Circular 14/2025/TT-NHNN on capital adequacy ratio of commercial banks and foreign bank branches

 CIRCULAR

On capital adequacy ratio of commercial banks and foreign bank branches

Pursuant to Law on the State Bank of Vietnam No. 46/2010/QH12, which had a number of articles amended and supplemented under Law No. 14/2022/QH15;

Pursuant to the Law on Credit Institutions No. 32/2024/QH15, which had a number of articles amended and supplemented under Law No. 43/2024/QH15;

Pursuant to the Government’s Decree No. 26/2025/ND-CP dated February 24, 2025, defining the functions, tasks, powers and organizational structure of the State Bank of Vietnam;

At the proposal of the Director of the Department of Banking System Safety;

The Governor of the State Bank of Vietnam hereby promulgates the Circular on capital adequacy ratio of commercial banks and foreign bank branches.

Chapter I

GENERAL PROVISIONS

Article 1. Scope of regulation and subjects of application

1. This Circular provides regulations on the capital adequacy ratio applicable to commercial banks and foreign bank branches.

2. Subjects of application include commercial banks and foreign bank branches (hereinafter collectively referred to as banks).

3. This Circular does not apply to the following commercial banks:

a) Commercial banks under special control;

b) Commercial banks subject to early intervention that implement a roadmap for compliance with the capital adequacy ratio under the written approval of the State Bank of Vietnam (hereinafter referred to as the State Bank) as provided at Point a, Clause 1, Article 159 of the Law on Credit Institutions.

Article 2. Interpretation of terms

In this Circular, the terms below are construed as follows:

1. Financial asset refers to any asset that is:

a) Cash;

b) An equity instrument of another entity;

c) Contractual right to:

(i) Receive cash or another financial asset from another entity;

(ii) Exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity;

d) A contract that will or may be settled in the equity instruments of another entity.

2. Financial liability refers to any of the following obligations:

a) Contractual obligations to:

(i) Deliver cash or another financial asset to another entity;

(ii) Exchange financial assets or financial liabilities with another entity under conditions that are unfavorable to the entity;

b) A contract that will or may be settled in the entity's own equity instruments.

3. Financial instrument refers to a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

4. Equity instrument refers to any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

5. Subordinated debt refers to a debt that a creditor accepts an agreement to receive repayment after other obligations are discharged, or for which a creditor gets and does not get other guarantees in case of the borrower's bankruptcy or dissolution.

6. Customer means an individual, credit institution, foreign bank branch, or other legal entity engaging in credit or deposit transactions with a bank, excluding transactions specified in Clause 4, Article 8 of this Circular.

7. Counterparty refers to a person, credit institution, foreign bank branch, or other legal entity that engages in the transactions specified in Clause 4, Article 8 of this Circular with a bank.

8. Bank exposure include:

a) Credit extensions, including entrusted credit extensions, received entrusted credit extensions for which the bank bears the risk, and purchases with reservation of the right of recourse of negotiable instruments, excluding reverse repurchase agreements (reverse repo) as provided in Clause 10 of this Article;

b) Valuable papers issued by another entity;

c) Contractual rights to receive cash or other financial assets from another entity in accordance with law, excluding those specified at Points a and b of this Clause.

9. Repurchase agreement (Repo) means a transaction in which one party sells and transfers ownership of a financial asset to another party and concurrently commits to repurchase and reacquire ownership of that financial asset at a specified time at a predetermined price.

10. Reverse repurchase agreement (Reverse Repo) means a transaction in which one party purchases and receives ownership of a financial asset from another party and concurrently commits to resell and transfer back ownership of that financial asset at a specified time for a specified price, including forward purchases of negotiable instruments or other valuable papers as prescribed by the State Bank regarding the discounting of negotiable instruments or other valuable papers.

11. Independent credit rating enterprises include:

a) Credit rating agencies such as Moody’s, Standard & Poor, Fitch Rating;

b) Credit rating enterprises established under Vietnamese law on credit rating services.

12. Optional credit rating refers to the credit rating conducted voluntarily by an independent credit rating enterprise without any agreement with the rated entity.

13. Contractual credit rating refers to the credit rating conducted by an independent credit rating enterprise under an agreement between the credit rating enterprise and the rated entity.

14. International financial institutions include:

a) The group of world banks, including the International Bank for Reconstruction and Development - IBRD, the International Financial Company - IFC, the International Development Association - IDA, the Multilateral Investment Guarantee Agency - MIGA;

b) The Asian Development Bank (ADB);

c) The African Development Bank (AfDB);

d) The European Bank for Reconstruction and Development (EBRD);

dd) The Inter-American Development Bank (IADB);

e) The European Investment Bank (EIB);

g) The European Investment Fund (EIF);

h) The Nordic Investment Bank (NIB);

i) The Caribbean Development Bank (CDB);

k) The Islamic Development Bank (IDB);

l) The Council of Europe Development Bank (CEDB);

m) Other international financial institutions with charter capital contributed by governments.

15. Risk mitigation means the bank’s application of measures to reduce partially or entirely potential losses arising from risks in the bank’s operations.

16. Derivative products include:

a) Derivative products specified in Clause 32, Article 4 of the Law on Credit Institutions, including:

(i) Credit derivative products, including credit insurance contracts, credit risk swap contracts, credit risk-weighted investment contracts, and other credit derivative contracts as specified by law;

(ii) Interest rate derivative products, including forward interest rate contracts, one-currency interest rate swap contracts, two-currency interest rate swap contracts or cross-currency swap contracts, interest rate option contracts, and other interest rate derivative contracts as specified by law;

(iii) Foreign exchange derivative products, including forward foreign exchange trading transactions, foreign exchange swap transactions, foreign exchange put and call option transactions, and other foreign exchange derivative transactions as specified by law;

(iv) Commodity price derivative products, including commodity price swap contracts, commodity price futures contracts, commodity price option contracts, and other commodity price derivative contracts as specified by law.

b) Derivatives, including futures contracts, option contracts, forward contracts, and other derivatives as specified by the law on derivatives and derivatives market;

c) Other derivative products as specified by law.

17. Additional Tier 1 capital instruments mean financial instruments issued by commercial banks that fully satisfy the conditions set forth in Appendix I to this Circular.

18. Credit risk includes:

a) Customer credit risk, which is the risk arising from the customer’s failure or inability to fully or partially perform the debt repayment obligation under the contract or agreement with the bank;

b) Counterparty credit risk, which is the risk arising from the partner’s failure or inability to fully or partially perform the payment obligation prior to or at the maturity of the transactions specified in Clause 4, Article 8 of this Circular.

19. Market risk refers to the risk arising from adverse fluctuations in interest rates, exchange rates, gold prices, securities prices, and commodity prices in the market. Market risk includes:

a) Interest rate risk, which is the risk arising from adverse fluctuations in market interest rates with respect to the value of valuable papers, interest-bearing financial instruments, and interest rate derivative products recorded in the bank’s trading book;

b) Foreign exchange risk, which is the risk arising from adverse fluctuations in exchange rates and gold prices in the market when the bank has a foreign currency position;

c) Equity risk, which is the risk arising from adverse fluctuations in stock prices in the market with respect to the value of stocks and derivative securities recorded in the bank’s trading book;

d) Commodity risk, which is the risk arising from adverse fluctuations in commodity prices in the market with respect to the value of commodity derivative products and the value of products in spot transactions exposed to the bank’s commodity risk.

