To answer some of the multitude of questions, Saigon Investment held a talk with Prof. Tran Ngoc Tho from the University of Economics in Ho Chi Minh City, who clarified many of the readers concerns and shared his expert views as well.

JOURNALIST: - Sir, the reason behind the failure of banks in the US and Vietnam is not very clear. It is known that at the last Annual General Meeting of 2023, many banks in Vietnam announced that they would increase capital, so do you see this as a good sign?

Prof. Tran Ngoc Tho: - Going back to a previous example, a bank advanced VND 30 billion and used an additional deposit of VND 270 billion to mortgage a house worth VND 300 billion, which should explain this problem more clearly. Now suppose the bank adds a new equity of VND 30 billion, since 90 percent of the bank capital comes from deposits, creditors have the right to ask if this new VND 30 billion equity is better for them. There is a risk in everything that lies ahead, which is difficult for anyone to anticipate. If the bank makes a mistake in lending, or is weak in risk management, the newly added VND 30 billion equity will disappear quickly in just a few days, same as what the three banks in the Silicon Valley in the US encountered recently.

Through the media, many bankers answered that raising capital is for increasing lending capacity. Incorrect understanding of the concept of bank capital is like driving a car thinking it is safe, but actually it is like falling into a blind spot. So, any small risk could lead to a bank collapsing with the creditor losing everything.

- Sir, is this what is called ambiguity of a bank, that you mentioned before?

- In the capital regulation standards according to Basel, there is no requirement to set aside capital for any purpose. Instead, banks increase equity capital to prevent unforeseen losses. In the story of the bank lending a house mortgage of VND 300 billion, if the bank increases its equity from 10 percent to 20 percent, then that additional 10 percent or VND 30 billion, is just to absorb the expected loss if the house drops in value by 1 percent. It does not say that the bank increased VND 30 billion in equity to use it to lend more, or to buy corporate bonds as the bankers said, and then put pressure on the State Bank of Vietnam to prioritize increasing the credit room for them.

Although these are interrelated, banks do not need equity capital for their assets but need equity for debt, and to make it reliable to existing creditors who have deposited money in the bank.

Few politicians really understand the functions of bank capital, same as many depositors. Bank operations are essentially based on trust. If the bank takes excessive risks or even violates the law, at some point the trust disappears and depositors run away from that bank. This is why we see one bank today, but it may be gone the next day.

- Sir, is this the reason why the State Bank of Vietnam protected the credit room policy despite the reactions?

- I still don't fully understand the actual motivation of the State Bank of Vietnam for setting the credit room ceiling for each bank. And also, with some suggestions that let banks operate according to market principles, or that banks just need to comply with Basel regulations, and it will be enough. I fully support market proposals. But in my opinion, Basel cannot be the solution to the current regulation of limit ing bank credit room.

- Sir, is Basel still the standard?

- Many reputable experts have made interesting analysis when saying that Basel 3 is just the roar of a mouse and not of a lion. Many people call the current Basel regulations that banks are applying as lack of capital standards and not a capable ratio. Bankers have little to lose so they plunge into this reckless business at the cost of both the economy and society. It is also one of the sources of the current and past banking crisis. We know that the current credit room regulation is not the optimal solution. But we have not proved whether the solutions of Basel are more optimal either.

Basel has three main pillars of sufficient capital requirements, supervision mechanism, and market discipline. These three pillars complement each other. Without any of these three pillars, Basel cannot find the solutions to remove the credit room.

For instance, if the supervision mechanism of pillar 2, and the information disclosure regime of pillar 3 are good, and for a long time no one discovers that the banks were too weak with even negative capital, then suddenly one fine day it is declared under special control, which becomes questionable. The state must make a statement to guarantee the ability of depositors to pay. This is to say that the taxpayers and state budget must bear any losses.

- Sir, before the bank falls into a blind spot, the whistle blower usually appears. Would you agree to this?

- We wonder why there was no early warning signs, no timely restructuring and corrective measures taken by some insolvent banks long before being discovered. Moreover, there are banks that are currently under special control, but some international auditing companies have confirmed that they have met Basel 2 standards, even approaching Basel 3 for many years now. If we believe in this protectionism and if we let the banks give credit freely, the consequences could be dire.

- Sir, do you agree that the problem is not with the car, but with the driver and the whistle blower?

- Drivers always have the mentality of reckless driving, even if they run in a supercar on a standard Basel motorway, sometimes the accident is even more serious. The banker and its crony capitalist group always dreamt of acquiring gold so any law would be accepted. The main risk in banks lies not in assets but in people. If supervisory mechanisms and people are not matched, then the super-caste code is easily invalidated.

Prof. Tran Ngoc Tho from the University of Economics in Ho Chi Minh City

- Sir, a bank is a market institution that accepts risks at the cost of both the system and the economy, and then the state bails out. Why do we keep falling into this vicious cycle?

