MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM
BANKING UNIVERSITY HO CHI MINH CITY
PHAM HOANG AN
IMPACTS OF CORPORATE GOVERNANCE ON
RISKS AND FINANCIAL PERFORMANCE OF
COMMERCIAL BANKS IN VIETNAM
SUMMARY OF PHD THESIS
Major: Finance - Banking
Code: 9.34.02.01
Scientific instructors: Dr. NGUYEN VAN THUAN
Dr. TRAN DUC THUC
HO CHI MINH CITY – 2020
1
CHAPTER 1: OVERVIEW OF THE RESEARCH
1.1. Research issues and urgency
Corporate governance (CG) is a topic that has attracted a lot of attention from researchers
and business managers around the world and especially the recent crisis of 2007-2009 has
revealed some weak points in corporate governance mechanisms in different countries.
The crisis initially began in the financial sector in the United States (such as: Lehman
Brothers and IndyMac), the UK (such as Northern Rock, Bradford and Bingley, Alliance
and Leicester, HBOS and Royal Bank of Scotland) and other developed economies and led
to significant losses in financial institutions around the world for several months (Erkens et
al, 2012). Therefore, concern about good corporate governance is an urgent requirement,
especially corporate governance in banks.
Banking activities are always accompanied by risk acceptance and the level of bank risk
can increase very quickly and easily. Banks can conceal (in part) their true level of risk that
is not visible to any outside investor (Becht et al., 2012). Moreover, the bank’s corporate
governance is different from the corporate governance of other companies as the bank’s
related parties are not only shareholders but also depositors and managing bodies (Becht et
al., 2012). Another special feature is that the ratio of equity in a bank’s total assets is often
much lower than that of non-financial companies.
Since 2011, foreign banks with strong financial resources and strong international
experience have been given equal rights in all fields with domestic banks. Market share in
the banking and financial sector in Vietnam is becoming increasingly crowded with many
business enterprises in the industry. Keeping market share and growing business in a
fiercely competitive environment is becoming more difficult than ever. The key to leading
the success of commercial banks can confidently stand and thrive in the context of fierce
competition with foreign banks, Vietnamese commercial banks need to change their minds
about modern banking management, with special emphasis on risk management and
meeting international governance standards.
Corporate governance (CG) is a topic that has always attained a lot of attention during the
development of the economy. Many large organizations such as OECD, World Bank ...
have made great efforts to develop healthy and effective corporate governance principles.
For the banking and financial sector, due to the important and specific role of commercial
banks (commercial banks) for the stability and sustainability of the entire economy, due to
the boom of the financial crisis accompanying the weaknesses and failures in the
operations of many commercial banks over the past time, corporate governance and risks
in commercial banks are becoming the top concern in many countries around the world,
from developed countries with outstanding finance such as the United States, Europe,
Japan... until developing countries with new financial and banking markets which are at an
early stage including Vietnam.
2
Internal corporate governance mechanisms are often responsible for developing and
executing strategic decisions in most organizations. The consequence of the crisis has been
evaluated by the researchers and has a high consensus that it is related to the performance
of the Board of Directors and is considered as one of the main reasons for the crisis (De
Andres and Vallelado, 2008; and Erkens et al, 2012). The Board of Directors is also held
responsible for not protecting shareholders’ rights and focusing on short-term rather than
long-term organizational goals (Erkens et al., 2012).
Recognizing the importance of the relationship between corporate governance, risk and
financial performance of the bank, the Basel Committee on Banking Supervision has
issued regulations to solve issues related to risk management and corporate governance in
banks. In 1988, Basel I was issued focusing on credit risk and bankruptcy risk. In 2004,
Basel II was issued guiding capital safety, risk management requirements and information
disclosure. And by the end of 2010, Basel III made many new proposals on capital,
leverage and liquidity standards to strengthen the regulations, supervision and risk
management of the banking sector.
The Basel Committee on Banking Supervision (2010), points out that effective Corporate
Governance practices are essential to building and maintaining public trust in the banking
system. These are essential elements for the healthy operation of the banking industry as
well as the whole economy. Weak corporate governance can lead to the collapse of banks,
causing serious social and economic losses due to the negative effects on the deposit
insurance system, as well as to impact large macroeconomic impacts, such as chain risks,
adversely affect payment systems. In addition, weak Corporate Governance can cause the
market to lose confidence in the bank’s ability to effectively manage assets and liabilities,
including deposit assets. This can ignite a sudden withdrawal of deposits and lead to a
solvency crisis of the bank. In fact, in addition to responsibilities for shareholder, banks are
also responsible for their depositors and other relevant stakeholders.