20. Operational risk refers to the risk arising due to inadequate or failed internal processes, people, system errors, failures or external events that cause financial losses or non-financial negative impacts on the bank (including legal risks). The operational risk excludes:

a) Reputational risk;

b) Strategic risk.

21. Reputational risk refers to the risk arising from negative reactions of customers, counterparties, shareholders, investors, or the public toward the reputation of the bank.

22. Strategic risk refers to the risk arising from the bank’s lack of strategy or the existence of an ineffective strategy in responding promptly to changes in the business environment, thereby reducing the bank’s ability to implement its business strategy and achieve its profit objectives.

23. Proprietary trading refers to purchase, sale, or exchange transactions conducted by the bank or the commercial bank’s subsidiaries in accordance with law, within a period not exceeding one year, for the purpose of earning profit from market price differences for the bank, involving the following financial instruments:

a) Financial instruments in the monetary market;

b) Currencies (including gold);

c) Securities in the capital market;

d) Derivative products;

dd) Other financial instruments traded on the official market.

24. Trading book refers to the portfolio that records the positions of:

a) Proprietary trading transactions;

b) Transactions conducted for the purpose of underwriting financial instruments;

c) Derivative product transactions for hedging the risks of the bank’s proprietary trading transactions;

d) Foreign exchange and financial asset trading transactions conducted to meet the demands of customers and counterparties, and transactions for offsetting such transactions.

25. Banking book refers to the portfolio that records the positions of:

a) Repo and reverse repo transactions;

b) Derivative product transactions for hedging risks of items recorded in the bank’s statement of financial position (including off-balance sheet items), excluding transactions classified in the trading book of the bank as specified at Points a and c, Clause 24 of this Article;

c) Financial asset trading transactions for liquidity reserve purposes;

d) Other remaining transactions not included in the bank's trading book.

26. Small- and medium-sized enterprise means an enterprise determined in accordance with the law on support for small- and medium-sized enterprises.

27. Standardized approach to credit risk means the approach used for calculating risk-weighted assets as prescribed in Chapter II of this Circular.

28. Internal rating-based approach (IRB) to customer credit risk means the approach used for calculating customer risk-weighted assets as prescribed in Chapter III of this Circular. The internal rating-based approach includes the foundation internal rating-based approach and the advanced internal rating-based approach.

29. Foundation internal rating-based approach (FIRB) means the internal rating-based approach under which the bank is required to independently estimate the probability of default (PD). The bank must use other relevant risk parameters as prescribed in this Circular for enterprise exposures and repurchased enterprise receivables.

30. Advanced internal rating-based approach (AIRB) means the internal rating-based approach under which the bank is required to independently estimate the probability of default (PD), loss given default (LGD), and exposure at default (EAD) for retail exposures and repurchased retail receivables.

31. Expected losses (EL) means the portion of losses that the bank anticipates to incur.

32. Effective maturity (M) of an exposure means the residual maturity of the exposure used to calculate customer risk-weighted assets.

33. Loss given default (LGD) means the ratio of the loss to the exposure at default. LGD is measured in decimal or percentage units.

34. Probability of default (PD) means the likelihood that a customer will default. PD is measured in decimal or percentage units.

35. Exposure at default (EAD) means the value of the exposure or the estimated value of the exposure at the time of default of the customer. EAD is measured in Vietnamese dong.

Article 3. Organizational structure and capital adequacy ratio management

1. Capital adequacy ratio management:

a) The Board of Directors, Members’ Council (applicable to commercial banks), or the General Director (Director) (applicable to foreign bank branches) shall:

(i) Promulgate internal regulations on compliance with the minimum capital adequacy ratio, appropriate to the bank’s needs, characteristics, level of operational risk, business cycle, risk adaptability, and business strategy; and in conformity with this Circular and relevant laws;

(ii) Supervise the General Director (Director) (applicable to commercial banks) in the implementation of capital adequacy ratio management.

b) The General Director (Director) shall:

(i) Develop and submit to the Board of Directors, Members’ Council (applicable to commercial banks) for promulgation of the internal regulations on compliance with the minimum capital adequacy ratio;

(ii) Manage the capital adequacy ratio to ensure compliance with internal regulations;

(iii) Supervise individuals and departments performing capital adequacy ratio management functions;

c) There shall be individuals or departments performing the function of capital adequacy ratio management, submitting to the General Director (Director) for reporting to the Board of Directors, Members’ Council (for commercial banks) or to the General Director (Director) (for foreign bank branches), in accordance with the internal regulations on compliance with the minimum capital adequacy ratio, and in conformity with this Circular and relevant laws.

2. The Supervisory Board of a commercial bank shall oversee compliance with the provisions on capital adequacy ratio under this Circular.

3. The internal audit unit of the bank shall conduct independent and objective review and assessment of the appropriateness and compliance with internal regulations on capital adequacy ratio management by the bank.

Article 4. Data and information technology system

1. Banks must maintain an adequate data and appropriate information technology system to calculate the capital adequacy ratio as prescribed by this Circular.

2. Banks shall organize data collection and management to ensure the following minimum requirements:

a) Having organizational structure, functions, and duties of individuals and departments; processes and tools to manage data ensuring data quality and completeness requirements;

b) Having procedures for data collection, reconciliation (internal and external), storage, access, supplementation, backup, and destruction to calculate the capital adequacy ratio in accordance with this Circular;

c) Being compliance with internal regulations of the banks and regulations of the State Bank on reporting and statistical regimes.

3. The information technology system must meet the following minimum requirements:

a) Centralized system-wide connectivity and management, ensuring security, safety, and efficiency in calculating the capital adequacy ratio in accordance with this Circular;

b) Tools connected to other systems for calculating equity, total risk-weighted assets, capital requirements for each type of risk, and capital adequacy ratio with accuracy and timeliness;

c) Procedures for review, inspection, backup, incident handling, regular and periodic maintenance;

d) Compliance with internal regulations of the banks and regulations of the State Bank on reporting and statistical regimes.

Article 5. Capital adequacy ratio

1. Capital adequacy ratios shall be determined as follows:

a) Formula for calculating Tier 1 core capital ratio:

b) Formula for calculating Tier 1 capital ratio:

c) Formula for calculating capital adequacy ratio:

In which:

- Tier 1 core capital, tier 1 capital, and equity are as specified in Appendix I to this Circular;

- RWA: Total risk-weighted assets;

- K_OR: Operational risk capital requirements;

- K_MR: Market risk capital requirements.

2. Banks shall maintain capital adequacy ratios as follows:

a) Commercial banks without subsidiaries and foreign bank branches shall maintain separate capital adequacy ratios;

b) Commercial banks with subsidiaries shall maintain both separate and merged capital adequacy ratios;

c) When calculating the merged capital adequacy ratio:

(i) In case the commercial bank has a subsidiary operating under the Law on Insurance Business, the commercial bank shall not consolidate such subsidiary in accordance with the consolidation principles under the laws on accounting and financial reporting applicable to credit institutions;

(ii) The total risk-weighted assets, operational risk capital requirements, and market risk capital requirements shall be calculated based on the data of the commercial bank and its subsidiaries in accordance with this Circular. In this case, the commercial bank shall apply the standardized approach to calculate the risk-weighted assets of its subsidiaries.

3. A commercial bank without subsidiaries and a foreign bank branch shall maintain the following separate capital adequacy ratios:

a) The minimum Tier 1 core capital ratio of 4.5%;

b) The minimum Tier 1 capital ratio of 6%;

c) The minimum capital adequacy ratio of 8%.

