Evaluating The Optimal Capital Adequacy Ratios Of Commercial Banks In Vietnam

Abstract

Competition between banks is unavoidable as a result of financial globalization and internationalization. This pushes commercial banks to continuously introduce their products and services as many as possible to attract customers, including very high-risk banking services that may cause damages to the bank if the economic crisis happened. With the primary objective to minimize unwanted risks may occur to banks during their operation, as well as to prevent inequality and unfairness in competitions and to increase the ability to absorb losses, the Bank or International Settle (BIS) introduced the BASEL II and III that require banks to maintain the minimum Capital Adequacy Ratios (CAR) – BASEL II with 8% and BASEL III with 10.5%. This begs a question of how the CAR regulated in two BASEL affects the banks‟ performances and profits earned? Will high CAR help banks to improve their performances or will negatively reduce the bank‟s performances? Being a part of the world‟s financial system, Vietnam banking system is also impacted by the two BASEL Accords above, current actual CAR of Vietnamese commercial banks should be seen as a matter as well. To answer this question, the optimal CARs are computed using two-stage DEA models by Chen et al (2010). The empirical results show that banks with optimal CARs surpassing 8% (as defined by Basel II) and 10.5 percent (as specified by Basel III) account for approximately 7.05% and 92.95% of all banks, respectively. In order to reach the optimal CAR level and get the highest performance, 77.56% of all banks should increase their current CAR. State-owned banks typically have higher optimal CARs than the private held ones, at 23.53 and 19.42 percent, respectively. Therefore, in order to approach the efficient frontier, it is advised that banks achieve optimal CAR and adhere to the new Basel III rules. In addition, by applying the t-test for unequal variances, there is a significant difference in the population mean between the private held banks and the state-owned ones in terms of optimal CAR since the p-value is 0.015 smaller than the significance level 0.05 (95% confidence level).