery, equipment and goods;

c) Banks and/or foreign bank branches have the contractual rights referred to in credit agreements to control all disbursements according to the progress of project, invest in machinery, equipment and purchase goods and manage operating income or cash flow, operate such projects, machinery, equipment and goods to recoup debts according to these credit agreements;

d) Such lending is performed under the following forms:

(i) Project financing loan is a specialized lending for project execution;

(ii) Income producing real estate loan is a specialized lending for execution of real estate trading projects (office, commercial centers, urban zones, building complexes, storage yards, warehouses, hotels or industrial parks, etc.);

(iii) Object finance loan is a specialized lending for investment in machinery or equipment (watercraft, aircraft, satellites or trains, etc.);

(iv) Commodities finance loan is a specialized lending for purchase of goods (crude oil, metals or cereals, etc.).

13. Commercial real estate refers to real estate invested in, purchased, assigned, leased and hire-purchased for for-profit sale, transfer, lease, sub-lease and hire-purchase purposes.

14. Repo transaction refers to a transaction in which one party sells and transfers ownership of a financial asset to another party with a promise to buy back and reclaim ownership of that financial asset at a specific date at a predetermined price.

15. Reverse Repo transaction refers to a transaction in which one party buys and receives ownership of a financial asset transferred from another party with a promise to sell and transfer ownership of that financial asset back at a specific date at a predetermined price, including buying forwards of financial assets in accordance with regulations set out by the State Bank concerning the discounting of negotiable instruments and other securities.

16. Independent credit rating companies include:

a) Credit rating agencies such as Moody’s, Standard & Poor, Fitch Rating;

b) Those established under Vietnamese laws on credit rating services.

17. Optional credit rating refers to the activity in which an independent credit rating company discretionarily carries out credit assessments without any agreement with rated objects.

18. Contractual credit rating refers to the activity in which an independent credit rating company carries out credit assessments under an agreement between it and a rated object.

19. OECD refers to the Organization for Economic Cooperation and Development.

20. International financial institutions include:

a) Group of international banks including the International Bank for Reconstruction and Development – IBRD, the International Financial Company – IFC, the International Development Association – IDA, the Multilateral Investment Guarantee Agency – MIGA;

b) The Asian Development Bank – ADB;

c) The African Development Bank - AfDB;

d) The European Bank for Reconstruction and Development - EBRD;

dd) The Inter-American Development Bank-IADB;

e) The European Investment Bank – EIB;

g) The European Investment Fund – EIF;

h) The Nordic Investment Bank – NIB;

i) The Caribbean Development Bank - CDB;

k) The Islamic Development Bank - IDB;

l) The Council of Europe Development Bank - CEDB;

m) Other financial institution of which the charter capital is formed by contributions made by sovereigns.

21. Risk mitigation refers to the activity in which a bank or foreign bank branch applies measures to partially or totally reduce any possible loss incurred due to operations thereof.

22. Derivative encompasses:

a) Derivatives referred to in Clause 23 Article 4 of the Law on Credit Institutions, which are subcategorized as follows:

(i) Credit derivatives including credit insurance contracts, credit default swaps, credit-linked note contracts and other derivative contracts as prescribed by laws and regulations;

(ii) Interest rate derivatives including forward interest rate contracts, single-currency interest rate swaps, two or cross-currency interest rate swaps, interest rate options and other derivative contracts as prescribed by laws and regulations;

(iii) Foreign currency derivatives including foreign exchange forwards, foreign currency swaps, foreign exchange options and other foreign currency derivative transactions as prescribed by laws and regulations;

(iv) Commodity derivatives including commodity swaps, commodity futures, commodity options and other commodity derivative contracts as prescribed by laws and regulations.

b) Derivative securities including future contracts, option contracts, forward contracts and other derivative securities as prescribed by laws on derivative securities and derivative securities markets;

a) Other derivatives stipulated by laws.

23. Underlying asset refers to a original financial asset used as the basis for valuing a derivative.

24. Credit risk includes:

a) Credit default risk is the risk that may arise due to a customer’s failure or incapability to pay debt obligations in part or in full under a contract or arrangement with a bank or foreign bank branch, unless otherwise stipulated by Point b of this Clause;

b) Counterparty credit risk refers to the risk that may arise due to a business partner’s failure or incapability to make prior or due payment for part or whole of debt obligations as prescribed by Clause 4 Article 8 hereof.

25. Market risk refers to the risk that may arise due to an adverse fluctuation in interest rates, securities prices and commodity market prices. Market risk includes:

a) Interest rate risk refers to the risk incurred due to an adverse variation in market interest rates with respect to value of securities, interest-bearing financial instruments, interest rate derivatives in the trading book of banks and/or foreign bank branches; 

b) Foreign exchange risk refers to the risk incurred due to an adverse variation in foreign exchange rates occurring on the market when a bank or foreign bank branch is running a foreign currency position; 

c) Equity risk refers to the risk incurred due to an adverse variation in market stock prices with respect to value of stocks, value of derivative securities in the trading book of banks and/or foreign bank branches; 

d) Commodity risk refers to the risk that may arise due to an adverse variation in commodity prices with respect to value of commodity derivatives, value of products in spot transactions exposed to the commodity risk of banks and/or foreign bank branches. 

26. Interest rate risk in the trading book refers to the risk incurred due to an adverse variation in interest rates with respect to income, value of assets, value of liabilities and value of off-balance-sheet commitments of banks and/or foreign banks that may arise as a consequence of: 

a) Difference in interest rate determination dates or interest rate redetermination periods;

b) Change in relationship between interest rate levels of different financial instruments that have the same maturity date;

c) Change in relationship between the levels of interest rate applied to different tenors;

d) Impacts resulted from interest rate option products or products with embedded interest rate options.

27. Operational risk refers to the risk arising due to inadequate or failed internal processes, people, system errors, failures or external events that cause financial losses or non-financial negative impacts on banks and/or foreign bank branches (including legal risks). The operational risk excludes

a) Reputational risk;

b) Strategic risks.

28. Reputational risk refers to the risk arising from negative reactions on the part of customers, partners, shareholders or the public to reputation of banks and/or foreign bank branches.

29. Strategic risk refers to the risk arising from a bank or foreign bank branch's availability or lack of timely response strategies or policies for business environment changes that may reduce the possibility of fulfilling business strategies or profit targets of banks and/or foreign bank branches.

30. Exposure refers to the portion of value of assets, liabilities and off-balance-sheet commitments of banks and/or foreign bank branches exposed to financial losses and non-financial negative impacts resulted from credit, market, liquidity, operational and other risks    

31. Proprietary trading refers to selling, buying and exchange transactions carried out by banks, foreign bank branches or subsidiaries of banks in accordance with laws and regulations with a view to selling, buying or exchanging financial instruments within a term of one year to earn banks and/or foreign bank branches profit generated from market price differences, including:

a) Financial instruments in the currency exchange market;

b) Currencies (including gold);

c) Securities in the equity market;

d) Derivative products;

dd) Other financial instruments traded in the official market.

32. Trading book refers to the portfolio used for recognizing the statuses of:

a) Proprietary trading transactions (except for transactions referred to in Point b Clause 3 of this Article);

b) Transactions aimed at performing guarantees for issuance of financial instruments;

c) Derivative product transactions aimed at hedging risks arising from proprietary trading transactions of banks and/or foreign bank branches; 

d) Foreign exchange or financial asset trading transactions aimed at serving the demands of customers, partners and transactions that serve the purpose of corresponding to these ones.

33. Banking book refers to the portfolio used for recognizing the statuses of:

a) Repo and reverse repo transactions;

b) Derivatives transactions performed to prevent accounts or entries on the asset balance sheet (including off-balance-sheet accounts or entries) of banks and/or foreign bank branches from being exposed to risks, except for transactions classified into the trading books of banks and/or foreign bank branches as provided in Point c, Clause 32 of this Article; 

c) Financial asset trading transactions performed to create liquidity reserves;

d) Other transactions which are not included in the trading books of banks and/or foreign bank branches. 

Article 3. Organizational structure and internal audit regarding capital adequacy ratio management

1. Banks and/or foreign bank branches are required to set up the organization structure, decentralization and authority delegation system, and assign functions and duties to particular individuals and divisions to manage the capital adequacy ratio in compliance with regulations set forth in this Circular and as appropriate to demands, characteristics and levels of operational risks, trading cycle and adaptability to risks and trading strategies of these banks and/or foreign bank branches.

2. Banks and/or foreign bank branches must perform internal audits on the capital adequacy ratio in accordance with regulations of the State Bank on the internal control systems of credit institutions or foreign bank branches.

Article 4. Database and information technology system

1. Banks and/or foreign bank branches must maintain an adequate data and information technology system as appropriate to calculate the capital adequacy ratio as prescribed by this Circular.

2. Banks and/or foreign bank branches must collect and manage data to ensure conformity to the minimum requirements as mentioned hereunder:

a) Have their organization structure, functions and duties of individuals and divisions, working processes and tools for data management to fulfill data quality and sufficiency requirements;

b) Have the processes of collecting and comparing data (internal and external), storing, accessing, supplementing, providing for, backing up and deleting data which ensure conformity to the capital adequacy ratio requirements set out in this Circular;

c) Meet requirements set out in the internal rules of banks and/or foreign bank branches, and regulations of the State Bank on the reporting and statistical regime.   

3. The information technology system must ensure conformance to the following minimum requirements:

a) Promote connection and centralized management in the entire system, ensure information security, safety and effectiveness upon calculation of the capital adequacy ratio as prescribed by this Circular;

b) Prepare tools to enhance connection with other systems to ensure accurate and timely calculation of the own equity and total asset based on credit risks, regulatory capital for particular risks and capital adequacy ratio;

c) Have the processes of reviewing, examining, providing for and responding to any failures or breakdowns, and periodic and regular maintenance processes;

d) Meet requirements set out in the internal rules of banks and/or foreign bank branches, and regulations of the State Bank on the reporting and statistical regime.   

Article 5. Independent credit rating company

1. Banks and/or foreign bank branches shall be entitled to use rating results received from independent credit rating companies established under laws and regulations on credit rating services for measuring the capital adequacy ratio as prescribed by this Circular provided that these companies satisfy the following requirements:

a) Objectivity: Credit rating must be stringent, systematic and subject to reassessment based on historical data to ensure that rating results must remain accurate for a period of at least one year; must be performed in a continual and timely manner prior to any change in financial status;

b) Independence: Credit rating companies shall not have to withstand any political and economic pressure that can affect credit rating results;

c) Transparency: Credit rating must be widely notified to all (domestic and overseas) parties concerned that have relevant legitimate interests; 

d) Disclosure: Credit rating companies must disclose information about credit rating methods, insolvency definitions and significance of each credit rating and actual insolvency rate of each credit rating and rating conversion;

dd) Resources: Credit rating companies must have sufficient resources to carry out credit ratings to meet required quality standards, employ the qualitative and quantitative method of credit rating and keep in frequent and continuous contact with rated objects at all levels to increase the quality of credit ratings;

e) Credibility: Credit rating must be trusted by organizations (investors, insurance businesses and commercial partners). Credit rating companies must have their internal processes to avoid misuse of confidential information relating to rated objects.

2. Banks and/or foreign bank branches must consistently use credit ratings provided by credit rating companies in management of risks and application of credit risk factors as prescribed by this Circular.