4. Commercial banks with subsidiaries shall maintain the following separate and merged capital adequacy ratios:

a) The minimum Tier 1 core capital ratio of 4.5%;

b) The minimum Tier 1 capital ratio of 6%;

c) The minimum capital adequacy ratio of 8%.

5. In addition to the mandatory ratios specified in Clauses 3 and 4 of this Article, the bank shall implement the capital conservation buffer (CCB) as prescribed below:

a) The CCB refers to the portion of Tier 1 core capital ratio remaining after the bank fully satisfies all capital adequacy ratios (including the Tier 1 core capital ratio, Tier 1 capital ratio, and capital adequacy ratio);

b) The bank may only distribute the remaining profit at its own discretion in accordance with the law on financial regimes in the form of cash when maintaining full compliance with all ratios in each of the following years:

In which the first year is defined as:

(i) The year in which the bank begins to apply the standardized approach registered in accordance with Point b, Clause 2, Article 7 of this Circular;

(ii) The year in which the bank is approved by the State Bank to apply the internal rating-based approach as prescribed at Point c, Clause 3, Article 7 of this Circular;

(iii) The year 2030 for all other cases.

6. In addition to the ratios specified in Clauses 3, 4 and 5 of this Article, the bank shall implement the countercyclical capital buffer (CCyB) as prescribed below:

a) The CCyB refers to the portion of Tier 1 core capital ratio remaining after the bank fully satisfies all capital adequacy ratios (including the Tier 1 core capital ratio, Tier 1 capital ratio, capital adequacy ratio and CCB (if any));

b) The Governor of the State Bank shall decide to apply a specific CCyB ratio ranging from 0% to 2.5% as deemed necessary from time to time.

7. For items denominated in foreign currencies and gold, banks shall convert them into Vietnamese dong when calculating the capital adequacy ratio as follows:

a) Record such items in foreign currency accounts in accordance with the laws on the system of accounting accounts;

b) For foreign exchange risk, the exchange rate used for conversion into Vietnamese dong shall be applied as follows:

(i) In case the date of calculating the capital adequacy ratio is not the last working day of the month, quarter, or year, the exchange rate used for conversion into Vietnamese dong shall be the accounting exchange rate in accordance with the State Bank's regulations on the system of accounting accounts applicable to credit institutions;

(ii) In case the date of calculating the capital adequacy ratio is the last working day of the month, quarter, or year:

- For banks that use Vietnamese dong as the accounting currency, the exchange rate used for conversion into Vietnamese dong shall be the rate applied when preparing the monthly, quarterly, and annual account balance sheet in accordance with the State Bank’s regulations on the system of accounting accounts applicable to credit institutions;

- For banks that use a foreign currency as the accounting currency, the exchange rate used for conversion into Vietnamese dong shall be the rate applied for converting financial statements prepared in foreign currency into Vietnamese dong in accordance with State Bank’s regulations on the financial reporting regime applicable to credit institutions;

c) For gold price:

(i) For commercial banks engaged in gold trading activities, the selling price listed by the bank at the end of the reporting day shall be used;

(ii) For banks not engaged in gold trading activities, the selling price listed by the enterprise or credit institution owning the gold brand at the end of the reporting day shall be used;

d) If the reporting date is not a working day, the bank shall apply the exchange rate and gold price of the most recent preceding working day.

8. Based on the results of inspection, examination, and supervision of the bank, in case it is deemed necessary to ensure the safe operation of the bank, depending on the nature and level of risk, the State Bank of Vietnam shall consider:

a) Requiring the bank to maintain a capital adequacy ratio higher than the level specified in this Circular;

b) Deciding to apply a capital buffer ratio to systemically important commercial banks in each specific period.

Article 6. Equity

1. A bank’s equity shall serve as the basis for calculating the capital adequacy ratio as prescribed in this Circular.

2. Equity includes the total amount of Tier 1 capital (comprising Tier 1 core capital and Additional Tier 1 capital) and Tier 2 capital as specified in Appendix I to this Circular.

Article 7. Application of provisions on capital adequacy ratio

1. From January 1, 2030, banks shall apply the provisions of this Circular, except for those specified in Chapter III of this Circular.

2. The implementation of the standardized approach for credit risk of customers and the calculation of capital adequacy ratios shall be carried out as follows:

a) From the effective date of this Circular, a bank that is capable of implementing the standardized approach for credit risk as prescribed in Chapter II of this Circular prior to the deadline specified in Clause 1 of this Article shall submit a written registration to the State Bank, which shall include the commencement date of the application of the standardized approach, together with a report from the Board of Directors or Members' Council of the commercial bank, or the General Director (Director) of the foreign bank branch, assessing compliance with the relevant provisions on the standardized approach under this Circular;

b) A bank shall implement the standardized approach for credit risk and other relevant provisions of this Circular, except for those in Chapter III, from the date on which the registered standardized approach is applied, and shall cease to apply the Circulars specified at Points a, b, and c, Clause 3, Article 82 of this Circular.

3. The implementation of the internal rating-based approach to customer credit risk and the calculation of capital adequacy ratios shall be carried out as follows:

a) From the effective date of this Circular, a bank capable of implementing the internal ratings-based approach for credit risk as prescribed in Chapter III of this Circular shall:

(i) Submit a written registration to the State Bank, enclosed with an implementation plan for applying the internal ratings-based approach as prescribed in Appendix VII to this Circular;

(ii) Implement the provisions on the transitional period for the internal ratings-based approach as set forth in Article 32 of this Circular;

b) A bank may request the State Bank of Vietnam to grant approval for the application of the internal ratings-based approach as prescribed in Article 33 of this Circular upon satisfying all the following conditions:

(i) After a minimum period of 02 years from the date the bank submitted the written registration to the State Bank as specified at Point a(i) of this Clause;

(ii) For the two consecutive years immediately preceding the date of submission of the dossier for approval by the State Bank, the bank has been assessed by an independent audit firm and the Board of Directors or Members’ Council of the commercial bank or the General Director (Director) of the foreign bank branch as having complied with the requirements related to the internal ratings-based approach as prescribed in this Circular (including the internal credit rating system, systems and tools for capital calculation serving the internal ratings-based approach, coverage ratio, and output floor ratio) in accordance with the scope for which approval is requested;

c) From the date of approval by the State Bank, the bank shall:

(i) Officially apply the internal ratings-based approach to calculate risk-weighted assets for credit risk and comply with other relevant provisions of this Circular;

(ii) Be exempt from compliance with the minimum capital adequacy ratios calculated under the standardized approach as prescribed in Chapter II of this Circular;

(iii) Cease to apply the Circulars specified at Points a, b, and c, Clause 3, Article 82 of this Circular in case where the bank has been granted approval by the State Bank before January 1, 2030.

Chapter II

RISK-WEIGHTED ASSETS UNDER THE STANDARDIZED APPROACH

Section 1

CALCULATION OF TOTAL RISK-WEIGHTED ASSETS UNDER THE STANDARDIZED APPROACH

Article 8. Total credit risk-weighted assets

1. Total risk-weighted assets (RWA) include the total customer risk-weighted assets (RWA_CR) and total counterparty credit risk-weighted assets (RWA_CCR), calculated according to the following formula:

RWA = RWA_CR + RWA_CCR

In which:

- RWA_CR: Total customer risk-weighted assets;

- RWA_CCR: Total counterparty risk-weighted asset.

