Financial Soundness Indicators for Financial Sector Stability in Viet Nam

Abstract

Financial soundness indicators (FSIs) are methodological tools that help quantify and qualify the soundness and vulnerabilities of financial systems according to five areas of interests: capital adequacy, asset quality, earnings, liquidity, and sensitivity to market risk. With support from the Investment Climate Facilitation Fund under the Regional Cooperation and Integration Financing Facility, this report describes the development of FSIs for Viet Nam and analyzes the stability and soundness of the Vietnamese banking system by using these indicators. The key challenges to comprehensively implementing reforms and convincingly addressing the root causes of the banking sector problems include (i) assessing banks’ recapitalization needs, (ii) revising classification criteria to guide resolution options, (iii) recapitalization and restructuring that may include foreign partnerships, (iv) strengthening the VAMC, (v) developing additional options to deal with NPLs, (vi) tightening supervision to ensure a sound lending practice; (vii) revamping the architecture and procedures for crisis management, and (viii) strengthening financial safety nets during the reform process.