3. Credit rating scales of independent credit rating companies must be distributed according to levels of risks upon calculation of the capital adequacy ratio as follows:

a) Credit rating scales of Moody’s, Standard & Poor, Fitch Rating is distributed as follows:

Standard & Poor’s

Moody’s

Fitch Rating

AAA, AA+, AA, AA-

Aaa, Aa1, Aa2, Aa3

AAA, AA+, AA, AA-

A+, A, A-

A1, A2, A3

A+, A, A-

BBB+, BBB, BBB-

Baa1, Baa2, Baa3

BBB+, BBB, BBB-

BB+, BB, BB-

Ba1, Ba2, Ba3

BB+, BB, BB-

B+, B, B-

B1, B2, B3

B+, B, B-

CCC+ and lower rankings

Caa1 and lower rankings

CCC+ and lower rankings

b) In the event that independent credit rating companies provide credit rating scales different from credit ratings referred to in Point a of this Clause, these companies must convert credit ratings as appropriate to credit rating scales of Moody’s, Standard & Poor or Fitch Rating to determine levels of risks to customers, partners and claims upon calculation of the capital adequacy ratio.

4. Banks and/or foreign bank branches shall use credit ratings provided by independent credit rating companies in compliance with the following principles:

a) Only contractual credit rating, instead of optional credit rating, which is provided by an independent credit rating company, may be used;

b) In the event that a customer obtains more than two credit ratings from different independent credit rating companies, banks and/or foreign bank branches must prefer to use the credit ratings corresponding to the greatest credit risk factor to apply to such customer; 

c) Do not use credit ratings of parent companies to apply credit risk factors to subsidiary or affiliate companies thereof;

d) Merely use credit ratings to apply credit risks to same-currency credit ratings;

dd) In the event that a claim is assigned one credit rating, banks and/or foreign bank branches shall use that credit rating to apply credit risk factors to that claim as provided by this Circular;

e) In the event that a claim is assigned more than two credit ratings determined by different independent credit rating companies, banks and/or foreign bank branches must prefer to use the credit ratings relative to the greatest credit risk factor to apply to that claim; 

g) In the event that a claim is not rated, banks and/or foreign bank branches shall take the following steps:

(i) In the event that customers or partners have other claims and financial liabilities assigned particular credit ratings, banks and/or foreign bank branches can use the credit ratings assigned to these ones in order to apply credit risk factors to the unrated claims when these claims are given precedence in advance payments for claims and financial liabilities assigned credit ratings;

(ii) In the event that customers or partners are rated, banks and/or foreign bank branches can use the credit ratings of these customers or partners in order to risk-weight the unrated claims which are not secured and given priority to obtain payments of subordinated debts made by these customers or partners;

(iii) In the event that rated customers or partners have fulfilled requirements set out in Subparagraph (ii) Point g of this Clause and maintain particularly rated claims or other financial liabilities which conform to requirements set out in Subparagraph (i) Point g of this Clause, banks and/or foreign bank branches can use the credit ratings of these customers or partners, or rated claims on or other financial liabilities to, depending on whichever the credit risk weight is greater, apply it to unrated claims on;

(iv) Unless prescribed in Subparagraph (i), (ii) and (iii) Point g of this Clause, banks and/or foreign bank branches have to consider unrated claims.

Chapter II

SPECIFIC PROVISIONS

Section 1. CAPITAL ADEQUACY RATIO AND OWNERS’ EQUITY

Article 6. Capital adequacy ratio

1. Capital adequacy ratio calculated in percent (%) is determined according to the following formula:

Where:

- C: Owners’ capital;

- RWA: Risk-weighted asset;

- KOR: Regulatory capital for operational risk;

- KMR: Regulatory capital for market risk.

2. Banks without subsidiary companies and/or foreign bank branches must maintain the minimum capital adequacy ratio of 8% as defined in financial statements thereof.

3. Banks with subsidiary companies must maintain:

a) The minimum capital adequacy ratio of 8% as defined in financial statements thereof;

b) The minimum consolidated capital adequacy ratio of 8% as defined in consolidated financial statements thereof. If these banks accept insurance businesses as their subsidiaries, the consolidated capital adequacy ratio shall be determined with reference to the consolidated financial statements thereof in which these insurance subsidiary companies are not included according to the consolidation principle stipulated by the law on accounting, and with reference to financial statements with respect to credit institutions.  

4. As for foreign-currency accounts or entries, banks and/or foreign bank branches shall perform conversion into Vietnamese dong to calculate the capital adequacy ratio as follows:

a) Comply with regulations on accounting of foreign currency entries set forth in laws on the accounting entry system;

b) With respect to foreign currency risks, the following regulations must be observed:

 (i) Vietnamese dong and US dollar exchange rate shall be assigned as the central exchange rate publicly quoted by the State Bank on the reporting date;

 (ii) Vietnamese dong and other foreign currency exchange rate shall be designated as the exchange rate applied to spot selling transactions in which money is transmitted by the wire transfer between banks and/or foreign bank branches at the end of reporting date.

5. Based on the State Bank’s final report on supervision, examination and inspection of transactions performed by banks and/or foreign bank branches, when there comes a need to ensure the safety for operations of banks and foreign bank branches, depending on the characteristics and level of risks, the State Bank shall require these banks and foreign bank branches to maintain the capital adequacy ratio which is greater than the ratio required by this Circular. 

Article 7. Owners’ equity

1. The own equity of banks and/or foreign bank branches shall serve as the basis for calculation of the capital adequacy ratio as prescribed herein.

2. The owners’ equity shall be expressed as the total of Tier 1 and Tier 2 capital minus deductions stipulated in Appendix 1 hereto attached.  

Section 2. RISK-WEIGHTED ASSET

Article 8. Risk-weighted asset

1. Risk-weighted asset (RWA) is composed of credit risk-weighted assets (RWACR) and counterparty credit risk-weighted assets (RWACCR) and is calculated according to the following formula:

RWA = RWACR + RWACCR

Where:

- RWACR: Credit risk-weighted asset;

- RWACCR: Counterparty credit risk-weighted asset.

2. Credit risk-weighted asset (RWACR) is the asset on the balance sheet, which is calculated according to the following formula:

RWACR = åEj x CRWj + åMax {0, (Ei* - SPi)} x CRWi

Where:

- Ej : Value of the jth asset (other than claims);

- CRWj : Credit risk weight for the jth asset stipulated by Article 9 hereof;

- Ei* : Value of the outstanding amount of the ith claim (Ei) defined under Clause 3 of this Article after being subject to a decreasing adjustment made as part of the risk mitigation techniques referred to in Article 12, 13, 14 and 15 hereof;

- SPi : Specific provision for the ith claim;

- CRWi: Credit risk weight of the ith claim stipulated by Article 9 hereof.

3. Value of the outstanding amount of a claim (including the outstanding amount of principal and interest or fee where applicable) of banks and/or foreign bank branches shall be calculated according to the following formula:

Ei = Eoni + Eoffi x CCFi

Where:

- Ei : Value of the outstanding amount defined according to the method of determining the historical cost of the ith claim;

- Eoni: Value of the outstanding amount of the on-balance sheet portion of the ith claim;

- Eoffi: Value of the outstanding amount of the off-balance sheet portion of the ith claim;

- CCFi: Credit conversion factor of the off-balance sheet portion of the ith claim, referred to in Article 10 hereof.

4. Calculation of counterparty credit risk-weighted asset (RWACCR) shall be applicable to:

a) Proprietary trading transactions;

b) Repo and reverse repo transactions;

c) Derivative product transactions aimed at hedging risks; 

d) Foreign exchange or financial asset trading transactions aimed at serving the demands of customers or partners, referred to in Paragraph d Clause 32 Article 2 hereof.

5. In the course of calculation of the capital adequacy ratio, any transactions in which counterparty credit risks have been taken into account shall not be exempted from the requirement for credit risk anticipation. Calculation of counterparty credit risk-weighted asset (RWACCR) shall follow instructions given in the Appendix 2 enclosed herewith.

Article 9. Credit risk weight

1. Banks and/or foreign bank branches shall classify assets, as prescribed by this Article and instructions given in the Appendix 6, for which credit risk weights are applied.

While calculating the consolidated capital adequacy ratio, banks can apply credit risk weights stipulated by host countries for claims of subsidiary, affiliate companies or overseas bank branches.

2. As for cash, gold assets and cash equivalents of banks and/or foreign bank branches, the credit risk weight equals 0%.

3. As for assets which are claims on the Government, State Bank, State Treasury, People's Committee of centrally-affiliated cities or provinces and policy banks, the credit risk weight is 0%.   As for claims on the Vietnam Asset Management Company and the Debt and Asset Trading Corporation, the credit risk weight is 20%.

4. As for assets which are claims on international financial institutions, the credit risk weight is 0%.

5. As for assets which are claims on the Government and the Central Bank of overseas countries, the credit risk weight is relative to the credit rating as follows: 

Credit rating

From AAA to AA-

From A+ to A-

From BBB+ to BBB-

From BB+ to B-

Below B- or unrated

Credit risk weight

0%

20%

50%

100%

150%

6. As for assets which are claims on non-central government public sector entities, local governments of sovereigns, the credit risk weight is applied like the one applied to these claims on that government as prescribed by Clause 5 of this Article. 

7. As for assets which are claims on financial institutions (including credit institutions), the credit risk weight is subject to the following regulations:

a) As for foreign financial institutions (including foreign credit institutions) other than international financial institutions referred to in Clause 20 Article 2 hereof, the credit risk weight is relative to the credit rating as follows: 

Credit rating

From AAA to AA-

From A+ to BBB-

From BB+ to B-

Below B- or unrated

Credit risk weight

20%

50%

100%

150%

b) As for foreign bank branches operating within Vietnam, the credit risk weight is relative to the credit rating of foreign credit institutions which are parent banks. 

c) As for assets which are claims on domestic credit institutions, except those under the form of reserve repo transactions in which counterparty credit risks are taken into account as prescribed by Clause 4 Article 8 hereof, the credit risk weight is applied as follows: 

Credit rating

From AAA to AA-

From A+ to BBB-

From BB+ to BB-

From B+ to B-

Below B- and unrated

The claim of which original maturity is at least 3 months

20%

50%

80%

100%

150%

The claim of which original maturity is fewer than 3 months

10%

20%

40%

50%

70%

8. As for subordinated debt purchase or investment assets, other debt securities issued by other banks and/or foreign bank branches which are not taken away from Tier 2 Capital referred to in No.19, Part I, Section A, No. 21 Part II, Section A, No. 13 Section B Appendix 1 hereof, the credit risk weight is subject to Point b and Point C Clause 7 of this Article.

9. As for assets which are debts owed by enterprises other than credit institutions or foreign bank branches, except those referred to in Clause 10 of this Article, the credit risk weight is applied as follows: 

a) With regard to small and medium-sized enterprises defined under laws and regulations on assistance in development of small and medium-sized enterprises, the credit risk weight is 90%;

b) As for other enterprises, banks and/or foreign bank branches must define sales targets, leverage ratios or owners’ equity determined by figures included in the annual financial statement (consolidated financial statement) which is audited on the latest date with respect to enterprises subject to independent audits, or in the annual financial statement (audited where applicable) submitted to a tax authority (including documents used as evidence of such submission) on the latest date with respect to enterprises exempted from independent audits in accordance with laws and regulations as follows: 

- Sales are defined by using figures shown on the income statement;

- Leverage ratio = Total debt/ Total asset;

Where: Total debt is calculated as the sum of borrowings and debts arising from short-term finance leases plus borrowings and debts arising from long-term finance leases in accordance with applicable regulations on accounting.

- Owners’ equity is defined by using figures shown on the balance sheet.

