Banks’ pervasive cross-ownership harbours risks
Banks’ pervasive cross-ownership harbours risks
Vietnam’s government is considering banking reforms that would enable foreign investors to acquire larger ownership shares in domestic banks. Dr. Vu Dinh Anh, deputy director of the Ministry of Finance’s Market and Price Institute, said that loosening the foreign ownership cap in Vietnamese banks could eventually lead to more complicated cross-ownership in local banks.
Is the cross-ownership of Vietnamese banks be unusual compared to the rest of the world ?
Cross-ownership is actually a common phenomenon across the world. It is also inevitable in Vietnam where financial institutions, commercial banks and the financial capacity of Vietnamese enterprises are growing rapidly.
However, at the current high level, cross-ownership has not only posed great risks for local financial institutions and banks, but could also crash the whole banking system.
Despite high risks, cross-ownership in Vietnam is showing signs of increasing. What are the reasons behind the situation?
The most basic reason originated from the current regulations. Firstly, when a financial institution or a commercial bank is formed, a prerequisite condition is that it must have the participation of other financial institutions.
Secondly, when expanding scale, credit institutions encourage a number of individuals, financial and non-financial enterprises to own a stake.
Thirdly, the State Bank plans to raise the foreign ownership cap for foreign investors to 30 per cent from the current 20 per cent. This will also cause increased cross-ownership, due to the predicted strong participation of foreign investors.
Fourthly, in recent years, there has been a sharp increase in types of businesses. Meanwhile, there was an overlapping in equity usage, including real and virtual capital to invest in financial institutions.
Cross-ownership itself isn’t the issue. The most important thing is to control the ownership rate, especially in commercial banks to avoid the situation of changing from ownership to dominance by one or a few individuals in a financial institution.
In your opinion, what measures are needed to prevent this possibility?
Firstly, I think, we must revise the whole banking system, in order to prevent the usage of cross-ownership as a tool to dodge regulations on risk management in commercial banks.
Secondly, the ownership rate of individuals or related people in a commercial bank should be more tightened in the coming time. In the past, the regulations on this rate were not seriously controlled, which saw cross-ownership dramatically increase.
The third issue is more worrying - the problem of virtual capital. We must ensure that capital poured into the banking system is real.
The final solution is to control cash flow turnover, especially the process of cross investment among individual investors in enterprises.
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