Optimal capital adequacy ratio - Evidence from Vietnam

Abstract

It is unavoidable for businesses, especially commercial banks, to compete with other firms or financial institutions in a globalized and internationalized world. The goals of all companies or commercial banks in particular are expanding their operations, enhancing their efficiency and maximizing their profits in order to face international firms in other nations. As a result, banks have to shoulder additional forms of risk as well as a larger possibility of bearing from risky projects, fluctuating economic situations and financial crises. The Basel Committee on Banking Supervision (BCBS) established Basel I, II and III with the main goal of preventing injustice and imbalance in competition among banks. The required BIS ratio or Capital Adequacy Ratio (CAR) in Basel I, II, and III are 8 percent, 8 percent and 10.5 percent, respectively. These requirements assist banks in providing a shield for them to deal with potential hazards or improving their capacity to suffer losses.The requirement in Basel III begs the issue of the impact of the new CAR–10.5% on operations and efficiency of commercial banks in Vietnam. It is considered whether a tighter BIS ratio would aid banks in assisting them to achieve greater profitability or would have a detrimental impact by lowering the efficiency of banks’ operation. This topic highlights the question about commercial banks’ existing real BIS ratios in the banking system of Vietnam. In order to find out the answer for this issue, this study utilized the Data Envelopment Analysis (DEA) method which is a model established by Chen et al. (2010) to measure the optimal CAR of several commercial banks in Vietnam. We collect all information related to 26 commercial joint stock banks in Vietnam over the period of 5 years from 2016 to 2020 to run the models. According to the empirical findings, the figures for banks whose optimal BIS ratio exceeds 8 percent (set by Basel II) and 10.5 percent (set by Basel III) are approximately 98 percent and 88 percent, respectively. Furthermore, 75.83% of all DMUs need to boost their existing BIS ratio to achieve the optimal level of BIS ratio as well as obtain the best performance. As a result, it is better for Vietnam commercial banks to comply with the new policy set by Basel III with the purpose of approaching frontier efficiency