2. Total customer risk-weighted assets (RWA_CR) is the total of assets on the statement of financial position calculated according to the following formula:

RWA_CR = SE_j x CRW_j + SMax {0, (E_i* - SP_i)} x CRW_i

In which:

- E_j: Value of the j^th asset (other than exposure);

- CRW_j: Credit risk weight of the j^th asset as prescribed in Article 9 and Section 2 of this Chapter;

- E_i*: The i^th exposure value (Ei) determined under Clause 3 of this Article, adjusted downward by credit risk mitigation techniques as prescribed in Articles 25, 26, 27, 28, and 29 of this Circular;

- SP_i: Specific provision for the i^th exposure;

- CRW_i: Credit risk weight of the i^th exposure as prescribed in Article 9 and Section 2 of this Chapter.

3. The exposure value (including principal balance; interest receivable, and fees receivable (if any) currently recognized as income as prescribed by law) of the bank shall be calculated according to the following formula:

E_i = Eon_i + Eoff_i x CCF_i

In which:

- E_i: The value determined based on the historical price of the i^th exposure;

- Eon_i: Outstanding amount of on-balance sheet portion of the i^th exposure;

- Eoff_i: Off-balance sheet commitment portions of the i^th exposure;

- CCF_i: Credit conversion factor of the off-balance sheet commitment portion of the i^th exposure as prescribed in Article 10 of this Circular.

4. Calculation of counterparty risk-weighted asset (RWA_CCR) shall be applicable to:

a) Proprietary trading transactions;

b) Repo and reverse repo transactions;

c) Derivative product transactions for hedging risks;

d) Foreign exchange or financial asset trading transactions aimed at serving the demands of customers or counterparties specified at Point d, Clause 24, Article 2 of this Circular.

5. Transactions for which counterparty credit risk has been calculated shall not be subject to customer credit risk when calculating the capital adequacy ratio. Counterparty risk-weighted assets (RWA_CCR) shall be calculated in accordance with the guidance provided in Appendix II to this Circular.

Article 9. Principles for application of credit risk weight (CRW)

1. Banks shall classify assets in accordance with Article 11 of this Circular and the guidance provided in Appendix VI attached hereto.

2. Based on the results of asset classification under Clause 1 of this Article, banks shall determine the corresponding credit risk weight for each type of asset as provided in Section 2 of this Chapter.

3. Based on the results of asset classification under Clause 1 of this Article, real estate exposures shall be assigned a credit risk weight according to the following principles:

a) A real estate exposure secured by collateral or a real estate exposure mortgaged by social house (including cases secured by one or more collaterals) shall apply the credit risk weight as prescribed in Article 17 of this Circular;

b) Real estate exposures (excluding real estate exposures secured by social house as prescribed in Clause 4, Article 16 of this Circular) that are secured by multiple collaterals shall be subject to the following principles:

(i) In case the qualifying real estate exposure is secured by multiple eligible collaterals, and one or more of such qualifying collaterals have a value at least equal to 100% of the exposure value, the bank shall apply the credit risk weight of the eligible collateral with the lowest risk weight;

(ii) In case the qualifying real estate exposure is secured by multiple qualifying collaterals, but none of the qualifying collaterals has a value equal to or greater than 100% of the exposure value, the bank shall apply the highest credit risk weight among the qualifying collaterals in accordance with Article 17 of this Circular;

(iii) In case the non-qualifying real estate exposure is secured by both qualifying and non-qualifying collaterals as specified at Point b(i), Clause 2, Article 16 of this Circular, and the total value of such collaterals is at least equal to 100% of the exposure value, or the non-qualifying real estate exposure is only secured by the collateral specified at Point b(i), Clause 2, Article 16 of this Circular with a value at least equal to 100% of the exposure value, the bank shall apply the credit risk weight as prescribed in Clause 4, Article 17 of this Circular;

(iv) For cases other than those specified at Points b(i), b(ii), and b(iii) of this Clause, the bank shall apply the credit risk weight as prescribed in Clause 5, Article 17 of this Circular.

c) In case one or more collateral(s) are used to secure multiple exposures, including real estate exposures, the bank shall allocate the value of the collateral(s) corresponding to each exposure in accordance with the agreement among the relevant parties (if any) and the bank's internal regulations. After allocation, the bank shall apply the principle specified at Point a or Point b of this Clause to determine the corresponding credit risk weight.

4. When calculating the merged capital adequacy ratio, commercial banks may apply the credit risk weights as prescribed in Section 2, Chapter II of this Circular to the exposures of their subsidiaries and overseas branches.

Article 10. Credit conversion factor

1. A credit conversion factor of 10% shall apply to:

a) Off-balance sheet commitments (including undrawn credit limits) over which the bank retains the right to unconditionally cancel or automatically cancel upon the customer’s breach of cancellation conditions or deterioration in performance capability;

b) Undrawn credit card limits.

2. A credit conversion factor of 20% shall apply to letters of credit issued or confirmed by the bank that satisfy all of the following conditions:

a) Letters of credit are documentary credits collateralized by the underlying shipment;

b) The original credit term is one year or less in accordance with the credit agreement in the issuance or confirmation of the letter of credit as prescribed by law.

3. A credit conversion factor of 50% shall apply to:

a) Letters of credit issued or confirmed by the bank that satisfy all of the following conditions:

(i) Letters of credit are documentary credits collateralized by the underlying shipment;

(ii) The original credit term is more than one year in accordance with the credit agreement in the issuance or confirmation of the letter of credit as prescribed by law;

b) Contingent liabilities based on specific transactions (including performance bonds, bid bonds, standby letters of credit for specific activities);

c) Securities and valuable paper issuance guarantees.

4. A credit conversion factor of 100% shall apply to:

a) Off-balance sheet commitments equivalent to loans (including irrevocable loan commitments that cannot be cancelled or changed in any form for established commitments, unless otherwise prescribed by laws; guarantees, standby letters of credit securing financial obligations for debts or bonds; irrevocable undisbursed credit limits, etc.);

b) Payment acceptances (including endorsements of documents against acceptance, etc.);

c) Payment obligations of the bank in transactions involving the sale of valuable papers with recourse in the event that the issuer fails to perform its obligations;

d) Forward contracts on assets, deposits, and partially prepaid securities to which the bank makes commitments;

dd) Off-balance sheet commitments not specified under Clauses 1, 2, and 3 of this Article and Points a, b, c, and d of this Clause.

5. For off-balance sheet commitments that are commitments to provide another off-balance sheet commitment (including commitments to provide guarantees, to issue letters of credit, to reimburse letters of credit, etc.), the credit conversion factor shall be the lower one between the credit conversion factor of the commitment to provide the off-balance sheet commitment and the credit conversion factor of the off-balance sheet commitment being provided.

