The central bank is seeking feedback on a draft circular governing prudential limits and safety ratios for banks and foreign bank branches, which would amend and replace its Circular 22/2019. The proposal aims to standardize regulations, align more closely with international practices and enhance the supervisory framework.

Headquarters of the State Bank of Vietnam in Hanoi. Photo courtesy of the government's news portal.

Under the draft, the regulator would introduce three key Basel III metrics: the liquidity coverage ratio (LCR), net stable funding ratio (NSFR), and leverage ratio (LEV).

The LCR measures high-liquid assets against net cash outflows under short-term stress conditions, while the NSFR compares available stable funding with required stable funding over a longer horizon. The leverage ratio, calculated without risk weighting, is designed to limit excessive balance sheet expansion.

For systemically important banks, the draft requires maintaining minimum leverage ratios, including additional buffers tailored to their systemic role.

The central bank said the new metrics would help ensure more stable funding structures, improve liquidity risk control, and limit leverage build-up in the banking system.

The proposal also replaces the LDR with a credit-to-deposit ratio (CDR), which captures both on-balance-sheet and off-balance-sheet credit exposures. The regulator may require stricter thresholds for specific institutions based on supervisory assessments.

This shift is intended to provide a more comprehensive view of credit activity and improve regulatory effectiveness.

In addition, the draft introduces a mechanism allowing the central bank to adjust coefficients, parameters, and prudential thresholds for individual institutions based on inspection and supervision outcomes. These adjustments may include factors related to cash inflows, outflows, and stable funding components, enhancing flexibility in risk management.

The draft also clarifies the definition of credit extension, standardizing it across regulations to include both on- and off-balance-sheet exposures. This approach will serve as the basis for calculating prudential ratios, including the CDR.

Furthermore, the proposal broadens the definition of “customer” to cover not only borrowers but also depositors and users of other banking products and services. This expanded definition will be used to determine exposure limits to a single client or related parties.

Banks will also be required to strengthen internal controls, ensuring transparency and preventing conflicts of interest in lending and debt restructuring activities. Decisions on loan restructuring must be made independently of initial credit approvals, except where otherwise specified.

Overall, the draft circular is part of a broader effort by the State Bank of Vietnam to enhance its prudential toolkit, align with global standards and safeguard the stability of Vietnam’s increasingly complex banking system.