 (i) The credit risk weight varies depending on sales target, leverage ratios and owners' equity of an enterprise as follows:

 

Less than VND 100 billion in sales

From VND 100 billion to under VND 400 billion in sales

From VND 400 billion to VND 1500 billion in sales

Greater than VND 1500 billion in sales

Leverage ratio of less than 25%

100%

80%

60%

50%

Leverage ratio ranging from 25% to 50%

125%

110%

95%

80%

Leverage ratio of greater than 50%

160%

150%

140%

120%

Owners’ equity being negative or equaling zero

250%

 (ii) The credit risk weight equal to 200% shall be applicable to enterprises failing to provide their financial statements to banks or foreign bank branches to calculate sales targets, leverage ratios and owners’ equity;

 (iii) As for enterprises coming into existence through initial establishment procedures (excluding those created through reorganization or legal ownership transformation procedures, etc.), and operating within a period of less than 1 year, the credit risk weight is 150%.

c) As for specialized lending used as project, object or commodities finances, the credit risk weight is greater than the range between the credit risk weight of 160% and the credit risk weight applied to enterprises as prescribed by Point b Clause 9 of this Article.

10. As for assets which are real estate secured loans, the credit risk weight is subject to the following regulations:

a) Banks and/or foreign bank branches must define the loan-to-value ratio for loans secured by real estate property as follows:

(i) Loan-to-value ratio = Total outstanding balance of loan/ Value of the asset pledged as collateral. Where:

- Total outstanding balance of loan includes total outstanding amount (already disbursed and not yet disbursed) of loan and total outstanding amount (already disbursed and not yet disbursed) of other loans secured by real estate property at banks and/or foreign bank branches;

- Value of the asset pledged as collateral is value of real property put up as collateral for these debts, which is determined on the lending approval date.

(ii) LTV ratio must be redefined when banks and/or foreign bank branches are informed of a devaluation of such collateral by more than 30% compared with value determined at the latest date.

b) The credit risk weight for debts secured by non-income-producing real estate property relative to the LTV ratio shall be applied as follows:

LTV

Below 40% in LTV

From 40% to below 60% in LTV 

From 60% to below 80% in LTV 

From 80% to below 90% in LTV 

From 90% to below 100% in LTV 

From 100% in LTV

Credit risk weight

30%

40%

50%

70%

80%

100%

c) As for debts secured by income-producing real estate, the credit risk weight relative to LTV ratio for debts collateralized by income-producing real estate property shall be applied as follows:

 

Below 60% in LTV

From 60% to below 75% in LTV 

From 75% in LTV

Debts secured by income-producing real estate

75%

100%

120%

d) As for debts secured by real estate property which is both income producing and non income producing real property, the credit risk weight particularly applied to either of such real estate property is proportionate to the gross floor area in the respective type of real estate;

dd) The credit risk weight equaling 150% shall be applied to debts secured by real estate property for which banks and/or foreign bank branches are not informed of the LTV ratio;

e) The credit risk weight equaling 200% shall be applied to assets which are credit loans used as finances for real estate business projects.

11. As for home equity loans, banks and/or foreign bank branches shall implement the following regulations:

a) Define the LTV ratio in accordance with regulations set forth in Clause 10 of this Article and the debt service coverage ratio for home equity loans as follows:

 (i) DSC = Total annual debt service/ Total annual income of a customer.

Where:

- Total annual debt service includes outstanding principal and interest amounts;

- Total annual income of a customer is the income earned within a DSC-calculation year by a customer after tax as prescribed and excludes the income generated from leasing of houses formed from that loan. In the event that an individual customer acts as an authorized representative of a family household to get involved in a borrowing relationship, total annual income of that customer shall be determined according to total income of family members sharing responsibility to pay debt obligations.   

 (ii) The DSC ratio must be redefined when banks and/or foreign bank branches are informed of any change in total income of their customers.

b) The credit risk weight applied to home equity loans is proportionate to the LTV and DSC ratio as follows:

Home equity loans

Below 40% in LTV

From 40% to below 60% in LTV 

From 60% to below 80% in LTV 

From 80% to below 90% in LTV 

From 90% to below 100% in LTV 

From 100% in LTV

Maximum DSC ratio of 35%

25%

30%

40%

50%

60%

80%

Minimum DSC ratio of 35%

30%

40%

50%

70%

80%

100%

c) The credit risk weight equaling 200% shall be applied to home equity loans for which banks and/or foreign bank branches are not informed of the LTV and/or DSC ratio;

12. As for an asset which is the retail portfolio, the credit risk weight is 75%.

13. As for bad debts, the credit risk weight is subject to the following regulations:

a) For a bad debt for which a specific provision is less than 20% of value of the bad debt (except the bad debt arising from a home equity loan for which a specific provision is less than 20% of the bad debt), the credit risk weight is 150%;

b) For a bad debt for which a specific provision ranges from 20% to 50% of value of the bad debt, or the bad debt arising from a home equity loan for which a specific provision is less than 20% of value thereof, the credit risk weight is 100%;

c) For a bad debt for which a specific provision is greater than 50% of value thereof, or the bad debt arising from a home equity loan for which a specific provision is from 20% of value thereof, the credit risk weight is 50%.

14. As for assets which are receivables arising from selling bad debts (exclusive of receivables arising from selling bad debts to VAMC and DATC), the credit risk weight is 200%.

15. As for assets being owners' equity instruments, stock purchases from enterprises (except for investments deducted from owners' equity as prescribed in the Appendix 1 enclosed herewith) and loans for investment or trade in securities or margin loans of securities firms, the credit risk weight is 150%.

16. As for assets being finance leases, the credit risk weight to be applied is the greater one in a comparison between the credit risk weight of 160% and the credit risk weight to be applied to finance lessee companies as prescribed by Point b Clause 9 of this Article.

17. As for assets being repurchases of receivables with retained right of recourse from financial companies and finance lessor companies as prescribed, the credit risk weight to be applied is the credit risk weight for debts with respect to sellers of receivables.

As for repurchases of receivables from financial companies and finance leasing companies, the credit risk weight to be applied is the credit risk weight for their debts.

18. As for other assets on the balance sheet, except for those referred to in Clause 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and 17 of this Article, the credit risk weight to be applied is 100%.

Article 10. Credit conversion factor (CCF)

1. The credit conversion factor equaling 10% shall be applied to:

a) Off-balance sheet commitments (including unused credit lines) that banks and/or foreign bank branches reserve their rights to revoke or automatically revoke due to customer's default on "revocable" terms or customer's reduced capacity to discharge his/her obligations;

b) Undrawn amounts in credit cards.

2. The credit conversion factor equaling 20% shall be applied to issuance and confirmation of commercial letters of credit based upon bills of lading which have the maximum original maturity of 1 year.

3. The credit conversion factor equaling 50% shall be applied to:

a) Issuance or confirmation of commercial letters of credit based upon bills of lading which have the minimum original maturity of 1 year;

b) Possible debts arising from specific activities (e.g. performance bonds, bid bonds, standby letters of credit for specific activities);

c) Guarantees for issuance of stocks or securities.

4. The credit conversion factor equaling 100% shall be applied to:

a) Loan-equivalent off-balance sheet commitments (e.g. the irrevocable lending commitment defined as the lending commitment that cannot be waived or changed under any form with respect to established commitments, unless otherwise prescribed by laws; guarantees or standby letters of credit securing debt obligations or bonds; undisbursed irrevocable lines of credit, etc.);

b) Payment acceptances (e.g. endorsements of documents against acceptance, etc.);

c) Payment obligations of banks and/or foreign bank branches arising from selling securities for which they are entitled to make a claim due to the issuer's default on commitments;

d) Forward contracts regarding assets, deposits and securities partially paid in advance on which banks and/or foreign bank branches make commitments;

dd) Off-balance sheet commitments which have not been prescribed in Clause 1, 2, 3, Point a, b, c and d Clause 4 of this Article.

5. As for off-balance sheet commitments which are commitments to provide an off-balance sheet commitment (e.g. commitments on issuance of guarantees, commitments on issuance of letters of credit, etc.), the credit conversion factor is the lower one in a comparison between the credit conversion factor applied to commitments to provide off-balance sheet commitments and the credit conversion factor applied to off-balance sheet commitments to be provided by commitments.  

Article 11. Credit risk mitigation

1. Banks and/or foreign bank branches shall be entitled to make a decreasing adjustment to value of receivables and transactions by implementing credit mitigation techniques referred to in Clause 2 of this Article.

2. Mitigating credit risks as provided for in Clause 1 of this Article shall be carried out by implementing a single or combined technique(s) mentioned hereunder:

a) Collateral;

b) On-balance sheet netting;

c) Third-party guarantee;

d) Credit derivatives.

3. Credit risk mitigation as provided for in Clause 1 of this Article must adhere to the following principles:

a) Credit risk mitigation techniques must be implemented in accordance with relevant laws. Documenting (papers, documents, etc.) on derivatives and on-balance netting must be validated by signatories, clarify responsibilities, obligations of parties involved, have legal effects and regularly be reviewed to ensure legality and validity thereof;

b) As for risk mitigation techniques (collateral, on-balance sheet netting and credit derivatives) implemented within a specified maturity, where the residual maturity of a risk mitigation technique is less than that of a claim, a decreasing adjustment to value of that claim shall be applicable to that credit risk mitigation technique of which the original maturity is less than one year and the residual maturity is at least three months;

c) Value of the decreasing adjustment to the risk mitigation technique shall be subject to a haircut if the residual maturity of a risk mitigation technique is less than the residual maturity of a claim or transaction (hereinafter referred to as maturity mismatch);

d) In cases where credit risk mitigation techniques, claims and transactions are not expressed in the same currency unit (hereinafter referred to as currency mismatch), value of the decreasing adjustment to a risk mitigation technique shall be subject to a haircut according to the currency mismatch;

dd) Banks and/or foreign bank branches must prepare other strategies, policies and processes for managing other risks (operational, liquidity and market risk, etc.) arising from credit risk mitigation and ensure that the required amount of capital is relative to these risks as prescribed herein;

e) In the case where two or multiple different risk mitigation techniques are applied to a single claim or transaction, banks and/or foreign bank branches will be required to subdivide that transaction or claim into portions covered by each type of credit risk mitigation technique to measure the exposure value of these portions as provided herein. 

4. The exposure value of a claim or transaction after risk mitigation shall be calculated according to the following formula:

Ei* = max{0,[Ei - åCj*(1-Hcj-Hfxcj)]} + max{0,[Ei-åLk*(1-Hfxlk)]} + max{0,[Ei - ål (1-CRWgtorl/CRWl)]} + max{0,[Ei-åCDn*(1- Hfxcdn)]}

Where:

- Ei*: The exposure value of the ith claim or transaction to which a decreasing adjustment is made by implementing credit risk mitigation techniques;

- Ei: The exposure value of the ith claim or transaction calculated as prescribed by Article 8 hereof;

- Cj*: Value of the collateral subject to the haircut appropriate for maturity mismatch;

- Hcj: Collateral haircut;

- Lk*: Value of on-balance sheet liability subject to the haircut appropriate for maturity mismatch;

- Gl: Value of third party protection;  

- CRWgtorl: Credit risk weight of the guarantor;  

- CRWl: Credit risk weight of the customer; 

- CDn*: Value of the credit derivative subject to the haircut appropriate for maturity mismatch;

- Hfxc, Hfxl, Hfxcd: haircut appropriate for currency mismatch between the claim, transaction and credit risk mitigation technique. The haircut appropriate for currency mismatch equals zero (0) when the claim, transaction and credit risk mitigation technique are expressed in the same currency.

