Study of optimal capital adequacy ratios of VietNamese commercial banks
Abstract
With the financial globalization and internationalization, the competitions between enterprises, financial institutions or banks are unavoidable. Every firms specially all the local commercial joint stock banks have motivations to expanse their business, improve their performance, increase profit to compete with foreign banks in the country. Therefore, the banks would have to bear more types of risk, and higher probability to suffer from the economic crisis in bad conditions like the global financial tsunami in 2008. With the main purpose of avoiding of competitive advantage inequality, and unfairness among international active banks, the Bank for International Settlement (BIS) stipulated the BASEL II and III with the requirement in the minimum capital adequacy ratios (BIS ratios, CAR) – 8% in BASEL II and 10.5% in BASEL III. This also helps the banks to create a buffer against any risks, and increase banks’ ability to absorb losses.
With the new policy in the BASEL III which will officially apply in 2019 – 10.5% as the minimum CAR, it raises the question about How the BIS ratios regulated in Basel II and III have impact on banks’ performance and profitability? The higher CAR will bring benefits to banks, help them to reach the frontier efficiency or will affect negative that reducing banks’ performances’ quality. This question also raises the issue in Viet Nam banking system with the current actual CAR of Viet Nam commercial banks. To answer this question, the optimal BIS ratios of banks are calculated using two stages DEA models of Chen et al (2010).
The data set used in running models is including twenty-eight Viet Nam commercial Joint stock banks in the period of six years from 2010 to 2015. The empirical result state that 99.1% of all banks that have the optimal CAR are greater than 8% regulated in BASEL II, while the percentage of banks that have the optimal CAR are higher than the rate at 10.5% defined in BASEI III is accounted for 92.4%. Moreover, it presents that 57.98% of the banks should raise their current level of capital adequacy ratios to reach their optimal ones. Therefore, we may conclude that the BASEL III will help the banks in Viet Nam banking industry to get to the frontier efficiency.