- Historically, the Royal Charter of England of 1694 stipulated that banks must promote public interest and the interest of the general public. The utility model bank was born with an initial capital of GBP 1,200,000, the capital contributor being the Governor of the Bank. Initially, the bank was established for the purpose of bringing convenience to everyone, but modern banks are becoming more and more prone to excessive risk-taking.

In order to limit  the excessive damage to the financial system and the economy, many scholars and politicians are calling on the governments of developed countries to radically reform the banking industry as a utility, as planned originally. We can mention proposals that may be applied to some extent by Western governments in the near future, such as the narrow bank model or the Chicago proposal.

- Sir, what is the general idea of the proposals?

- The general idea is that banks must increase capital and liquidity reserves more, as their operating model is narrow and must diversify for borrowers. The countries that follow a pure market economy are also demanding banks be seen as a utility. As for us, a country that boasts a socialist-oriented market economy, we need to see clearly what Vietnamese bankers should do.

In a pure market economy like the US, there is also the Community Reinvestment Act (CRA), enacted in 1977, which requires banks to be responsible for serving low- and middle-income individuals. Banks are required to maintain transparency in documentation for these activities.

When it comes to Vietnamese banks, most of us only hear about the connection with real estate owners. Continually these associations have proposed that banks must save real estate as they believe that real estate and banks are compatible and real estate supports banks and vice versa. It is paradoxical and heartbreaking to see small medium enterprises and farmers being discriminated against.

- Sir, in your opinion, will this significantly reduce cross-ownership and affect the group of shareholders manipulating the banks?

- I do believe so. Meanwhile, let's see what our future plans are. The Draft Law on Credit Institutions is expected to reduce the share ownership ratio of individual shareholders, institutional shareholders, and related persons of shareholder, from not more than 5 percent, 15 percent, 20 percent under the current Law, to 3 percent, 10 percent, and 15 percent. In my opinion, this regulation only solves the top of the problem. We must do so that the bank is no longer an ideal place for the forces to find ways to possess it.

- Sir, the National Assembly will be discussing the revised Law on Credit Institutions very soon. Should we now refer to a bank as a utility?

- Because banks mobilize capital and lend, so we talk about the bank as we talk about our balance sheet. I find there is an interesting connection between the story ‘Trương Ba's Soul in the Butcher's Body’ and the bank's balance sheet and cross-ownership and manipulation of the bank.

The soul of Truong Ba is the right part of the balance sheet, that is to say it is the debt obligation of which about 90 percent are deposits. The left side of the balance sheet is the bank's loans, the body of the butcher. So, if the butcher's behavior is excessively sticky or only focused on backyard lending and cross-ownership, all consequences will only be painful for Truong Ba's soul, which are the depositors and creditors of the house.

I hope that the State Bank of Vietnam, the Government, and the National Assembly focus on discussing solutions so that the banks can truly become a utility for society and the economy.

- Sir, as per your analysis, I see something wrong when the Prime Minister and the State Bank of Vietnam asked banks to review before reducing interest rates to save businesses and the economy. What are your thoughts on this?

- Exactly as you commented. It is reasonable to trade off being secured by such a safety net. In principle, deposit, and lending interest rates should be considerably low. This is because banks don't have factors for all kinds of risks to cover their costs because there is already a network of state guarantees.

It's like you get 100 percent car accident insurance, then deliberately drive away. Now when society needs it, we say the car broke down, and the driver was injured, so it's very difficult to serve now.

We must see if we can accept that the Prime Minister called on the leaders of the State Bank of Vietnam to reduce interest rates. It would be better to take responsibility rather than just advocate.

For a long time now, whenever it came to lowering interest rates, banks have used all sorts of excuses to argue that they cannot, with an argument somewhat similar to the fable story of "The Emperor’s New Clothes".

- Sir, what exactly should banks do to set things right in the current difficult economic situation?

- The tens of trillions of profits made in 2023 that the bankers are sharing must be invested back into the country during this difficult time. At this time, interest rates will be reduced, and then the State Bank of Vietnam will intervene. Bankers should reduce the division of profits. Do not put the burden on the State Bank of Vietnam and force it to pump a lot of money into the market.

This is not apologizing to bankers but pointing out the responsibility towards the country. Society cannot deny the significant contributions of banks towards economic development over the years, but during difficult times, banks need to step up and hold themselves much more responsible to the nation.

I like the title of one compelling book “The CEO and the Monk”, which talks about the tremendous value of ethical companies and spiritual business leaders. It is the story of a Fortune 500 company and its two executives whose unique working relationship is based on something as simple and powerful as doing the right thing, and on keeping an eye on profits and ethics at the same time.