Section 2

CREDIT RISK WEIGHTS FOR GROUPS OF CUSTOMER RISK-WEIGHTED ASSETS

Article 11. Classification of groups of customer risk-weighted assets for determining credit risk weights

1. Groups of assets (excluding the assets deducted from equity as prescribed in Appendix I to this Circular) shall include:

a) Exposures, including:

(i) Exposures classified as non-performing loans and off‑balance‑sheet credit commitment amount classified in Group 3, Group 4, or Group 5 under the regulations of the State Bank on asset classification in operations of commercial banks, non-bank credit institutions, and foreign bank branches;

(ii) Exposures not falling under Point a(i) of this Clause;

b) Cash, gold, and cash equivalents of the bank;

c) Equity instruments of enterprises; loans for margin trading transactions of securities companies;

d) Finance leases;

dd) Receivables purchased by finance companies and finance leasing companies;

e) Receivables arising from the sale of non-performing loans (excluding receivables arising during the process of selling non-performing loans to the Vietnam Asset Management Company (hereinafter referred to as VAMC) and the Vietnam Debt and Asset Trading Corporation (hereinafter referred to as DATC));

g) Remaining assets on the statement of financial position, excluding the assets specified in Points a, b, c, d, dd, and e of this Clause.

2. Exposures specified at Point a(ii), Clause 1 of this Article shall be classified for the application of credit risk weights as follows:

a) Exposures to sovereigns, exposures to the Government of Vietnam, the State Bank, the State Treasury, People’s Committees of provinces and centrally-run cities, policy banks, exposures to international financial institutions, exposures to VAMC and DATC;

b) Exposures to credit institutions and foreign bank branches;

c) Exposures to enterprises and individuals, including:

(i) Loans for investment in and trading of securities;

(ii) Real estate exposures;

(iii) Specialized lending to enterprises;

(iv) Other exposures to enterprises, excluding those specified at Points c(i), c(ii), and c(iii) of this Clause;

(v) Loans to individuals for agricultural and rural development;

(vi) Retail exposures;

d) Other exposures, excluding those specified at Points a, b, and c of this Clause.

Article 12. Credit risk weight of non-performing loans

1. For non-performing loans with specific provisions exceeding 20% of the value of the non-performing loan, non-performing loans being exposures mortgaged by houses that satisfy the conditions specified at Points a(i) and a(ii), Clause 2, Article 16 of this Circular, and off‑balance‑sheet credit commitment amount specified at Point a(i), Clause 1, Article 11 of this Circular, the credit risk weight shall be 100%.

2. For non-performing loans with specific provisions of up to 20% of the value of the non-performing loan, excluding the exposures specified in Clause 1 of this Article, the credit risk weight shall be 150%.

Article 13. Credit risk weight for exposures under Point a, Clause 2, Article 11 of this Circular

1. For exposures to the Government of Vietnam, the State Bank, the State Treasury, People’s Committees of provinces and centrally-run cities, and policy banks, the credit risk weight shall be 0%.

2. For exposures to international financial institutions, the credit risk weight shall be 0%.

3. For exposures to VAMC, the credit risk weight shall be 20%, unless otherwise provided for by law applying a different credit risk weight to such exposures.

4. For exposures to DATC, the credit risk weight shall be 20%.

5. For exposures to foreign governments and foreign central banks, the credit risk weight shall be determined according to the credit rating as follows:

6. For exposures to non-central government public sector entities (PSEs) and foreign local governments, the credit risk weight shall be applied according to the credit risk weight of the respective government exposure as provided in Clause 5 of this Article.

Article 14. Credit risk weights for exposures to credit institutions and foreign bank branches

1. For foreign credit institutions, the credit risk weight shall be determined according to the credit rating as follows:

2. For foreign bank branches operating in Vietnam, foreign bank branches operating in other countries, and Vietnamese bank branches operating overseas, the credit risk weight shall be determined based on the credit rating of the parent bank.

3. For exposures to domestic credit institutions, except for the exposures prescribed in Clauses 4 and 5 of this Article, the credit risk weight shall be determined as follows:

4. For loans, guarantees, and deposits from the acquiring institution and other credit institutions to the compulsorily transferred commercial bank as prescribed by the Law on Credit Institutions, the acquiring institution and other credit institutions shall apply a credit risk weight of 0%.

5. For loans and deposits of the supporting credit institution to the credit institution under special control in accordance with the Law on Credit Institutions, the supporting credit institution shall apply a credit risk weight of 0%.

Article 15. Credit risk weight of loans for securities trading

The credit risk weight of loans for securities trading is 150%.

Article 16. Real estate exposures

1. A real estate exposure is an exposure to individuals or legal entities for the purposes of purchasing, hire-purchasing, constructing, renovating, repairing, or trading real estate or real estate projects, excluding the exposures stipulated in Articles 12, 13, and 14 of this Circular.

2. Real estate exposures include:

a) Qualifying real estate exposures:

(i) Real estate exposures mortgaged by social houses as prescribed in Clause 4 of this Article;

(ii) Qualifying real estate exposures mortgaged by residential houses as prescribed in Clause 3 of this Article;

(iii) Qualifying real estate exposures mortgaged by commercial real estates as prescribed in Clause 3 of this Article;

b) Non-qualifying real estate exposures:

(i) Real estate exposures mortgaged by existing residential houses or existing commercial real estate that may be transferred but have not yet been issued with a certificate of land use rights and ownership of land-attached assets in accordance with the law;

(ii) Other real estate exposures other than those specified at Points a and b(i) of this Clause.

3. Qualifying real estate exposures must satisfy both of the following conditions:

a) Having qualifying collateral that fully meets the following conditions:

(i) The collateral is existing residential house or existing commercial real estate that may be transferred and has been issued with a certificate of land use rights and ownership of land-attached assets in accordance with the law; In which, residential house means a building constructed for residential purposes and to serve the living needs of individuals or households; existing commercial real estate means to an existing building not constructed for residential purposes or to serve the living needs of individuals or households;

(ii) The bank has the legal right to handle the real estate collateral in accordance with the agreement and the laws on secured transactions, housing laws, and other relevant laws;

(iii) The bank must determine the value of the collateral in accordance with Point c, Clause 5 of this Article;

b) The total appraised value of the qualifying collateral must be maintained at not less than 100% of the exposure value.

4. A real estate exposure mortgaged by social house is an exposure arising from a loan granted to an individual for the purchase or hire-purchase of social house, or house under the government-supported programs or projects (hereinafter referred to as social house), as defined by law, and secured by the very social house formed from the loan proceeds. Such collateral being social house must satisfy the conditions specified at Point a(ii) and Point a(iii), Clause 3 of this Article.

5. Calculation of loan to value (LTV) ratio

a) The LTV shall be used to determine the credit risk weight of qualifying real estate exposures specified at Point a, Clause 2 of this Article;

b) The formula for determining LTV is as follows:

In which:

(i) L: means the total outstanding balance of the exposure, which is the total outstanding balance of the qualifying real estate exposure subject to LTV calculation and the outstanding balances of other exposures secured by the same collateral as that of the exposure subject to LTV calculation at the banks. The outstanding balance of an exposure upon LTV calculation includes the on‑balance‑sheet principal outstanding balance and off‑balance‑sheet credit commitment amount;

(ii) V: means the total value of the real estate collateral of the qualifying real estate exposure subject to LTV calculation, determined based on the most recent valuation.

c) Principles for determining the value of real estate collateral:

(i) The value of real estate collateral shall be determined in accordance with the bank’s internal regulations on collateral valuation, which must comply with the law on classification of assets, provisioning rate, provisioning methods, and the use of provisions to handle risks in operations of credit institutions and foreign bank branches;

(ii) The valuation of real estate collateral shall be conducted by a valuation organization or a unit independent from the bank's credit approval unit, in accordance with the bank’s internal regulations mentioned at Point c(i) of this Clause.

