Bankers operate an ecosystem of businesses

(SGI) - Two important topics were recently covered by Saigon Investment on the existence of cross-ownership in banks, and on how to prevent this cross-ownership from occurring in banks.
Bankers operate an ecosystem of businesses

Both these topics were discussed with Dr. Lê Đạt Chí and Dr. Hồ Quốc Tuấn, who are experts in the field of financial banking. In order for readers to gain a deeper insight into the responsibilities of the Board of Directors in a bank, Saigon Investment continued this conversation with Dr. Lê Đạt Chí from the University of Economics in Ho Chi Minh City.

JOURNALIST: - Sir, in some countries if a bank makes a mistake or makes a loss, shareholders have the right to sue the Board of Directors. Could this be applicable in Vietnam?

Dr. LÊ ĐẠT CHÍ: - In terms of legal regulations, it is the deterrence of the first supervisory responsible in the Board of Directors, because the banking system has an important role in the economy. Currently, Vietnam also has a Decree regulating this issue. Accordingly, a group of shareholders or a shareholder owning more than 2 percent of shares has the right to sue corporate managers.

This regulation may sound like it is promoting the rights of the small shareholder, but in actual fact, it is impossible to sue the Board of Directors. Imagine if a shareholder owns only 2 percent shares so there is likely no information given from Board meetings as well as the results of any decisions. Banks are specially controlled after the mistakes made by the Board of Directors, so how can small shareholders sue members of the Board of Directors is rather unlikely. If a bank is operating normally, it is almost impossible to find any evidence that the Board of Directors is involved in wrongdoing.

- Sir, does this mean that our laws are porous?

- As I said, when cross-ownership is developing increasingly to a high degree, along with the development of financial products, the State Bank of Vietnam alone cannot supervise cross-ownership. We often talk about a shareholder or a group of shareholders who own the bank, and they are the ones that nominate someone to be a member of the Board of Directors, and this group of shareholders is recognized by other shareholders.

Suppose that after the general meeting of shareholders to elect a new member for the Board of Directors, this group of shareholders no longer owns the bank, or if it is still only symbolic and they only return when necessary for shareholders' votes! Therefore, for a full five-year term of the new Board of Directors, a bank is run by representatives of the elected shareholders. But in fact, these shareholders have sold their shares or even taken them to mortgage elsewhere. In other words, these shareholders have capitalized the amount of capital contributed to the bank into money to perform other jobs, instead of simply being an immovable capital contribution for ownership. This leads to an extremely high level of risk tolerance of representatives on the Board of Directors seat.

These are the things that the legal system needs to aim at so as to deter the liability of members of the Board of Directors. For instance, through monitoring lax processes, building organizational structure, and internal supervision of banking operations that are not transparent, to issuing resolutions on granting loans or extending loans.

- Sir, in your opinion is there any way to upgrade the law to prevent this from happening?

- When cross-ownership has entered the genealogy of a major shareholder then the discovery can only be traced by using AI technology. However, it is still not easy, because owners can ask a relative like their grandchild and this will also be difficult for AI to detect.

This is not to say that we give up, but we can establish the identity of this large shareholder or group of shareholders when they nominate a person to the Board of Directors. Also, from here the regulator can rely on the identity of the owner and how the business related to major shareholders is operating as shown in the financial statements. At the same time, it is required to announce major shareholders, the chairman of the Board of Directors, and the general director of enterprises who are shareholders in the group of shareholders who nominate members of the Board of Directors in the bank.

This way the real owners of the bank will be found, and more importantly the class of businesses that owns this intermediary bank will be known through its business activities. The shares owned in the bank of these businesses are represented in the assets, so it will be shown in financial statements such as sales or mortgages.

- Sir, does this means that not only information transparency but also transparency in the relationship among members of the Board of Directors will be visible in the bank?

- Yes. We sometimes say transparent, but we do not define the word transparent. For instance, the role of banks in Vietnam is different from the banking system of other countries in one point, that is, it is both a retail bank and an investment bank. It is easy to see that banks now own more securities companies. And everyone knows and sees that stock companies that are the backyard of banks have increased their capital tremendously, with many stock companies now having the same amount of capital as banks.

Of course, the supervision of a stock company will be very loose compared to a bank. So, we have to see what happens when a bank has a securities company with an extremely large capital scale. Even if the State Bank of Vietnam sends an inspector to check the bank's loan documents, there are doubts about the backyard owners, and this skepticism will be eliminated when this cash flow goes to another class of financial institutions or securities companies.

Transparency here is the transparency of asset classes in banks because the operation of the current commercial banking system confuses both the functions of retail banks and investment banks. Recently, the operation of the commercial banking system in investing in corporate bonds is very large, which is a potentially risky investment and an asset that needs to be transparent in the bank. Banks when investing in corporate bonds today are required to have a process, but the process does not create the quality of this asset class, but it is necessary to separate this investment to another institution, such as a fund management company. Transparency of these asset classes will partly reflect the quality of a financial report, thereby partly reflecting the picture of the banking system.

Transparency needs to be established in more detail in credit contracts with related parties mentioned in the bank management report. The subjects related to the bank managers should be listed in more detail, and the major shareholders or groups of shareholders related to the members of the Board of Directors should be included in the bank governance report. This will require banks to report related transactions such as bond investments, loans, or loan guarantees. This transparency will help the market and the State Bank of Vietnam to monitor the quality of the bank's asset class and the classification of debt groups having only one type of book.

- Sir, the most obvious worrying factor now is that bankers have formed a strong ecosystem, isn't it?

- This is correct. Every banker has an ecosystem of businesses. This ecosystem is hard to see because of low transparency. Only when there is an inspection will the market know the truth. In fact, there are areas that really need an ecosystem to develop, but for banks, forming an ecosystem only for personal purposes will put the economy in jeopardy, because then they have too many tools to invest in the same risk. Instead of the function of a retail bank having to find customers to lend to, the current investment banking function will be open to speculation in currency trading.

I took an example recently where there was a bank with state capital that provided capital to a securities company with a large amount of capital, but the collateral assets were ambiguous in value. Or the announcement of the State Bank of Vietnam about the operation of a bank in the restructuring process, which in the past used an ecosystem of businesses just to finance a project in order to circumvent the lending limit provisions of the Law on Credit Institutions. A real example is when auctioning 40 percent shares of PG Bank from Petrolimex, and three businesses and one individual bought it.

So, what is the relationship between these three businesses and one individual we must ask. Simply that these three businesses and one individual satisfy the provisions of the current law on the group of associated shareholders. This is the ecosystem that the big boss has revealed when overcoming many regulations of our current laws.

- Thank you very much.

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