Article 12. Credit risk mitigation by the collateral

1. Credit risk mitigation by the collateral shall only be applied to the following types of eligible collateral:

a) Cash, securities, credit cards issued by credit institutions or foreign bank branches;

b) Gold (standard gold, physical gold, gold jewelry of which value is converted into 99.99% purity gold);

c) Securities issued or secured by payment guarantees by the Government, State Bank of Vietnam;

d) Debt securities rated by an independent credit rating company where these are at least BB- when issued by sovereigns or PSEs;

dd) Debt securities rated by an independent credit rating company where these are at least BBB- when issued by firms;

e) Equities listed on the Stock Exchange of Ho Chi Minh city and Hanoi capital.

2. The collateral instruments referred to in Clause 1 of this Article are required to:

a) Comply with laws and regulations on secured transactions;

b) Securities, debt securities or equities not issued or guaranteed by customers and/or parent companies, subsidiaries and affiliates of customers.

3. The collateral haircut (Hc) calculated in percent (%) shall be applied according to the following principles:

a) As for the collateral instruments referred to in Point dd and Point e Clause 1 of this Article, the haircut is calculated at a daily mark-to-market price when there is an order matching occurring within 10 business days immediately preceding the calculation date. Where there is none of order matching transactions occurring within 10 business days prior to the calculation date, the haircut is 100%;

b) The collateral haircut is determined as follows:

 (i) Cash, credit cards and securities issued by banks and/or foreign bank branches, securities issued or guaranteed by the Government and State Bank of Vietnam, People’s Committees of centrally-affiliated cities and provinces or policy banks will be subject to the haircut of zero;

 (ii) Credit cards, securities, stocks and gold will be subject to the following haircuts:

Credit assessment of the issuer of securities and stocks

Residual maturity

Sovereigns (including institutions applying the credit risk weight treated as sovereigns) (%)  

Other issuers (%)

From AAA to AA-

≤ 1 year

0.5

1

>1 year, ≤ 5 years

2

4

> 5 years

4

8

- From A+ to BBB-

- Credit cards and securities issued by credit institutions and/or other foreign bank branches

≤ 1 year

1

2

>1 year, ≤ 5 years

3

6

> 5 years

6

12

BB+ to BB-, except credit cards and securities issued by credit institutions and/or other foreign bank branches

All

15

 

Main index equities VN30/HNX30 (including convertible bonds) and gold

15

Other equities listed on the Stock Exchange of Ho Chi Minh city and Hanoi capital

25

4. Value of the collateral adjusted for maturity mismatch (C*) is calculated according to the following formula:

C* = C x (t - 0.25) / (T - 0.25)

Where:

- C: Value of the collateral;

- T: min (5, residual maturity of a transaction or claim) expressed in years;

- t: min (T, residual maturity of the collateral) expressed in years.

5. The haircut appropriate for currency mismatch between the claim, transaction and collateral (Hfxc) is 8%.

Article 13. Credit risk mitigation by the on-balance sheet netting

1. On-balance sheet netting is defined as a decreasing adjustment by banks and/or foreign bank branches to value of a claim in proportion to the balance amount of deposit of a customer made at these banks and/or foreign bank branches.

2. Banks and/or foreign bank branches shall be entitled to make a decreasing adjustment to value of claims by applying the on-balance sheet netting technique upon calculation of total risk-weighted asset only if the following conditions are met:

a) Have a well-founded legal basis for concluding that the agreement on netting and offsetting of assets and liabilities of customers or counterparties is enforceable regardless of whether the counterparty is insolvent or bankrupt;

b) Determine assets and liabilities with each customer or counterparty that are subject to the on-balance sheet netting agreement at any time;

c) Monitor and control their risks;

d) Monitor and control the relevant exposures on a net basis.

3. Value of the customer’s deposit balance adjusted for maturity mismatch (L*) is calculated according to the following formula:

L* = L x (t - 0.25) / (T - 0.25)

Where:

- L: Customer’s deposit balance;

- T: min (5, residual maturity of a transaction or claim) expressed in years;

- t: min (T, residual maturity of the on-balance sheet liability) expressed in years.

4. The haircut appropriate for currency mismatch between the claim, transaction and deposit balance of a customer (Hfxl) is 8%.

Article 14. Credit risk mitigation by the third party guarantee

1. Credit risk mitigation by the guarantee shall only be applied to guarantors referred to in Clause 2 of this Article and adhere to the requirements set out in Clause 3 of this Article:

2. Guarantors include:

a) Government, central bank, PSEs, local governments;

b) Credit institutions and/or foreign bank branches rated at least BBB-;

c) Corporations rated at least A-.

3. Credit risk mitigation by the third party guarantee will be required to satisfy the following conditions:

a) A guarantee must represent a direct claim, be clearly defined and incontrovertible to specific obligations of a customer or counterparty to the guarantor;

b) The credit protection contract is irrevocable; there must be no clause in the contract that would allow the guarantor unilaterally to cancel the credit cover or that would increase the effective cost of cover in the event that capability of the customer or counterparty to discharge their obligations decreases; the guarantor is obliged to pay out in a timely manner in the event that the customer or counterparty fails to make the payments due;

c) The credit protection contract has the minimum duration equal to that of a claim or transaction;

d) The guarantor must be assigned the credit risk weight lower than that assigned the obligor (or the guarantor is rate better than the obligor);

dd) The guarantor is not a parent company, subsidiary or affiliate company of the guarantor.

4. Where a claim is not totally guaranteed, banks and/or foreign bank branches shall only be allowed to make a decreasing adjustment to the portion of the claim that has been guaranteed.

Article 15. Credit risk mitigation by the credit derivative

1. Banks and/or foreign bank branches shall be entitled to make a decreasing adjustment to value of claims by using credit derivative products only if the following conditions are met:

a) The credit events specified by the contracting parties must at a minimum cover: (i) failure to pay the amounts due under terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with the grace period in the underlying obligation);

 (ii) bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events;

 (iii) restructuring of the underlying obligation involving forgiveness or postponement of interest due to their financial problems.

b) A mismatch between the underlying obligation of a customer, counterparty and the reference obligation under the credit derivative is impermissible;

c) The credit derivative shall not terminate prior to the grace period of the underlying obligation;

d) The identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. The protection buyer must have the right or ability to inform the protection provider of the occurrence of a credit event.

2. Banks and/or foreign bank branches must calculate counterparty credit risk-weighted assets (RWACCR) for the portion covered by credit risk mitigation by credit derivatives in accordance with Clause 4 Article 8 hereof with respect to the issuer of credit derivatives.

3. Value of the credit derivative adjusted for maturity mismatch (CD*) shall be calculated according to the following formula:

CD* = CD x (t - 0.25) / (T - 0.25)

Where:

- CD: Value of the credit derivative;

- T: min (5, residual maturity of a transaction or claim) expressed in years;

- t: min (T, residual maturity of the credit derivative) expressed in years.

4. The haircut appropriate for currency mismatch between the claim, transaction and credit derivative (Hfxcd) is 8%.

Section 3. REGULATORY CAPITAL FOR OPERATIONAL RISK

Article 16. Regulatory capital for operational risk

1. Regulatory capital for operational risk (KOR) shall be determined according to the following formula:

KOR =

(BInthyear + BI(n-1)thyear + BI(n-2)th year

x 15%

3

Where:

- BInthyear: Business index defined in the last quarter at the calculation date;

- BI(n-1)thyear, BI(n-2)th year: Business index defined in the respective quarters of 2 years preceding the calculation year.

2. The business index shall be determined the following formula:

BI = IC + SC + FC

Where:

- IC: Absolute value of interest income and its equivalents minus interest cost and its equivalents;

- SC: Total value of income earned from service activities, costs incurred from service activities, other operating income and costs;

- FC: Total absolute value of Net Profit/Loss from foreign exchange, trading securities and investment securities trading activities.

The business index shall be determined under instructions given in the Appendix hereto attached.

Section 4. REGULATORY CAPITAL FOR MARKET RISK

Article 17. Policies and procedures for determination of the exposure for calculation of the regulatory capital for market risk

1. For purposes of identifying the regulatory capital for market risk, banks and/or foreign bank branches must develop documented policies on conditions and criteria for determining items of the trading book in order to calculate exposures on the trading book to ensure that they are separated from the banking book. Banks and/or foreign bank branches shall take on the following obligations:

a) Make a distinction between trading-book and banking-book transactions. Transaction data must be recorded in an accurate, adequate and timely manner into the risk management database and accounting records thereof;

b) Identify the sales department directly performing transactions;

c) Trading-book and banking-book transactions must be recognized on the system of accounting records and compared with figures recorded by the sales department (journal for transactions or other recording form);

d) The internal audit department must regularly review and assess items of the trading and banking book.

2. Banks and/or foreign bank branches will be allowed to reclassify and transfer items from the trading book to the banking book only when these items no longer satisfy conditions and criteria set forth in Clause 1 of this Article, and will not be allowed to transfer financial instruments from the banking book to the trading book.

3. Banks and/or foreign bank branches must develop policies and procedures for determining exposures in order to calculate the regulatory capital for market risk. These policies and procedures should, at a minimum, address:

a) Proprietary trading strategies for each type of currency, financial instrument, derivative product, and for assurance of no selling and buying restriction or risk-hedging capability;

b) Market risk limits (loss cut, profit realization and proprietary trading limits for customer service advisers, currency limits, concentration limits, maximum holding period, etc.); limits subject to review or assessment occurring once a year or upon the time when there is significant changes resulting in impacts on market risk exposures;

c) Procedures for management of market risk exposures required to ensure that:

 (i) Market risk exposures will be closely identified, measured, monitored, managed and supervised;

 (ii) There will be a separate department to perform proprietary trades where customer service advisers are granted autonomy to perform transactions within permitted limits and scope of proprietary trading strategies; there will be a department in charge of managing and keeping account of proprietary trades and trading-book items;

 (iii) Risk exposures and risk measurement results must be reported to regulatory authorities in accordance with regulations on management of risks of banks and/or foreign bank branches; 

 (iv) All of the financial statuses on the trading book must be measured and valued at current market price or data available on the official market at least once a day to determine amounts of loss, profit and market risk exposure;

 (v) Input market data must be collected in a maximum manner from appropriate sources and regularly reexamined in terms of appropriateness of input market data.

d) Regulations on conditions and criteria for recording of trading-book items and transfer of items between the trading and banking book as prescribed by laws;

dd) Methods for measuring market risk (including detailed description of used assumptions and parameters); methods for measuring market risk subject to review and assessment occurring annually or upon the time when any sudden change resulting in market risk exposures occurs; 

e) Procedures for monitoring risk exposures and compliance with market risk limits in line with proprietary trading strategies of banks and/or foreign bank branches. 

4. Policies and procedures referred to in Clause 1 and 3 of this Article must be periodically approved, released, amended or revised by relevant competent authorities of banks and/or foreign bank branches at least once a year and internally audited in accordance with regulations of the State Bank on the internal control system of credit institutions and/or foreign bank branches.

5. Banks and/or foreign bank branches shall submit regulations set out in Clause 1 and 3 of this Article to the State Bank (Bank Supervision and Inspection Agency) for supervisory purposes prior to their entry into force.    Where necessary, the State Bank (Bank Supervision and Inspection Agency) may request banks and/or foreign bank branches in writing to revise such policies and procedures.     

Article 18. Regulatory capital for market risk

1. Regulatory capital for market risk (KMR) shall be determined according to the following formula:

KMR = KIRR + KER + KFXR + KCMR + KOPT

Where:

- KIRR: Regulatory capital for interest rate risk, except options;

- KER: Regulatory capital for equity risk, except options;

- KFXR: Regulatory capital for foreign exchange risk (including gold), except options;

- KCMR: Regulatory capital for commodities risk, except options;

- KOPT: Regulatory capital for options.