Article 17. Credit risk weight of real estate exposures

1. Credit risk weight of real estate exposures mortgaged by social houses according to LTV as follows:

a) Where the customer's debt repayment source does not derive from the collateral:

b) Where the customer's debt repayment source derives from the collateral:

2. Credit risk weight of qualifying real estate exposures mortgaged by residential houses according to LTV as follows:

a) Where the customer's debt repayment source does not derive from the collateral:

b) Where the customer's debt repayment source derives from the collateral:

3. Credit risk weight of qualifying real estate exposures mortgaged by commercial real estate according to LTV as follows:

a) Where the customer's debt repayment source does not derive from the collateral:

b) Where the customer's debt repayment source derives from the collateral:

4. Credit risk weight of real estate exposures as prescribed at Point b(i), Clause 2, Article 16 of this Circular

a) Where the customer's debt repayment source does not derive from the collateral:

(i) For exposures to individuals, the credit risk weight shall be 75% if the customer has a total outstanding balance of credit extension for real estate exposures (including on‑balance‑sheet principal outstanding balance and off‑balance‑sheet credit commitment amount) not exceeding VND 8 billion. In case the above condition is not satisfied, the credit risk weight shall be 100%.

(ii) For exposures to enterprises, the credit risk weight shall be applied in accordance with Clause 1 or Clause 2, Article 19 of this Circular;

b) Where the client’s source of debt repayment is from the collateral, the credit risk weight shall be 150%.

5. Credit risk weight of real estate exposures as prescribed at Point b(ii), Clause 2, Article 16 of this Circular

a) For exposures to individuals, the credit risk weight shall be 100%;

b) For exposures to enterprises, the credit risk weight shall be greater of 150% or the credit risk weight of enterprise exposures as provided in Clause 1 or Clause 2, Article 19 of this Circular.

Article 18. Credit risk weight of specialized lending

1. Specialized lending refers to a credit extension to an enterprise with legal entity status for the purposes specified at Points a, b, and c, Clause 3 of this Article (including specialized lending during the operational phase), excluding exposures specified in Articles 12, 13, 14, 15, and 16 of this Circular, and fully satisfying the following conditions:

a) The customer is an enterprise established solely for the purpose of implementing the project, investing in machinery and equipment, or trading in goods formed from the credit extension proceeds, without engaging in any other business activities;

b) Being secured by the project, machinery, equipment, or goods formed from the credit extension proceeds, and the entire debt repayment source is derived from the business operation or exploitation of such project, machinery, equipment, and goods.

2. The bank shall determine the operational phase as prescribed in Clause 1 of this Article as follows:

a) The operational phase refers to the phase that satisfies all of the following conditions:

(i) The phase during which the project, machinery, and equipment have been completed and placed into commercial operation and use, in accordance with legal regulations and agreements among the relevant parties;

(ii) The phase in which the net cash flow for the year, after deducting outstanding short-term liabilities, is positive, and medium- and long-term liabilities decrease compared to the immediately preceding year, where:

- Net cash flow refers to the annual net cash flow derived from the Statement of Cash Flows;

- Medium- and long-term liabilities include long-term borrowings and financial lease liabilities, based on the Balance Sheet figures;

- Outstanding short-term liabilities are determined on the basis of short-term liabilities indicated in the Balance Sheet and other information provided by the customer;

b) The bank shall determine the indicators specified at Point a(ii) of this Clause based on the annual financial statements of the immediately preceding fiscal year (consolidated financial statements, where required by law), comprising: Audited annual financial statements at the most recent time for enterprises subject to independent audit; audited annual financial statements (if any) or annual financial statements submitted to the tax office (with evidence of submission to the tax office) at the most recent time for enterprises not subject to independent audit in accordance with law, together with other relevant information provided by the customer.

3. Specialized lending shall be conducted in the following forms:

a) Project finance refers to specialized lending to implement a large-scale, complex, and high-cost project (such as a power plant, chemical processing plant, mine, transportation, environmental, media, or telecommunications infrastructure, etc.);

b) Object finance refers to specialized lending to invest in machinery and equipment (such as ships, aircraft, satellites, trains, etc.);

c) Commodities finance refers to specialized lending to finance reserves, inventories, or receivables of exchange-traded commodities (such as crude oil, metals, grains, etc.).

4. The bank shall stipulate in the credit extension agreement provisions to control all disbursements and payments in accordance with the implementation schedule of the project, the investment in machinery and equipment, or the purchase of goods, as well as the management of revenues and cash flows from the operation and exploitation of such project, machinery, equipment, and goods, for the purpose of debt recovery under the credit extension agreement. In cases where multiple banks finance the same project, investment in machinery and equipment, or purchase of goods, the banks shall agree on responsibilities and the division of rights and obligations to ensure compliance with the above-mentioned control requirements.

5. Credit risk weight for specialized lending:

a) For specialized lending that does not meet the requirements specified in Clause 4 of this Article, the credit risk weight shall be 200%;

b) For project finance and object finance:

(i) Prior to the operational phase, the credit risk weight applied shall be the higher of the credit risk weight applicable to enterprises as prescribed in Clause 2, Article 19 of this Circular and 160%;

(ii) During the operational phase, the credit risk weight shall be 100%;

c) For commodities finance, the credit risk weight shall be 100%.

Article 19. Credit risk weight for enterprise exposures

Enterprise exposures refer to exposures to legal entity enterprises, excluding the exposures specified in Articles 12, 13, 14, 15, 16, and 18 of this Circular. The applicable credit risk weights are as follows:

1. For small- and medium-sized enterprises, the credit risk weight shall be 85%.

2. For enterprises other than those specified in Clause 1 of this Article, the bank shall determine revenue target, leverage ratio, and equity based on figures in the annual financial statements (consolidated annual financial statements if required by law), including: Audited annual financial statements at the most recent time for enterprises subject to independent audit; audited annual financial statements (if any) or annual financial statements submitted to the tax office (with evidence of submission to the tax office) at the most recent time for enterprises not subject to independent audit in accordance with law.

Revenue means revenue from sale of goods and provision of services, as recorded in the Statement of Profit and Loss; equity shall be based on figures in the Balance Sheet.

Leverage ratio = Total debt/Total assets

In which: Total debt is determined as the sum of short-term borrowings and finance lease liabilities and long-term borrowings and finance lease liabilities in accordance with the accounting law; Total assets are taken from the Balance Sheet.

a) The credit risk weight shall be applied according to the enterprise’s revenue target and leverage ratio as follows:

b) A credit risk weight of 200% shall be applied to:

(i) Enterprises that fail to provide the financial statements to the bank for the calculation of revenue, leverage ratio, and equity (except for the cases specified at Point c of this Clause);

(ii) Enterprises whose equity is negative or equal to zero;

c) For newly established enterprises (excluding cases of establishment resulting from reorganization, conversion of legal form, etc.) that have been in operation for less than one year, or newly established enterprises for less than 15 months but whose accounting periods are consolidated in accordance with the Law on Accounting, the credit risk weight shall be 150%.

Article 20. Credit risk weight for loans to individuals for agricultural and rural development

1. Loans to individuals for agricultural and rural development are loans to individuals as prescribed by the Government’s regulations on credit policy for agricultural and rural development.

