Banks in Vietnam — VietEcon

So I wanted to talk about the banking system in Vietnam, because I am reading this book, Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze right now. First of all, it is wonderful. Second, it also has so many illuminating insights into the world financial system that raise questions for Vietnam as well.

One of the things that he points to as the cause of the financial crisis is not a run on the banks but the inability of banks to source wholesale funding - it just dried up. Now why is that important? Well, as Matt Levine has said in a number of columns (here), banking is a magic show where short-term deposits are magically transformed into long-term loans. Oftentimes, short-term deposits (where you put your money in the bank) are actually pretty stable. Especially since most governments have stepped in and provided lots of guarantees around these deposits, meaning if the bank goes under, your money will be returned regardless.

But many of the big players in the US and European banking system were not funded by deposits, but were rather funded by wholesale lending in the interbank market. Banks were able to use their assets (in this case mortgage-backed securities or packages of these) to borrow in the interbank market. This money was used to fund loans and the purchase of securities, including things like mortgage-backed securities, etc. That stopped when people lost faith in the securities and in the bank’s ability to pay back the money. And it stopped all at once.

So I started to look at the Vietnamese banking system, and how it is funded. In this case, the banking system is fairly safe, with most credit actually funded by deposits (not wholesale funding), according to the government and the IMF. It is around 90% and has been stable.

I do think there are, let’s say, “areas of improvement” with the banking system in Vietnam that I would like to talk about over the next few days. In particular, about half of the assets in the system are in the state-owned banks that have significantly lower return on assets (RoA) than the private banks.

Also, capital adequacy ratios (CAR) are pretty low, especially with Basel III coming online in much of the world soon. It requires a CAR of 10.5%. Note that Vietnam is not even yet on Basel II, which at a 8% minimum CAR would be difficult for some banks. Or course the changes in Basel II and Basel III are not just the CAR, but also the risk-weighting of a bank’s assets, which can drastically alter the ratio.

Finally, credit is the main driver of growth in Vietnam. Total credit is greater than GDP (142% at yearend 2018). The figure is high but in line with the world average. Unfortunately, it is growing at a very fast pace and is driving overall GDP growth.

We will talk more about this over the next few days.