2. Regulatory capital for interest rate risk (KIRR) shall be determined according to the following formula:

Where:

-  : Regulatory capital for specific interest rate risk arising from interest rate variation due to elements relating to specific issuers, calculated by using the Appendix 4 hereto attached;

- : Regulatory capital for general interest rate risk arising from interest rate variation due to market interest rate elements, calculated by using the Appendix 4 hereto attached.

Regulatory capital for interest rate risk shall be calculated under instructions given in the Appendix 4 hereto attached.

3. Regulatory capital for equity risk (KER) shall be determined according to the following formula:

Where:

- : Regulatory capital for specific equity risk arising from equity price variation due to elements relating to specific issuers, calculated by using the Appendix 4 hereto attached;

- : Regulatory capital for general equity risk arising from equity price variation due to elements relating to market price, calculated by using the Appendix 4 hereto attached.

Regulatory capital for equity risk shall be calculated under instructions given in the Appendix 4 hereto attached.

4. Regulatory capital for foreign exchange risk (KFXR) shall apply in the event that total value of net foreign exchange exposure (including gold) of banks and/or foreign bank branches is greater than 2% of the owners’ equity thereof. Regulatory capital for foreign exchange risk shall be calculated under instructions given in the Appendix 4 hereto attached.

5. Regulatory capital for commodities risk (KCMR) shall be calculated under instructions given in the Appendix 4 hereto attached.

6. Regulatory capital for options (KOPT) shall apply only when total value of options is greater than 2% of the owners’ equity of banks and/or foreign bank branches. Regulatory capital for options (KOPT) shall be calculated under instructions given in the Appendix 4 hereto attached.

Section 5. REPORTING AND INFORMATION DISCLOSING REGIME

Article 19. Reporting regime

Banks and foreign bank branches must report on capital adequacy ratio in accordance with regulations of the State Bank on statistical reporting system applied to credit institutions and/or foreign bank branches.

Article 20. Information disclosure

1. On biannual basis in a given financial year, banks and/or foreign bank branches shall disclose information on the capital adequacy ratio as stated in requirements set out in the Appendix 5 hereto attached.

2. Banks and/or foreign bank branches must develop information disclosure procedures ensuring:

a) Form (such as requirement relating to publications or postings on the website, etc.) and location (such as requirement relating to notification at main office) of disclosure of information about the capital adequacy ratio is specifically stipulated to guarantee transparency, public access and convenience for individuals and organizations concerned;

b) Disclosed information (especially quantitative information) must correspond to figures shown in the financial statement released at the same date;

c) There are processes and methods for collecting information (qualitative and quantitative contents) about the capital adequacy ratio as prescribed herein;

d) There are policies and procedures for examining accuracy, adequacy and update of disclosed information as prescribed herein;

dd) Responsibilities, authority and cooperation with departments and individuals concerned in information disclosure activities must be fully prescribed;    

e) Information disclosure procedures must be made known to individuals and departments concerned, and must be reviews and revised on annual basis.

3. Banks and/or foreign bank branches must submit information disclosure procedures to the State Bank (Bank Supervision and Inspection Agency) within a period of 10 days from the date of release, revision or replacement occurring.

Chapter III

RESPONSIBILITIES OF THE AFFILIATES OF THE STATE BANK

Article 21. Responsibilities of the Bank Supervision and Inspection Agency

1. Carry out supervision, examination and inspection activities towards banks and/or foreign bank branches; instruct and collaborate with the State Bank branches of centrally-affiliated cities and provinces where the Bank Supervision and Inspection Department in charge of inspecting and supervising compliance of local banks and/or foreign bank branches with regulations enshrined herein is not located.

2. Take charge of and collaborate with Departments and Authorities concerned in requesting the Governor of the State Bank in application of the minimum capital adequacy ratio which is greater than 8% in accordance with regulations set out in Article 6 hereof.

3. Collaborate with the Forecast and Statistics Department in development of report templates for the capital adequacy ratio issued together with regulations of the State Bank on statistical reporting system.

Article 22. Responsibility of other affiliates of the State Bank

1. The Forecast and Statistics Department shall act as the central entity for submission of capital adequacy ratio report templates to the Governor of the State Bank as prescribed herein.

2. The State bank branches located in centrally-affiliated cities and provinces without the presence of the Department of Bank Inspection and Supervision who takes charge of inspecting and supervising operations of banks and/or foreign bank branches in the area to ensure the compliance with regulations laid down in this Circular. 

Chapter IV

IMPLEMENTATION PROVISIONS

Article 23. Effect

1. This Circular shall enter into force from January 1, 2020, unless otherwise prescribed in Clause 2 of this Article.

2. Regulations of this Circular shall be applied earlier than the date referred to in Clause 1 of this Article to banks and/or foreign bank branches as provided for in Clause 3 of this Article.

3. Banks and/or foreign bank branches can enforce the capital adequacy ratio referred to herein prior to the date referred to in Clause 1 of this Article and submit application for implementation of this Circular to the State Bank (Bank Supervision and Inspection Agency) in which capability to implement this ratio and scheduled implementation date must be clearly defined. The date of official implementation of this Circular by banks and/or foreign bank branches submitting application for such implementation shall be specified in writing by the State Bank.

Article 24. Implementation

The Chief of the Office, Chief of the Banking Inspection and Supervision Agency, Heads of affiliated entities of the State Bank, Directors of the State Bank branches located at centrally-affiliated cities and provinces, Chairpersons of the Board of Directors, Chairpersons of the Board of Members, and General Director (Director) of banks and/or foreign bank branches, shall be responsible for implementing this Circular./.

 

 

 

PP. THE GOVERNOR
THE DEPUTY GOVERNOR




Nguyen Dong Tien

 

APPENDIX 2

COUNTERPARTY CREDIT RISK-WEIGHTED ASSETS

 (Appended to the Circular No. 41/2016/TT-NHNN dated December 30, 2016 of the State Bank’s Governor prescribing prudential ratios for operations of banks and foreign bank branches)

1. With respect to transactions with the Central Clearing House, Securities Depository Center and transactions of banks and/or foreign bank branches having short options, the counterparty credit risk will be calculated as 0.

2. With respect to transactions secured by margins and collateral that conform to conditions stipulated by Article 12 hereof, margins and risks hedged by collateral will be deducted from values of transactions as prescribed by Article 12 hereof.

3. A transaction or underlying asset would be evaluated on the basis of their mark-to-market value.  In the absence of the mark-to-market value, a bank and/or foreign bank branch must carry out mark-to-model evaluation and bear responsibility for accuracy and appropriacy of the calculation method, and simultaneously report to the State Bank (Bank Inspection and Supervision Agency) before application of such method.   The State Bank (Bank Inspection and Supervision Agency) will request the bank and/or foreign bank branch to revise the calculation method where appropriate.    

4. With respect to transactions of derivatives, the counterparty credit risk exposure to the jth transaction (RWAccrj) is calculated according to the following formula:

RWAccrj = [(RCj + PFEj) - Cj]x CRW

Where:

a) RCj: Replacement cost of the jth transaction which is calculated as the mark-to-market value of replacement transaction in proportion to value of the underlying asset or principal transaction (only a positive value accepted);

b) PFEj: Potential future exposure of the jth transaction which is calculated on the basis of the sum of values of notional underlying principal determined under laws and regulations on bookkeeping multiplied by the add-on factors relative to the following specific residual maturity:

 

Interest rate

Foreign exchange (including standard gold)

Equities, fund certificates or warrants

Precious metals (except gold)

Other commodities

1 years or less

0.0%

1.0%

6.0%

7.0%

10.0%

Over 1 year to 5 years

0.5%

5.0%

8.0%

7.0%

12.0%

Over 5 years

1.5%

7.5%

10.0%

8.0%

15.0%

Where:

 (i) For contracts with multiple exchanges of principal, the add-on factors are to be multiplied by the number of remaining payments in the contract;

 (ii) In the event that notional underlying principal amounts are differed under terms and conditions of the exchange contracts, the add-on factors must be calculated based on each value of notional underlying principal stated in these contracts.

 (iii) For contracts that are structured to settle outstanding exposures following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be set equal to the time until the next reset date. In the case of interest rate contracts with remaining maturities of more than one year that meet the above criteria, the add-on is 0.5%;

 (iv) Forwards, swaps, call options and similar derivative contracts not covered by any of the columns in this matrix are to be treated as “other commodities”;

 (v) No potential future credit exposure (PFEj) would be calculated for single currency floating / floating interest rate swaps; the counterparty credit risk-weighted assets in these contracts would be evaluated solely on the basis of their mark-to-market value.

 (vi) The following add-on factors apply to credit derivatives:

Credit derivatives

Add-on

1. Total return swaps

- Qualifying reference obligation defined as obligations of government public sector entities, development banks or other swaps rated from Baa or higher by Moody, or BBB or higher by Standard & Poor’s or Fitch Rating;

 

5%

- Non-qualifying reference obligation defined as obligations that fail to meet the above requirements.

10%

2. Credit default swaps:

- Qualifying reference obligation;

 

5%

- Non-qualifying reference obligation.

10%

c) Cj: Collateral value. Cj is adjusted by the haircut referred to in Article 12 hereof. Cj = 0 if the requirements referred to in Article 12 hereof are not satisfied;

d) CRW: Counterparty credit risk weight stipulated by Article 9 hereof.

5. With respect to a Repo and Reverse Repo (except the repo on the financial asset stipulated in Section 6 of this Appendix), the counterparty credit risk weighted asset (RWAccrj) is calculated according to the following formula:

RWAccrj = {Max[(0, Ej - Cj x (1-Hc-Hfx))]} x CRW

Where:

- Hc: Haircut appropriate to the underlying asset referred to in Article 12 hereof. Cj equals 0 unless all requirements specified in Article 12 hereof are satisfied;

- Hfx: Haircut appropriate for the currency mismatch between the transaction, collateral and collateral, and is equal to 8%;

- CRW: Counterparty credit risk weight stipulated by Article 9 hereof.

a) As for the repurchasing bank and/or foreign bank branch in a repo,

 (i) Ej: The agreed-upon repurchase price of the jth transaction as prescribed by laws;

 (ii) Cj: Value of the jth underlying asset;

b) As for the selling bank and/or foreign bank branch in a repo,

 (i) Ej: Value of the jth underlying asset;

 (ii) Cj: The agreed-upon repurchase price of the jth transaction as prescribed by laws.

6. As for a repo transaction of a financial asset prescribed by regulations of the State Bank on discounting of negotiable instruments and other securities, counterparty credit risk is calculated according to the following formula:

RWAccr = Ej x CRW

Where:

- Ej: Value of the jth transaction;

- CRW: Counterparty credit risk weight stipulated by Article 9 hereof.

7. As for a spot transaction where a counterparty fails to make a payment on the agreed-upon payment date, a bank and/or foreign bank branch is required to establish strict monitoring and supervisory procedures, and calculate the counterparty credit risk weighted asset (RWAccr) in the event that payment for that transaction is not made after 5 days from the agreed-upon payment date according to the following formula:    

RWAccr = 12.5 x GD x r

Where:

- GD: Exposure value of the transaction;

- r: Credit risk weight appropriate for the number of days late, defined as follows:

Number of days late

Credit risk weight

5 – 15 days

8%

16 – 30 days

50%

31 – 45 days

75%

46 days or more

100%

8. As for a transaction without any spot payment arrangement, if a bank and/or foreign bank branch has made a payment and its counterparty has yet to discharge its payment obligations within 5 business days after the agreed-upon payment date, it will calculate the counterparty credit risk weighted asset according to the following formula:

RWAccr = Ej x CRW

Where:

- Ej: Value of the jth transaction;

- CRW: Counterparty credit risk weight stipulated by Article 9 hereof.