2. The credit risk weight for loans to individuals for agricultural and rural development shall be 50%.

Article 21. Credit risk weight for retail exposures

1. Retail exposures are credit extensions to individuals (including sole proprietorships, households, cooperatives, and other organizations without legal person status), excluding the exposures specified in Articles 12, 15, 16, and 20 of this Circular, where the outstanding balance of credit extensions (including on-balance sheet loan principal outstanding and off-balance sheet commitment amount) to a single customer fully satisfies the following conditions:

a) Does not exceed VND 8 billion;

b) Does not exceed 0.2% of the total outstanding balance of retail exposures (including on-balance sheet loan principal outstanding and off-balance sheet commitment amount) of that bank itself.

2. The credit risk weight for retail exposures shall be 75%.

Article 22. Credit risk weight for other exposures

For exposures specified at Point d, Clause 2, Article 11 of this Circular, the credit risk weight shall be 100%.

Article 23. Credit risk weight for other assets

1. For assets specified at Point b, Clause 1, Article 11 of this Circular, the credit risk weight shall be 0%.

2. For assets specified at Point c, Clause 1, Article 11 of this Circular, the credit risk weight shall be 150%.

3. For assets being financial leases, the credit risk weight applied shall be the higher of the credit risk weight applicable to the lessee enterprise as prescribed in Clause 1 or Clause 2, Article 19 of this Circular and 160%.

4. For assets being purchased receivables with reservation of the right of recourse of finance companies or financial leasing companies as prescribed, the credit risk weight applied shall be the credit risk weight of the exposure to the seller of the receivables. For purchased receivables of finance companies or financial leasing companies, the credit risk weight applied shall be the credit risk weight of the exposure.

5. For assets specified at Point e, Clause 1, Article 11 of this Circular, the credit risk weight shall be 200%.

6. For assets specified at Point g, Clause 1, Article 11 of this Circular, the credit risk weight shall be 100%.

Section 3

USE OF INDEPENDENT CREDIT RATINGS

Article 24. Independent credit rating enterprises

1. A bank may apply the rating results of independent credit rating enterprises established and operating in accordance with the law on credit rating services to calculate the capital adequacy ratio as prescribed in this Circular when the independent credit rating enterprises satisfy the following conditions:

a) Objectivity: The credit rating must be rigorous, systematic, subject to reassessment to ensure consistency with historical data for at least three years; performed continuously and promptly in response to changes in financial conditions;

b) Independence: The credit rating enterprise must not be subject to political or economic pressures affecting the credit rating results;

c) Transparency: The credit rating must be publicly disclosed to relevant parties with legitimate interests (including foreign parties, if any);

d) Public disclosure: The credit rating enterprise must disclose information on the rating approach, the concept of default, the meaning of each credit rating grade, the actual probability of default for each credit rating grade, and rating migration;

dd) Capability: The credit rating enterprise must have sufficient resources to conduct ratings of good quality, apply an approach combining qualitative and quantitative rating, and maintain regular and continuous contact with all levels of the rated entity to enhance the quality of the credit rating value;

e) Credibility: Credit rating results must be trusted by organizations (investors, insurance businesses and commercial partners). The credit rating enterprises must have internal procedures to prevent the misuse of confidential information related to the rated entity.

2. A bank must use the credit rating grade provided by the independent credit rating enterprise consistently for risk management and for applying the credit risk weight as prescribed in this Circular.

3. The credit rating scale of an independent credit rating enterprise shall be determined and allocated corresponding to the level of risk in calculating the capital adequacy ratio as follows:

a) The credit rating scales of Standard & Poor’s, Moody’s, and Fitch Ratings shall be allocated as follows:

b) In the event that an independent credit rating enterprise has a credit rating scale different from that specified at Point a of this Clause, such independent credit rating enterprise must convert the corresponding credit rating grades to conform with the credit rating scale of Moody’s, or Standard & Poor’s, or Fitch Ratings in order to determine the level of risk of the customer, counterparty, or exposure when calculating the capital adequacy ratio.

4. The use by a bank of the credit ratings issued by an independent credit rating enterprise shall comply with the following principles:

a) Only contractual credit ratings may be used; optional credit ratings of an independent credit rating enterprise shall not be used;

b) Where a customer has two or more credit ratings, the bank shall apply the credit rating corresponding to the highest credit risk weight to that customer;

c) Credit ratings of the group, corporation, or parent company of such group or corporation shall not be used to apply credit risk weights to its subsidiaries or affiliates within the same group or corporation;

d) Credit ratings shall be used to apply credit risk weights only for credit ratings in the same currency;

dd) Where an exposure has one credit rating, the bank shall use such credit rating to apply the credit risk weight for that exposure in accordance with this Circular;

e) Where an exposure has two or more credit ratings, the bank shall apply the credit rating corresponding to the highest credit risk weight to that exposure;

g) Where an exposure does not have a credit rating, the bank shall apply the following principles:

(i) If the customer or counterparty has other exposures or financial liabilities with a separate credit rating, the bank may use such separate credit rating to apply the credit risk weight to the unrated exposure if such exposure has the same or higher seniority of claim than the rated exposure or financial liability;

(ii) If the customer or counterparty has a credit rating, the bank may use such credit rating to apply the credit risk weight to the unrated exposure if such exposure has the highest seniority of claim and is unsecured;

(iii) If the credit risk weight of the unrated exposure cannot be determined in accordance with Points g(i) and g(ii) of this Clause, the bank must apply the higher credit risk weight;

(iv) In cases not specified at Points g(i), g(ii), and g(iii) of this Clause, the bank shall regard the exposure as unrated.

Section 4

CREDIT RISK MITIGATION TECHNIQUES

Article 25. Credit risk mitigation

1. A bank may adjust downward the value of an exposure or transaction through the credit risk mitigation techniques specified in Clause 2 of this Article.

2. The credit risk mitigation referred to in Clause 1 of this Article shall be effected by one or a combination of the following measures:

a) Collateral;

b) On-balance sheet netting;

c) Third-party guarantee;

d) Credit derivative products.

3. The credit risk mitigation as provided for in Clause 1 of this Article must adhere to the following principles:

a) The credit risk mitigation technique must be implemented in accordance with relevant laws, be agreed upon in writing by the parties (clearly stating the responsibilities and obligations of the participating parties), and be effective at the time the credit risk mitigation technique is applied;

b) For a risk mitigation technique with a fixed term, where the remaining term of the risk mitigation technique is shorter than the residual maturity of the exposure, the downward adjustment of the exposure value may only be made for a credit risk mitigation technique having an original term of at least 01 year and a remaining term of at least 03 months;

c) Where the remaining term of the credit risk mitigation technique is shorter than the residual maturity of the exposure or transaction (hereinafter referred to as maturity mismatch), the adjusted value of the risk mitigation technique must be subject to a haircut in accordance with the maturity mismatch, except in the case specified in Clause 6, Article 26 of this Circular;

d) Where the credit risk mitigation technique and the exposure or transaction are denominated in different currencies (hereinafter referred to as currency mismatch), the adjusted value of the risk mitigation technique must be subject to a haircut in accordance with the currency mismatch;

dd) The bank must have internal regulations for managing other types of risks (operational risk, market risk, etc.) arising from the application of credit risk mitigation techniques and must ensure the corresponding capital requirements for such risks in accordance with this Circular.

e) Where multiple eligible risk mitigation techniques as prescribed in Clause 2 of this Article and in Articles 26, 27, 28, and 29 of this Circular are applied to one or more exposures or transactions, the bank may allocate the value of each mitigation measure corresponding to the value of the exposure or transaction in accordance with the agreement between the relevant parties (if any) and the bank’s internal regulations, so as to separately calculate the mitigated value for each portion of the balance of such exposure or transaction pursuant to Clause 4 of this Article, provided that the total allocated value of all measures to the exposures or transactions does not exceed the total value of eligible measures for credit risk mitigation.