The Corporate Governance rules of banks announced by the Basel Committee also
specifically emphasize the role and importance of the Board of Directors. The Board of
Directors not only prevents ineffective management practices leading to business mistakes
but also ensures that the bank always takes advantage of opportunities to add value to all
stakeholders. In addition, the Board of Directors affects the supervisory mechanism for
senior managers, and also affects the appointment, dismissal, suspension and remuneration
policies (BCBS, 2010).
In the scheme of restructuring the system of credit institutions (CIs) in the period of 2011-
1015 and the period of 2016 - 2020, there is a proposal to restructure the banking
governance system, including: increasing transparency in public disclosing information,
changing the capital ownership ratio of commercial banks, improving the conditions and
standards of management capacity, working experience and professional qualifications for
leading and managing titles of credit institutions (Chairman of Board of Directors/Board of
Members, General Director/Director, Members of Board of Directors/Board of
3
Members, ...) (Government, 2012, 2017). During this period, many banks have gradually
improved their governance capacity towards international standards. But through the event
on August 20, 2012 occurred at Asia Commercial Joint Stock Bank and most recently,
especially at Ocean Commercial Joint Stock Bank, Construction Commercial Joint Stock
Bank, Global Petroleum Commercial Joint Stock Bank and Dong A Commercial Joint
Stock Bank made managers and the public is really worried about the personnel,
management and performance of commercial banks.
Stemming from the aforementioned issues, the author chooses the topic: “The impact of
corporate governance on risks and financial performance of commercial banks in
Vietnam” as his research topic.
1.2. Objectives of the study
The overall objective of the thesis is to study the impact of corporate governance on risks
and financial performance of commercial banks in Vietnam. From the research results, the
thesis will also discuss policy implications to improve corporate governance capacity, limit
risks and improve the financial performance of commercial banks in Vietnam.
To achieve the overall objective, the thesis respectively resolves three specific objectives
as follows:
- Objective 1: Testing the impact of corporate governance on the risks of commercial
banks in Vietnam.
- Objective 2: Testing the impact of corporate governance on the financial performance of
commercial banks in Vietnam.
- Objective 3: Proposing some policy implications to improve corporate governance
capacity, limit risks in order to improve the financial performance of commercial banks in
Vietnam.
1.3. Research question
To achieve the above research goal, the research focuses on finding answers to the
following questions:
- Question 1: What factors of corporate governance affect the risks of commercial banks in
Vietnam?
- Question 2: What factors of corporate governance affect the financial performance of
commercial banks in Vietnam?
- Question 3: What policy implications can be applied to improve corporate governance
capacity, limit risks to improve the financial performance of commercial banks in
Vietnam?
1.4. Object and scope of the study
4
1.4.1. Research subjects: The impact of corporate governance on risks and financial
performance of commercial banks in Vietnam.
1.4.2. Research scope:
- In terms of space: Research of commercial banks in Vietnam
- In terms of time: The study focuses on the period from 2011 to 2017. Because in this
period, Vietnamese commercial banks began to apply the Law on Credit Institutions in
2010, including many new regulations on organization, administration and management in
accordance with international practices. At the same time, in this period, Vietnamese
commercial banks also performed a comprehensive restructuring of their operations,
including restructuring the banking management system.
- In terms of content: There are many ways to measure corporate governance such as
corporate governance index or use of representative variables, so the scope of this study
only uses variables that represent corporate governance to analyze the impact of corporate
governance on the bank’s risk and financial performance.
1.5. Research Methods
- To solve the set goals, the research uses the following research methods:
+ Building regression models to test and estimate the impact of corporate governance on
the bank’s risk and financial performance. Specifically, the research conducts to build
econometric models based on the models of previous studies with appropriate adjustments
to study the impact of corporate governance on risks and financial performance of
commercial banks in Vietnam.
+ Researching to use the method of panel regression analysis with the methods (OLS,
FEM, REM) to estimate the models. In addition, the research also uses a number of
methods to test for some hypothetical errors as well as ensure the correctness of the model
used in the study.
In addition, the research also uses SGMM (System Generalized Method of Moments)
method to deal with endogenous problems (if any) in the research model.
- Research data: Data used in this study are taken from annual reports, corporate
governance reports, audited financial statements of 29 commercial banks in Vietnam, and
World Economic Outlook (WEO) of the International Monetary Fund (IMF), General
Statistics Office of Vietnam, 2011 - 2017.
1.6. Achievements and new contributions of the topic
With the above research objectives and research methods, the results have shown that in
the context of Vietnam, the results are: (i) the factors of corporate governance that impact
on bank risk, including: percentage of independent members of Board of Directors
(Bindep), percentage of female members of Board of Directors (Femdir), percentage of
foreign members of Board of Directors (Fordir), percentage of members of Board of