After 5 business days from the agreed-upon payment date, if the counterparty has yet to pay its obligation, the bank and/or foreign bank branch shall be obliged to subtract the exposure value of that transaction and the replacement cost, if any, from the own equity until the counterparty's fulfillment of its contractual obligation.

9. Bilateral netting is defined as the process by which a bank and/or foreign bank branch substitutes a single payment obligation to its counterparty for a given currency on a given value date provided that these obligations are denominated in the same currency on the same value date.    Bilateral netting shall be implemented only when the bank and/or foreign bank branch satisfies the requirements that it has:

a) a bilateral netting agreement or contract which creates a single legal obligation, covering all included transactions such that the bank and/or foreign bank branch would have either a claim to receive or obligation to pay the net sum of the mark-to-market values of included individual transactions in the event the counterparty fails to perform its contractual obligations due to default, bankruptcy, liquidation or other similar circumstances; a bilateral netting arrangement or contract which excludes terms and conditions allowing the counterparty to make restricted or incomplete payments generated from the asset of the defaulting party even if the paying party is the receiver of a net amount; 

b) the bilateral netting is enforceable under legislation of each of the relevant jurisdictions;

c) procedures in place to ensure that the legal characteristics of bilateral netting agreements or contracts are kept under review in the light of possible changes in relevant law.

10. Counterparty credit risk weighted asset (RWAccr) subject to the bilateral netting can be calculated as the net mark-to-market replacement cost, if positive, plus an add-on based on the notional underlying principal.   The add-on for netted transactions (ANet) is expressed through the following formula:

ANet = AGross (0.4 + 0.6 NGR)

Where:

- AGross: The gross add-on defined as aggregation of potential future exposures of component transactions which are calculated according to the formula referred to in Section 4 of this Appendix.

- NGR: the ratio of net replacement cost to gross replacement cost for transactions subject to legally enforceable netting agreements/contracts.  

Example for repos or reverse repos:

Bank A and Bank B have entered into a repo agreement for VND 100 billion of 10-year bonds issued by Bank C (unrated) that mature within 3 month at the repurchase price of VND 98 billion. The mark-to-market value of these bonds on the value date is VND 99 billion. The risk weights applied to Bank A and Bank B for claims having the original maturity of less than 3 months are 50% and 70% respectively.

- Bank A (seller) must calculate its counterparty credit risk-weighted asset included in this transaction according to the following formula:

RWAccr = [Max(0, (99 - 98 x (1-0.12)]x 70% = VND 8.932 billion

- Bank A (buyer) must calculate its counterparty credit risk-weighted asset included in this transaction according to the following formula:

RWAccr = [Max(0, (98 - 99 x (1-0.12)]x 50% = VND 5.44 billion.

 

APPENDIX 4

REGULATORY CAPITAL REQUIREMENTS FOR MARKET RISK

 (Appended to the Circular No. 41/2016/TT-NHNN dated December 30, 2016 of the State Bank’s Governor prescribing prudential ratios for operations of banks and foreign bank branches)

A. Principle of calculation of the capital charge for market risk

A transaction or underlying asset would be evaluated on the basis of their mark-to-market value.  In the absence of mark-to-market value, a bank and/or foreign bank branch must carry out mark-to-model evaluation and assume responsibility for accuracy and appropriacy of the calculation method, and simultaneously report to the State Bank (Bank Inspection and Supervision Agency) before application of such method.   The State Bank (Bank Inspection and Supervision Agency) will request the bank and/or foreign bank branch to revise the calculation method where appropriate.    

B. Method of calculating the capital charge for market risk

Regulatory capital charge for interest rate risk

1. Scope of calculation of regulatory capital charge for interest rate risk:

Banks and/or foreign bank branches must calculate the regulatory capital charge for interest rate exposure to all of the financial instruments on the whole trading book (including long or short positions) of which mark-to-market values would be affected to the extent of any change in interest rate occurring, except: 

a) Convertible bonds on which the regulatory capital requirement for bond price is charged under the provisions of Section II of this Appendix;

b) Equity instruments, debt-based equity instruments of other entities which have been taken away from capital of the bank and/or foreign bank branch during the process of calculating equity as prescribed by Appendix 1 hereof; 

c) Underlying assets in option contracts on which regulatory capital requirements for option transactions are charged;

d) Financial instruments purchased according to securities repo agreements between credit institutions or foreign bank branches.

2. Principle of calculation of regulatory capital requirement for interest rate risk:

a) Banks and/or foreign bank branches must charge the regulatory capital requirement for specific interest rate risks on each financial instrument that has long or short position, and for general interest rate risks to the entire portfolio to meet:

 (i) regulatory capital requirement for specific interest rate risks arising from factors relating to financial instrument issuers;

 (ii) regulatory capital requirement for general interest rate risks arising from any change to interest rates on the market. 

b) Interest rate derivatives must be converted into matched notional positions of underlying assets and mark-to-market values of underlying assets must be used for calculating regulatory capital requirements for interest rate risks as follows:

 (i) Calculating regulatory capital requirements for general interest rate risks under the provisions of Point 4 of this Section;

 (ii) Calculating regulatory capital requirements for specific interest rate risks under the provisions of Point 3 of this Section. Currency and interest rate swap contracts; interest rate or foreign currency forward contracts; interest rate future contracts; future contracts based on the interest rate index; foreign currency or other financial instrument future contracts for which specific interest rate risks are not weighted.

c) Purchase (sale) of forward contracts or future contracts under which underlying assets are debt securities must be converted into 02 matched positions of the following debt securities:

 (i) Long (short) position of a debt security;

 (ii) Short (long) position of debt security on which interest rate is zero (zero coupon) and to which specific interest rate risk is zero (e.g. equivalent zero-coupon Government bonds) with maturity equal to maturity of a forward or future contract.

d) A forward contract or future contract under which the underlying asset is the portfolio of debt securities or index of debt securities must be converted into the forward or future contract of each of the following debt securities:

 (i) A forward contract or future contract under which the underlying asset is the portfolio of debt securities or index of debt securities must be the aggregation of forward or future contracts of each security included in the portfolio/index of which value is equal to the corresponding ratio of value of each debt security to value of the entire portfolio/index;

 (ii) Forward or future contracts of each debt security of which positions are calculated in accordance with Point 4b of this Section.

dd) As for interest rate forward contracts, banks and/or foreign bank branches selling (buying) interest rate forward contracts must be converted into 02 matched positions as follows: 

 (i) Short (long) position of notional value of debt security on which interest rate is zero (zero coupon) and to which specific interest rate risk is zero (e.g. equivalent zero-coupon Government bonds) with maturity equal to the total of maturity of a forward contract plus maturity of the underlying asset;

 (ii) Long (short) position of notional value of debt security on which interest rate is zero (zero coupon) and to which specific interest rate risk is zero with maturity equal to maturity of a forward contract.

e) As for foreign currency or interest rate swap contracts, banks and/or foreign bank branches must calculate the regulatory capital requirement for market risk based on two notional positions (position 1 and 2) as follows: 

 

Notional position 1

Notional position 2

Banks and/or foreign bank branches receive fixed interest rates and pay floating interest rates

 (ii) Short position of a debt security to which the specific interest rate risk equals zero, on which the interest rate is floating and of which maturity is the duration of redetermination of the interest rate.

Long position of a debt security to which the specific interest rate risk equals zero, on/of which the interest rate and maturity is the floating interest rate and maturity of the swap contract respectively.

Banks and/or foreign bank branches receive floating interest rates and pay fixed interest rates

Short position of a debt security to which the specific interest rate risk equals zero, on/of which the interest rate and maturity is the floating interest rate and maturity of the swap contract respectively.

Long position of a debt security to which the specific interest rate risk equals zero, on which the interest rate is floating and of which maturity is the duration of redetermination of the interest rate.

Banks and/or foreign bank branches receive and pay floating interest rates

Short position of a debt security to which the specific interest rate risk equals zero, on which the interest rate is floating and of which maturity is the duration of redetermination of the interest rate

Long position of a debt security to which the specific interest rate risk equals zero, on which the interest rate is floating and of which maturity is the duration of redetermination of the interest rate.

Banks and/or foreign bank branches receive and pay fixed interest rates

Short position of a debt security to which the specific interest rate risk equals zero, on which the interest rate is fixed and of which maturity is the duration of the swap contract.

Long position of a debt security to which the specific interest rate risk equals zero, on which the interest rate is floating and of which maturity is the duration of the swap contract.

With respect to foreign currency swap transactions, two notional positions of debt security to which specific interest rate risk equals zero are two notional positions of debt security of which currency units for issuance are two corresponding currency units in these foreign currency swap transactions. 

3. The capital charge for specific interest rate risk (KIRR) will be calculated according to the following formula:

Where:

- ei: mark-to-market value of the ith financial asset;

- SRW: specific risk weight for each financial instrument.

The specific risk weight is calculated as follows:

a) As for financial instruments issued or guaranteed by the Government of Vietnam or People’s Committees of centrally-affiliated cities and/or provinces, the credit risk weight is 0%;

b) As for other financial instruments, the specific risk weight SRW is calculated according to the following table:

Financial instrument

External credit assessment

SRW

Category 1

From AA- to AAA

0%

From BBB- to A+

0.25% (residual term to final maturity 6 months or less)

 

1% (residual term to final maturity greater than 6 and up to and including 24 months)

 

1.6% (residual term to final maturity exceeding 24 months)

From B- to BB+

8%

Below B-

12%

Unrated

12%

Category 2

 

0.25% (residual term to final maturity 6 months or less)

1% (residual term to final maturity greater than 6 and up to and including 24 months)

1.6% (residual term to final maturity exceeding 24 months)

Category 3

From BB- to BB+

8%

Below BB-

12%

Unrated

12%

Where:

- Category 1: Financial instruments issued by governments or local authorities of countries.

- Category 2:

+ Financial instruments issued by international finance organizations or state enterprises;

+ Other financial instruments rated BBB- or higher by at least two credit rating organizations.

- Category 3: The rest of financial instruments.

4. The capital charge for the general interest rate risk ( ):

a) The capital charge for general interest rate risk is the sum of the absolute values of capital charges for general interest rate risk which are calculated in a single currency.

b) The capital charge for general interest rate risk is calculated by using the maturity method according to the following formula:

Where:

- NWP: Capital charge for the risk incurred by mismatched positions on the whole trading book;

- VD (vertical disallowance): Capital charge for the risk incurred by the matched positions in the same maturity ladder;

- HD (horizontal disallowance): Capital charge for the risk incurred by the matched positions in the same one (01) zone or between different zones.

c) The capital charge for general interest rate risk is calculated by taking the following steps:

 (i) Step 1: Determine maturity periods based on the residual term to final maturity or the residual term to the rate fixing period of each position of a single financial instrument.

