Dr. Hồ Quốc Tuấn talks about how to prevent cross-ownership in the banking system and how the legal framework related to this practice needs to be amended and changed radically.
JOURNALIST: - Sir, as Dr. Lê Đạt Chí said in our previous issue, cross-ownership in banks is becoming increasingly complex and even the Law on Credit Institutions and the Law on Enterprises cannot prevent it. What is your opinion on this?
Dr. HỒ QUỐC TUẤN: - This is a fact and not only Vietnam, but even other countries are experiencing a similar situation. Let me give an example of a large corporation that has many subsidiaries that control a few banks, and these banks only specialize in lending to companies within the same internal structure of this group. Hence, when a problem with this group occurs, it affects the capital adequacy of the entire financial system because it involves many banks.
Recently in Vietnam, cross-ownership has been raised to a high level. This is to say that it includes not only lending outside the system to friendly businesses or businesses in the backyards of the bank owners but also lending to related people inside the bank, such as to businesses owned by members of the Board of Directors or Executive CEO of the bank.
These businesses are actually intermediaries to push the loan capital into companies related to the real owners of the bank, with the most obvious example being bonds in the recent past. A batch of bonds issued privately is valued up to thousands of billion dongs, but only a few investors who are not part of the financial institutions hold these. This is also the reason why at all costs major shareholders must be seated in some position on the Board of Directors, so as to easily control and grant credit to their backyard companies.
- Sir, is it correct to say that to solve the first problem of cross-ownership is to deal with the Board of Directors?
- Yes this is correct, and the Board of Directors is the first line of defense. For a long time, many countries in the world have introduced regulations for the Board of Directors to be independent members. In Vietnam, they are usually members nominated by people close to the bank owner. Because the candidate for independent members must have someone to nominate the new Board of Directors for the term of office, or to nominate a large group of shareholders.
These independent members can create two problems. Firstly, they rarely are capable of understanding bank management. Secondly, even if independent members are really knowledgeable people they may not be dedicated to this work because they have a lot of their own work, and managing or supervising the bank needs continuous supervision. As evidenced by many banks today when meeting to issue a new resolution, members are often absent or vote in a safe manner on sensitive issues. Therefore, for both sides, these independent members are often those who are very close to the bank owners, and hence defunct.
To solve this problem one must look at many aspects. For example, in the appointment process, there must be a voice of small shareholders and a large enough number of shares. But usually, the owners of the bank dominate and control the general meeting of shareholders. The factors in selecting independent members on the Board of Directors must change. In Germany, for instance, they offer a number of members to be elected without relying on the percentage of votes owned by the owner. Vietnam should also consider this option.
The second line of defense regarding the Board of Directors is the issue of punishment. Currently, many Western countries go hand in hand with the BOD model, which is a control model of small shareholders, and allows small shareholders to sue large shareholders. If the Board of Directors fails to fulfill its duty to protect small shareholders, the latter can sue for compensation. They have the concept of class action, that is to say, all small shareholders can sue together. If the case is won, all the small shareholders will be compensated, and this compensation can be very large.
- Sir, in your opinion does this apply to Vietnam?
- It is true that in Vietnam this issue is quite complicated and difficult to implement because it is very difficult for a small shareholder to sue any Board of Directors or a company because it is a civil case. The proof is that over the years on the stock market, there have been no cases of small shareholders suing large shareholders or members of the Board of Directors. That said, it is not a deadlock, but to solve it two problems must be raised.
Firstly, the State Bank of Vietnam must have the power and resources to monitor all banks and their subsidiaries related to bank owners. If sanctions and fines are found to be very severe, the owners will use loopholes and lend by backyard means. To counter this the judicial system for sanctions on banks must always be transparent. In foreign countries, now they have begun to build data systems and systems using AI to find the final owner thereby setting up a monitoring system for banking activities. Secondly, the operating mechanism of the Board of Directors of a bank should operate differently from that of a business enterprise.
According to the Law on Enterprise, the Board of Directors operates on the basis of an individual and when making resolutions that call it necessary to sell, this cannot be maintained in the mechanism of a bank. A bank has five members on the Board of Directors where usually one or two members are absent from meetings, so a resolution is given to whomsoever we all understand is there. Therefore, the Board of Directors of a bank operates flexible regulations that can be changed from the percentage of members attending the meeting to the minimum rate to pass a resolution, to the transparency of the reasons for disagreement of these members.
