On the afternoon of May 31, TPBank held the Kick-off Ceremony of the Basel III Capital Calculation project based on the internal ranking method including both basic and advanced (FIRB & AIRB).
Opportunity to save capital, overcome the rigid disadvantages of the old method
The Basel Accords refer to banking supervision treaties issued by the Basel Committee on Banking Supervision with the objective of enhancing financial stability through improving the quality of banking supervision worldwide.
In particular, the Basel III Agreement sets forth the key requirements on capital and liquidity management. The higher the standard, the more demanding on capital, along with the mandatory application of a larger reserve buffer to reduce operational risk.
With the previous standard approach (SA), a bank's assets were assigned fixed risk weights, which were specifically assigned to different asset classes based on their respective levels of risk.
This helps banks ensure liquidity ratios, leverage and sufficient capital reserves to adapt to market fluctuations and withstand economic shocks. However, the possibility of having more capital than necessary is an under-optimized point of this method because it directly affects the profitability and profitability of the bank.
Meanwhile, the IRB allows banks to use their own internal risk management models and practices to self-assess the risk components and exposures of their asset portfolios to calculate capital requirements more accurately than the simple risk-weighted percentages specified by the SA.
Instead of applying a rigid level of risk weight like the old method, estimating risk parameters through specific models helps to measure risk more accurately, most closely reflects the risk level of each customer/loan, and offers the opportunity to save capital if the bank holds a good credit portfolio.
Good foundation in the past and leap in the future
In November 11, TPBank announced that it had completed all the requirements of Basel III, IFRS 2021 and put it into full operation right from the fourth quarter. At that time, TPBank was the first bank in the market to be independently reviewed and recognized by a third party, KPMG Vietnam Co., Ltd.
In 2022, when many banks in Vietnam are still applying Basel II, TPBank has completed the implementation of Basel III, Basel III Reforms according to SA. And in May 5, TPBank continued to implement the Basel III Capital Calculation Project based on the internal rating method (FIRB & AIRB).
To perform calculations according to IRB, the Bank must meet a series of strict requirements on data quality and model governance.
The data used to build IRB models must simultaneously ensure completeness, integrity and rationality with a minimum length of 5-7 years, so banks need to invest resources to collect data, build and manage datamarts with very large volumes of data, and a large number of models to build, monitor and verify also requires a strong model with a specialized human resource framework.
The experience of overcoming each "obstacle" in the past is an advantage for TPBank to be ready to continue implementing more advanced methods.
The collection of data and the construction of models for assessing expected credit loss under IFRS-9 previously verified by an independent third party - Ernst & Young Malaysia - shows that the quantitative models in the internal measurement system are of good quality, creating a favorable foundation for TPBank to continue researching, developing, building and calibrating PD, LGD - Basel III models according to IRBD, Basel III.
In addition, TPBank has put into use advanced technologies such as AI algorithms, machine learning, etc. to support model building and management.
To accomplish all this, TPBank has to sacrifice short-term profits to solve the problem of large investment costs, especially investment in information technology systems, data processing, application of advanced algorithms as well as costs for recruiting, training and maintaining high-quality personnel to meet the bank's requirements.
Mr. Nguyen Hung, General Director of TPBank shared: “TPBank's development orientation is to become one of the leading banks in complying with and applying international risk management standards to the Bank's actual operations.
We have done that well in the past, and so far, TPBank has enough technology, data and high-quality human resources to continue implementing IRB capitalization this year.
The application of these advanced international standards requires the Bank to spend a lot of effort and expense, to limit its activities to strict requirements of the standards, but TPBank will firmly overcome the shocks of the economy towards a professional, transparent and healthy bank, ensuring sustainable development.".
Mr. Le Trung Kien - Deputy Director of the Department of Safety Supervision of the Credit Institutions System.
Speaking at the program, Mr. Le Trung Kien - Deputy Director of the Safety Supervision Department of the Credit Institutions System, highly appreciated TPBank's right orientation and initiative when implementing the Basel III project:We all clearly see the role of the application of standards in the development of the system of credit institutions, in addition to the development of scale and technology. This is the foundation to maintain and ensure the safety of the banking system.
With the previous available foundation, plus the advice of KPMG, I believe that the implementation of this project with the short roadmap to accomplish the set goals will be a big challenge for TPBank, but when successful, the project will create a new step in risk management, adding more long-term core values for TPBank in the near future.".
Application of IRB – the next way
The implementation of IRB not only helps the bank to optimize the cost of capital, but also contributes to improving governance capacity when the Bank applies IRB's results to business operations.
One of the most prominent applications of IRB is in credit management activities such as: limit determination, loan valuation, efficiency measurement; in parallel with it is active portfolio management according to risk levels, risk-adjusted returns and the bank's taste for each specific risk portfolio, thereby contributing to capital allocation decisions and effective capital planning/strategy.
Besides these applications, TPBank will continue to study and apply the results of IRB during the implementation of the upcoming project to further improve the Bank's risk management capacity.
Currently, although there is no legal framework for the application of capital calculation under IRB, the management agency has oriented credit institutions to pilot Basel implementation under IRB as one of the goals of the banking industry by the end of 2025. TPBank is one of the first banks to research and deploy this method.
The implementation of the project will help the bank optimize capital costs, enhance IRB's applications to business operations and portfolio management, etc., thereby improving TPBank's financial and risk management capabilities, safety and sustainability, contributing to strengthening customer confidence and TPBank's position in the market.
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