 (ii) Step 2: Slot positions of financial assets into the maturity ladder according to the following table:

 


 

Maturity ladder (30 days per 1 month; 360 days per 1 year)

Risk weight

Net position

Weighted Position

Matched Weighted Position

Unmatched Weighted Position

Sums of weighted positions by zone

Matched Weighted Position by zone

Unmatched Weighted Position by zone

Matched weighted position between zones

Zone

Coupon ≥ 3%

Coupon <3%>

%

Long

Short

Long

Short

 

+/-

Long

Short

 

+/-

1/2

2/3

1/3

1

2

3

4

5

6

7

8

 

 

 

 

 

Zone 1

Less than 1 month

Less than 1 month

0.00

 

 

 

 

 

 

 

 

 

 

 

 

 

1 - less than 3 months

1 - less than 3 months

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

3 - less than 6 months

3 - less than 6 months

0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

6 - less than 12 months

6 - less than 12 months

0.70

 

 

 

 

 

 

 

 

 (b)

 

 

 

 

 

Zone 2

1- less than 2 years

1- less than 1.9 years

1.25

 

 

 

 

 

 

 

 

 

 

 

 

 

2- less than 3 years

1.9- less than 2.8 years

1.75

 

 

 

 

 

 

 

 

 

 

 

 

 

3- less than 4 years

2.8- less than 3.6 years

2.25

 

 

 

 

 

 

 

 

 (c)

 

 

 

 

 

Zone 3

4- less than 5 years

3.6- less than 4.3 years

2.75

 

 

 

 

 

 

 

 

 

 

 

 

 

5- less than 7 years

4.3- less than 5.7 years

3.25

 

 

 

 

 

 

 

 

 

 

 

 

 

7- less than 10 years

5.7- less than 7.3 years

3.75

 

 

 

 

 

 

 

 

 

 

 

 

 

10- less than 15 years

7.3- less than 9.3 years

4.50

 

 

 

 

 

 

 

 

 

 

 

 

 

15- less than 20 years

9.3- less than 10.6 years

5.25

 

 

 

 

 

 

 

 

 

 

 

 

 

20 years or over

10,6- less than 12 years

6.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12- less than 20 years

8.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20 years or over

12.50

 

 

 

 

 

 

 

 

 (d)

 

 

 

 

 

 

 

 

 

 

Total (L)

Total (S)

Total (a)

 

 

 

 

 

(e)

(f)

(g)

 

 

 

 

 

 

NWP=|(L)-(S)|

VD=10%*(a)

 

 

 

 

 

 

 

 

- Step 3: Calculate the long position in each maturity band as the sum of long positions in that maturity band, and the short position as the sum of short positions in that maturity band.

- Step 4: Calculate the weighted long/short position in each maturity band by multiplying the long/short position by the interest rate risk weight in that maturity band.

- Step 5: Calculate NWP according to the following formula:

NWP = The absolute value of (the sum of weighted long positions in maturity bands (Sum of weighted long positions in maturity ladders (identified by the letter L on the aforesaid table) – Sum of weighted short positions in maturity ladders (identified by the letter S on the aforesaid table)). 

- Step 6: Calculate VD:

- Determine which maturity band both long position and short position are present in order to calculate the matched weighted position in that maturity band as the lesser of the absolute values of long position and short position in that maturity band;

- Calculate the sum of the matched weighted positions in maturity bands (identified by (a) in the aforesaid table);

- Calculate VD according to the formula: VD = 10% x (a).

- Step 7:

- Calculate the unmatched weighted position in each maturity band as the difference between the absolute value of the weighted long position and that of the weighted short position in that maturity band with a positive sign (+)/ a negative sign (-); 

- Calculate the sums of unmatched weighted position by zone as the aggregation of unmatched weighted long/short positions by zones; 

- Calculate the matched weighted position by zone as the lesser of the absolute values of long position and short position in each zone (signs assigned to the matched weighted positions by zones 1, 2 and 3 are (b), (c) and (d), respectively, in the aforesaid table). 

- Step 8:

- Calculate the unmatched weighted position by zone as the difference between the absolute value of the weighted long position by that zone and that of the weighted short position by that zone; 

- Calculate the matched weighted position between zones by each pair of zones as follows:

+ The matched weighted position between zone 1 and zone 2 is calculated as the lesser of the absolute value of the unmatched weighted position by zone 1 and that of unmatched weighted position by zone 2 if both of these positions have opposite signs (identified by (e) on the above table); 

+ The matched weighted position between zone 2 and zone 3 is calculated as the lesser of the absolute value of the unmatched weighted position by zone 2 and that of unmatched weighted position by zone 3 if both of these positions have opposite signs (identified by (f) on the above table); 

+ The matched weighted position between zone 1 and zone 3 is calculated as the lesser of the absolute value of the residual unmatched weighted position by zone 1 and that of residual unmatched weighted position by zone 3 if both of these positions have opposite signs (identified by (g) in the above table).

- Step 9: Calculate HD according to the following formula:

HD = (b) x 40% + (c) x 30% + (d) x 30% + (e) x 40% + (f) x 40% + (g) x 100%

Example: Maturity ladder approach in calculation of the capital charge for general interest rate risk

Assume a bank is holding the following financial assets:

 (a) Caterogy-2 bond has the market value of VND 15 billion, residual maturity of 8 years and coupon rate of 8%; 

 (b) Government bond has the market value of VND 75 billion, residual maturity of 2 years and coupon rate of 7%

 (c) Interest rate swap contract has the market value of the notional underlying asset equal to VND 150 billion. Accordingly, the bank receives the floating interest rate and pays the fixed interest rate with the subsequent rate fixing period beginning after 9 months, and the residual life of the swap contract is 8 years; 

 (d) Long position in the interest rate future contract is worth VND 50 billion, delivery date after 6 months, and life of the underlying Government security is 3.5 years.

Positions of financial assets are slotted into maturity ladder time-bands according to the following chart:

 

Maturity

 (1 month including 30 days, 1 year including 360 days)

Risk weight

Net position

Weighted Position

Matched Weighted Position

Unmatched Weighted Position

Sums of weighted positions by zone

Matched Weighted Position by zone

Unmatched Weighted Position by zone

Matched weighted position between zones

Zone

Coupon ≥ 3%

Coupon < 3%="">

%

Long

Short

Long

Short

 

+/-

Long

Short

 

+/-

1/2

2/3

1/3

1

2

3

4

5

6

7

8

 

 

 

 

 

Zone 1

Less than 1 month

Less than 1 month

0.00

 

 

 

 

 

 

 

 

 

 

 

 

 

1 - less than 3 months

1 - less than 3 months

0.20

VND 75 billion in the Government bond

 

0.15

 

 

 

 

 

 

 

 

 

 

3 - less than 6 months

3 - less than 6 months

0.40

 

VND 50 billion in the future contract

 

0.2

 

 

 

 

 

 

 

 

 

6 - less than 12 months

6 - less than 12 months

0.70

VND 150 billion in the swap contract

 

1.05

 

 

 

 

 

 (b)

 

 

 

 

 

Zone 2

1 - less than 2 years

1 - less than 1.9 years

1.25

 

 

 

 

 

 

 

 

 

 

 

 

 

2 - less than 3 years

1.9 - less than 2.8 years

1.75

 

 

 

 

 

 

 

 

 

 

 

 

 

3 - less than 4 years

2.8 - less than 3.6 years

2.25

VND 50 billion in the future contract

 

1.125

 

 

 

 

 

 (c)

 

 

 

 

 

Zone 3

4 - less than 5 years

3.6 - less than 4.3 years

2.75

 

 

 

 

 

 

 

 

 

 

 

 

 

5 - less than 7 years

4.3 - less than 5.7 years

3.25

 

 

 

 

 

 

 

 

 

 

 

 

 

7- less than 10 years

5.7- less than 7.3 years

3.75

VND 14 billion in the bond classified into Category 2 

VND 150 billion in the swap contract

0.5

5.625

 

 

 

 

 

 

 

 

 

- Calculate the capital charge for the risk incurred by mismatched positions on the trading book (NWP):

NWP = |(75 x 0.2%) - (50 x 0.4%) + (150 x 0.7%) + (50 x 2.25%) - (150 x 3.75%) + (14 x 3.75%)|

= |(0.15 – 0.2 + 1.05 + 1.125 – 5.625 + 0.5)|

= |(-3)| = VND 3 billion

- Calculate the capital charge for VD within the same maturity ladder:

As there are both long and short position present within the time-band of 7 – 10 years, the matched weighted position must be calculated as 0.5 (the lesser of the absolute values of the weighted long position (0.5) and the weighted short position (-5.625).

VD = 0.5 x 10% = VND 0.05 billion.

Step 7:

- The unmatched weighted position of each maturity ladder:

+ Time-band from 7 to 10 years: |0.5| - |-5.625| = -5.125

- The matched weighted position by zone:

+ As there is more than one position only in Zone 1, HD can only be calculated in this zone. In doing this, the matched weighted position in this zone is the lesser of the absolute values of the added long and short positions in the same zone and is calculated as 0.2.

The capital charge for the HD within zone 1 is calculated as 0.2 x 40% = VND 0.08 billion.

Step 8:

- The unmatched weighted position by zone 1 is calculated as the difference between the absolute value of the weighted long position by zone 1 and that of the weighted short position by zone 1, and equals |0.15 + 1.05| - |-0.2| = 1; 

Similarly, the unmatched weighted position by zone 2 equals |1.125| = 1.125;

The unmatched weighted position by zone 3 equals |0| - |-5.125| = -5.125.

- Calculate the matched weighted position between zones by each pair of zones:

+ The matched weighted position between zone 2 and zone 3 is 1.125 (f);

The capital charge for HD between zone 2 and zone 3 is equal to 1.125 x 40% = VND 0.45 billion;

+ The matched weighted position between zone 1 and zone 3 is 1 (g);

The capital charge for HD between zone 1 and zone 3 is equal to 1 x 100% = VND 1 billion.

The total capital charge in this example:

- NWP: VND 3 billion;

- VD: VND 0.05 billion;

- HD in zone 1: VND 0.08 billion;

- HD between zone 2 and zone 3: VND 0.45 billion;

- HD between zone 1 and zone 3: VND 1 billion;

Total amount of capital charge: VND 4.58 billion. 

II. Regulatory capital requirement for equity risk

1. Regulatory capital requirement for equity risk is applied to equity positions in the trading book. Banks and/or foreign bank branches must calculate the capital charge for specific and general equity risk to convertible equities, bonds and derivatives of which the underlying assets are equities (except options) in the trading book, except convertible equities or bonds which have already been removed from the own equity of banks and/or foreign bank branches when calculating equity under the provisions of Appendix 1 hereof.

2. An equity position (long or short position) is calculated for financial instruments referred to in Point 1 of this Section according to the following principles:

a) Long (short) position of an equity or equity-based financial instrument issued by an issuing entity is netted;

b) As for equity derivatives, equity positions will be determined by notional equity positions as follows:

 (i) In futures or forwards under which the underlying assets are equities, these positions are calculated on the mark-to-market value. 

 (ii) In forwards in which the underlying assets are stock indices, these positions are calculated on the basis of mark-to-market value of the securities portfolio in stock indices;

 (iii) In swaps for which long and short equity positions are calculated, banks and/or foreign bank branches must, at the same time, recognize two positions, subject to obligations agreed upon the contracts. For example in a swap, a bank and/or foreign bank branch must recognize a long position when receiving an amount generated by any change in value of an equity or a stock index, and recognize a short position when paying another stock index. If either of the aforesaid positions is associated with receipt or payment of fixed interest rate or floating interest rate, the bank and/or foreign bank branches must calculate interest rate exposures in accordance with Section I of this Appendix.

3. The capital charge for specific equity risk ( ) will be calculated according to the following formula:

 = (LP + SP)x 8%

Where:

- LP: Long position;

- SP: Short position.

4. The capital charge for general equity risk () will be calculated according to the following formula:

= |LP - SP| x ERW

Where:

- LP: Long position;

- SP: Short position;

- ERW: General equity risk weight which is applied according to the following rules:

a) Equities or equity-based financial instruments (e.g. convertible bonds) and derivatives of which the underlying assets are equities will be weighted at 8%;

b) Derivatives of which the underlying assets are stock indices will be weighted at 10%.