- Sir, should there be a supervisory model outside of the State Bank of Vietnam?
- Yes, currently there are quite a few countries in the world that separate the safety model of the financial system from the role of the central banking system like that in the U.K. and the US. We have seen that recently, the US handles risks not directly through the US Federal Reserve Bank (FED) but through the US Federal Deposit Insurance Agency (FDIC) playing this role. Or in the case of British bonds when there is a problem, although the Bank of England (BoE) enforces bond purchases, an independent supervisory body called the Financial Conduct Authority (FCA) must participate.
Returning to the Vietnam model, if you want to implement it like other countries, you must first build a data system of disclosures of related companies and people related to bank owners. Or regulate company reporting and notice of ownership of related people. Accordingly, the bank supervisor will also have to ask the bank owner to provide this information and make the information public. At that time, the regulator will easily see which owners own what percentage of the bank.
This is a fact in Vietnam that it is stipulated that a shareholder or group of shareholders holding 10 percent of the shares continuously for six months can stand for election or nominate a member of the Board of Directors. So, who is in this group of shareholders, which companies, and whether their own shares are actually held after the meeting date, is not transparent and known.
An indispensable role is that of the press agency. For instance, if the media suspects that when they hear a story about a banker taking advantage of backyard loans but have no proof, they may begin to organize analytical data as evidence and publicize it. From here the whole market will be alarmed by the analysis given. The management agency will rely on this information for reference and trace back the clues.
- Sir, it is not easy to ask for transparency within the banking system. Do you agree with this?
- In practical terms, it is true that it is very difficult to ask for clear transparency in the banking system. Moreover, many banking terms, even though they are transparent, are not understood by most investors, even analysts. The bank itself is a special field, a model of blood supply to the economy, and when held too tightly this capital can become stagnant.
Even in China, there are many layers of management of banks. For instance, the last time the central bank lowered policy interest rates many times, but joint stock banks still did not lower lending rates, especially for banks. In the field that is in dire need of capital, which is real estate, there is no move to lower lending rates. Because they do not just look at the rate cut by the Central Bank of China, but also at the market, debtors, and creditors. For the economies of some countries, it may be optimal, but for a developing economy like Vietnam, it is advisable to refer to the model of other countries and consider to what extent it is acceptable in Vietnam.
Assuming the bank is locked too tight, the owners will run through investment funds, through securities, accidentally creating an underground banking system and this will also create a huge risk. Even the International Monetary Fund (IMF) is concerned that the coming crisis is not in the official banking system but in the underground banking system. Knowing that underground banks cannot directly mobilize deposits for the public, the collapse of underground banks will have less impact on the economy. Therefore, Vietnam should also consider balancing these two points. We cannot force the bank to the extent that the cash flow will move into the underground banking area too much, but we must leave a gap for the two sides to balance.
Remember, Vietnam's economy is different from the economies of developed countries, and we must accept flexibility for the economy, especially in the openness of the economy. In short, we have to accept at a level like the ebb and flow of the tide, which is also the point of view of controlling transparency and controlling the safety of the bank. This is to say that when the tide is high, it is restrained, and when it is low tide it begins to touch risk, and the State Bank of Vietnam or the supervisory agency must immediately intervene. They must intervene early before going aground. Therefore, my view is that the Vietnamese banking system cannot be expected to be as stable or as good as the banking system of some countries, but there must be a point when we intervene when seeing risks.
- Sir, according to your analysis what should the power of the State Bank of Vietnam be in an emergency?
- Stabilizing the whole financial system requires one more problem. I remember talking to some experts on global financial markets and they asked the question of whether Vietnam has a report on financial stability or fiscal stability, or nothing at all. According to me, it is not yet available. While these two reports are important, it oversees every year all activities for Congress, for regulatory agencies. This report can be on the State Bank of Vietnam or even on the Ministry of Finance. Because from here the Government can begin to decide where these funds can be disbursed to immediately support the economy, or the Government may immediately grant the State Bank of Vietnam a special right to activate at a level permitted by the Government or the National Assembly. It is for the Government to make this decision.
- Thank you very much.