III. Regulatory capital requirement for commodity risk

1. Regulatory capital requirement for equity risk is applied to commodity positions in the trading book. Banks and/or foreign bank branches must calculate capital charges for commodity risk for positions of commodity derivatives in the trading book.

2. (Long or short) position of a commodity derivative is calculated for commodities (except exchange rate-weighted standard gold) according to the following principles:

a) Position of commodity derivative will be calculated for each type of commodity. When calculating positions of commodity derivatives of the same type, the netting shall be applied.

b) Each commodity position is expressed in Vietnamese dong by converting the standard unit of measurement at the spot price of that commodity on the calculation date.

3. The capital charge for commodity risk (KCMR) will be calculated according to the following formula:

Where:

 Capital charge for commodity directional risk arising due to changes in the spot price of that commodity;

 Capital charge for other commodity risk arising from changes in the forward prices due to maturity mismatches of that commodity or changes in the price relationships between two similar, but not identical, commodities.

4. The capital charge for commodity directional risk () will be calculated according to the following formula:

Where:

NP: Net position of each commodity derivative.

5. The capital charge for other commodity risk () will be calculated according to the following formula:

Where:

- LP: Long position of each commodity derivative;

- SP: Short position of each commodity derivative.

6. Interest rate or foreign exchange exposures arising from holding or taking of positions in commodities must be relevantly calculated for interest rate or foreign exchange risk positions as prescribed by Section I and IV of this Appendix.

IV. Regulatory capital requirement for interest rate risk

1. The capital charge for foreign exchange risk (KFXR) shall be determined according to the following formula:

KFXR = (Max (åSP, åLP) + GoldP) x 8%

Where:

- åSP: Sum of short positions in foreign currencies in the portfolio of foreign currencies;

- åLP: Sum of long positions in foreign currencies in the portfolio of foreign currencies;

- GoldP: Gold position.

2. (Long or short) position of a foreign currency is calculated for a single currency (including standard gold) according to the following principles:

a) Position in each currency should be calculated by summing:

 (i) Spot position calculated as difference between all asset items and all liability items (including accrued interest and costs of payment thereof) in the currency;

 (ii) Net forward position calculated as difference between all amounts to be received and all amounts to be paid in a specified currency under forward foreign exchange transactions, including currency futures and the principal on currency swaps not included in the spot position;

 (iii) Guarantees (or similar obligations) that are unlikely to be revocable and under which obligors fail to discharge their agreed-upon obligations;

 (iv) Net future income/expenses not yet accrued but already fully hedged;

 (v) Profit/loss items in foreign currencies generated/incurred from business activities in foreign countries in accordance with the bookkeeping laws of the host countries.

b) Position in a foreign currency is the original currency position in that foreign currency (calculated under laws and regulations on foreign currency positions held by credit institutions and foreign bank branches) converted into Vietnamese dong at the position conversion rate.   

V. Regulatory capital requirement for option

1. Banks and/or foreign bank branches must calculate the regulatory capital charge for options under which the underlying assets are financial instruments exposed to interest rate, equity, foreign currency and commodity risk.

2. The capital charge for option will be calculated as follows:

a) If a bank and/or foreign bank branch has a long option, the capital charge for that option will be calculated as follows:

 (i) If the bank and/or foreign bank branch has long cash and long put option, or short cash and long call option, the capital charge for that option will be calculated as follows:

KOPT = Max(0, {MVunderlying x (SRW + GRW) - Max(0,VOPT)})

Where:

- MVunderlying: Market value of the underlying in the option;

- SRW: Specific risk weight for the option and GRW: General risk weight for the option, which are calculated as follows:

+ Interest rate option:

§ Specific risk weight is specific interest rate weight referred to in Section I of this Appendix;

§ General risk weight is general interest rate weight referred to in the maturity method spreadsheet referred to in Section I of this Appendix.

+ Equity option:

§ Specific risk weight is specific equity risk weight referred to in Section II of this Appendix;

§ General risk weight is 8%.

+ Foreign currency option: General risk weight is 8%.

+ Commodity option: The sum of specific risk weight and general risk weight is 15%.

- VOPT: Monetary value of the option (if any) or equals zero.

Example 1: Bank A has long foreign currency position of USD 1 million at the current exchange rate of 22,000 VND/USD, and for the purpose of risk hedging, Bank A buys a put option at the price of 21,000 VND/USD. The capital charge for option risk will be calculated upon exercise of the option will be calculated as follows:

- Monetary value of the option:

VOPT = Max (0; (21,000 – 22,000) x 1 million (USD)) = 0

- The capital charge for option risk:

KOPT = Max (0; 1 million (USD) x 22,000 x 8% - 0) = VND 1.76 billion

Example 2: Bank A has long foreign currency position of USD 1 million at the current exchange rate of 22,000 VND/USD, and for the purpose of risk hedging, Bank A buys a put option at the price of 23,000 VND/USD. The capital charge for option risk will be calculated upon exercise of the option will be calculated as follows:

- Monetary value of the option:

VOPT = (23,000 – 22,000) x 1 million (USD) = VND 1 billion

- The capital charge for option risk:

KOPT = Max (0; 1 million (USD) x 22,000 x 8% - VND 1 billion) = VND 0.76 billion.

 (ii) If the bank and/or foreign bank branch has long call option or long put option, the capital charge for the option will be calculated as follows:

KOPT = Min [(MVunderlying x (SRW + GRW)), MVOPT]

Where:

- MVunderlying: Market value of the underlying upon exercise of the option.

- SRW: Specific risk weight for the option and GRW: General risk weight for the option, which are calculated in the same manner as in Point 2a of this Section.

- MVOPT: Market value of the option.

Specific risk weight (SRW), general risk weight (GRW) will be charged for each underlying transaction as follows:

Example: Bank A buys a put option for commercial purposes with the underlying asset worth USD 1 million and the option price of $12,000. The capital charge for option risk will be calculated upon exercise of the option will be calculated as follows:

MVunderlying x (SRW + GRW) = USD 1 million x 8% = $8,000.

KOPT = Min [(MVunderlying x (SRW + GRW)), MVOPT] = Min (8,000; 12,000)= $8,000.

b) If a bank and/or foreign bank branch has a short option, the capital charge for the option will be calculated according to the Delta-plus method. The capital charge calculated by using the Delta-plus method is the sum of the following components:

1. The capital charge for the Delta risk weight (KDWP) will be calculated as follows:

KDWP = MVunderlying x DOPT x (SRW + GRW)

Where:

- MVunderlying: Market value of the underlying upon exercise of the option;

- DOPT: Delta value of the option transaction determined by banks and/or foreign bank branches under the instructions of the Basel Committee, or using DOPT on the market (if any);

- SRW: Specific risk weight for the option and GRW: General risk weight for the option, which are calculated in the same manner as in Point 2a of this Section;

2. Gamma risk weight (KGamma) will be calculated as follows:

Each option on the same underlying will have a gamma impact that is either positive or negative.  These individual gamma impacts will be summed, resulting in a net gamma impact for each underlying that is either positive or negative. The total gamma capital charge will be the sum of the absolute values of the net negative gamma impacts.

The gamma impact (GI) will be calculated as follows:

GI = 0.5 x Gamma x (VU)2

Where:

- Gamma: Gamma value of the option transaction determined by banks and/or foreign bank branches under the instructions of the Basel Committee, or using the gamma value on the market (if any);

- VU: Variation of the underlying of the option, which is calculated as follows:

 (i) For options on the underlying assets which are interest rate risk-weighted financial instruments:

VU = MVunderlying x RW

Where:

- MVunderlying: Market value of the underlying upon exercise of the option;

- RW: General risk weight provided in the table showing positions in financial instruments slotted by maturity ladders in Section I of this Appendix.  

 (ii) For options on the underlying assets which are equities, equity-based financial instruments and derivatives of which the underlying assets are equities, stock indices or foreign currencies (including standard gold):

VU = MVunderlying x 8%

Where:

MVunderlying: Value of the underlying upon exercise of the option.

 (iii) For options on the underlying assets which are commodities:

VU = MVunderlying x 15%

Where:

MVunderlying: Market value of the underlying upon exercise of the option.

3. The Vega factor is calculated as the sum of the absolute values of capital charge for Vega impact of each underlying. The capital charge for Vega impact of each underlying shall be determined according to the following formula:

KVR = 25% x proportion of the volatility in value of the underlying asset x |total Vega value of the option of the same underlying asset|.

Where:

- Proportion of the volatility in value of the underlying asset is defined by banks and/or foreign bank branches under the instruction of the Basel Committee or is the one on the market (if any);

- Vega value of options on the same underlying is defined by banks and/or foreign bank branches under the instruction of the Basel Committee or is the one on each underlying on the market (if any).

Example: If a bank and/or foreign bank branch has a short option, the capital charge for an option transaction will be calculated according to the Delta-plus method as follows:

Bank A has a short call option on a commodity:

- Exercise price: X = $490;

- Market value of the underlying asset 12 months from the expiration of the option: MV = $500;

- Risk-free interest rate: 8%/year;

- Volatility of the underlying asset in the option transaction: = 20%;

- Current value of the option: S0 = $65.48.

By using the Black-Scholes Greeks model, the delta and gamma will be calculated as follows:

Delta DOPT = -0.721 (the price of the option changes by 0.721 if the price of the underlying moves by 1).

Gamma = -0.0034 (the delta changes by 0.0034 (from -0.721 to -0.7244) if the price of the underlying moves by 1).

 (i) The capital charge for the Delta risk weight (KDWP) will be calculated as follows:

The sum of the specific risk weight and the general risk weight for the commodity option: SRW + GRW = 15%

KDWP = MVunderlying x DOPT x (SRW + GRW)

= $500 x (0.721) x 15%

= $54.075

 (ii) The capital charge for the Gamma risk weight (KGamma) will be calculated as follows:

 (ii) The capital charge for the Vega risk weight (KVR) will be calculated as follows:

By using the Black-Scholes model, total Vega of the short option equals 168.

KVR = 25% x percent of the volatility in value of the underlying asset x |total Vega value of the option of the same underlying asset|.

= 25% x 20% x 168

= 8.4

The capital charge for the Vega risk equals $8.4.

The capital charge for market risk to the short call option in the above-mentioned example is

$54.075 + $9.5625 + $8.4 = $72.0375

 

 

 

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Thuộc tính Văn bản pháp luật 41/2016/TT-NHNN

Loại văn bảnThông tư
Số hiệu41/2016/TT-NHNN
Cơ quan ban hành
Người ký
Ngày ban hành30/12/2016
Ngày hiệu lực01/01/2020
Ngày công báo...
Số công báo
Lĩnh vựcTiền tệ - Ngân hàng
Tình trạng hiệu lựcCòn hiệu lực
Cập nhật11 tháng trước
(01/01/2020)
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Lược đồ Circular 41/2016/TT-NHNN prescribing prudential ratios operations banks and or foreign bank branches


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        Circular 41/2016/TT-NHNN prescribing prudential ratios operations banks and or foreign bank branches
        Loại văn bảnThông tư
        Số hiệu41/2016/TT-NHNN
        Cơ quan ban hànhNgân hàng Nhà nước
        Người kýNguyễn Đồng Tiến
        Ngày ban hành30/12/2016
        Ngày hiệu lực01/01/2020
        Ngày công báo...
        Số công báo
        Lĩnh vựcTiền tệ - Ngân hàng
        Tình trạng hiệu lựcCòn hiệu lực
        Cập nhật11 tháng trước
        (01/01/2020)

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              Văn bản gốc Circular 41/2016/TT-NHNN prescribing prudential ratios operations banks and or foreign bank branches

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