This principle shall also apply in cases where, within a single risk mitigation technique, there are multiple collaterals or multiple guarantors, or multiple credit derivative products mitigating a single exposure or transaction, or where one risk mitigation technique is applied to multiple exposures or transactions.

4. The value of exposure or transaction with credit risk mitigation shall be calculated according to the following formula:

Ei* = max{0,[E_j - SC_j*(1-Hc_j-H_fxcj)]} + max{0,[E_k - SL_k*(1-H_fxlk)]} + max{0,[E₁-SG_l(1-CRWgtor_l/CRW_l)]} + max{0,[E_n - SCD_n*(1- H_fxcdn)]} + E_x

In which:

E_i = E_j + E_k + E_l + E_n + E_x

- E_i*: Value of exposure or transaction i, adjusted for credit risk mitigation techniques;

- E_i: Value of exposure or transaction i, calculated in accordance with Article 8 of this Circular;

- E_j: Value of exposure or transaction i, calculated in accordance with Article 8 of this Circular, adjusted for credit risk mitigation by collateral;

- E_k : Value of exposure or transaction i, calculated in accordance with Article 8 of this Circular, adjusted for credit risk mitigation by on-balance sheet netting;

- E_l: Value of exposure or transaction i, calculated in accordance with Article 8 of this Circular, adjusted for credit risk mitigation by third-party guarantee;

- E_n : Value of exposure or transaction i, calculated in accordance with Article 8 of this Circular, adjusted for credit risk mitigation by credit derivative products;

- E_x : Value of exposure or transaction i, calculated in accordance with Article 8 of this Circular, not adjusted for credit risk mitigation;

- Cj*: Value of the collateral subject to the haircut appropriate for maturity mismatch;

- Hc_j: Haircut appropriate to the collateral;

- L_k*: Value of on-balance sheet liability subject to the haircut appropriate for maturity mismatch;

- G_l: Value of third-party guarantee;

- CRWgtor_l: Credit risk weight of the guarantor;

- CRW_l: Credit risk weight of the customer;

- CD_n*: Value of the credit derivative product subject to the haircut appropriate for maturity mismatch;

- H_fxc, H_fxl, H_fxcd: Haircut appropriate for currency mismatch between the exposure or transaction and the risk mitigation technique.

Article 26. Credit risk mitigation by collateral

1. Credit risk mitigation by collateral shall apply only to the following collateral:

a) Cash; valuable papers issued by credit institutions or foreign bank branches; term deposit balances or savings deposit balances (hereinafter referred to as deposit arrangements);

b) Gold;

c) Valuable papers issued or payment-guaranteed by the Government of Vietnam, the State Bank, the State Treasury, provincial-level People’s Committees, or policy banks;

d) Debt securities issued by governments or government PSEs which are rated by independent credit rating enterprises at BB- or higher;

dd) Debt securities issued by enterprises which are rated by independent credit rating enterprises at BBB- or higher;

e) Stocks listed on the Vietnam Stock Exchange.

2. Collateral prescribed in Clause 1 of this Article must satisfy the following conditions:

a) Comply with the law on secured transactions;

b) Valuable papers, debt securities, and stocks must not be issued or payment-guaranteed by the customer, the customer’s parent company, subsidiary, or affiliate;

c) Collateral specified at Points dd and e, Clause 1 of this Article must have matched transactions within the 10 consecutive working days immediately preceding the calculation date.

3. The collateral haircut (Hc) as a percentage (%) shall be determined as follows:

a) Cash, deposit arrangements, and valuable papers issued by the bank itself, valuable papers issued or payment-guaranteed by the Government of Vietnam, the State Bank, the State Treasury, provincial-level People’s Committees, or policy banks shall be subject to a collateral haircut of 0;

b) Deposit arrangements, valuable papers, securities, and gold shall have the following collateral haircuts:

4. Value of the collateral (excluding collateral being cash and gold) adjusted for maturity mismatch (C*) shall be calculated according to the following formula:

C* = C x (t - 0.25) / (T - 0.25)

In which:

- C: Value of the collateral;

- T: Determined as the minimum value between 5 years and the residual maturity of the exposure or transaction, expressed in years;

- t: Determined as the minimum value between T (expressed in years) and the residual maturity of the collateral, expressed in years.

5. The currency mismatch haircut between the exposure or transaction and the collateral (H_fxc) shall be 8%.

6. The residual maturity prescribed in Clause 3 of this Article shall be determined according to the residual maturity of the exposure and shall not be adjusted for maturity mismatch under Clause 4 of this Article for deposit arrangements of other credit institutions or foreign bank branches that fully meet the following conditions:

a) The deposit arrangement contains an agreement on the automatic renewal of the deposit upon maturity and the customer is not allowed to withdraw prior to maturity under the deposit arrangement (including the period after the automatic renewal of the deposit);

b) The bank must agree with the customer in the credit extension contract or the security contract on the bank’s right to control all payments and cash flows of the deposit arrangement for debt recovery under the credit extension contract.

Article 27. Credit risk mitigation by the on-balance sheet netting

1. Credit risk mitigation by on-balance sheet netting means the bank adjusts downward the value of a customer’s exposure by the amount of that customer’s deposit balance at the same bank when calculating the total risk-weighted assets, in cases where all of the following conditions are fully met:

a) Full legal dossier exists for the agreement on the netting of the customer’s exposure balance and deposit balance, including in the event that the customer becomes insolvent or bankrupt; such agreement must comply with the civil law and other relevant laws;

b) The exposure balance and the deposit balance for each customer under the on-balance sheet netting agreement can be identified at all times;

c) The maturity of the deposit balance can be monitored and controlled;

d) The netted balance between the customer’s exposures and deposits can be monitored and controlled.

2. Value of the customer’s deposit balance adjusted for maturity mismatch (L*) shall be calculated according to the following formula:

L* = L x (t - 0.25) / (T - 0.25)

In which:

- L: Customer’s deposit balance;

- T: Determined as the minimum value between 5 years and the residual maturity of the exposure or transaction, expressed in years;

- t: Determined as the minimum value between T (expressed in years) and the residual maturity of the on-balance-sheet liability, expressed in years.

3. The currency mismatch haircut between the exposure or transaction and the customer’s deposit balance (H_fxl) shall be 8%.

Article 28. Credit risk mitigation by the third-party guarantee

1. Credit risk mitigation by guarantees shall only apply to guarantors specified in Clause 2 of this Article and must satisfy the conditions specified in Clause 3 of this Article.

2. Guarantors include:

a) Government, central bank, government PSEs, local authorities;

b) Credit institutions and foreign bank branches with a credit rating of BBB- or higher;

c) Enterprises with a credit rating of A- or higher;

d) International financial institutions.

3. Credit risk mitigation by third-party guarantees must satisfy the following conditions:

a) The bank must have the right to claim directly against the guarantor for each specific obligation of the customer or counterparty, and such right of claim must be specific and irrevocable;

b) The guarantee commitment must be irrevocable and unconditional; the guarantor must not unilaterally terminate the guarantee obligation or increase the guarantee fee when the ability of the customer or counterparty to perform obligations deteriorates; the guarantor must commit to promptly performing the guarantee obligation when the customer or counterparty fails to perform obligations;

c) The guarantee contract must have an effective term at least equal to the term of the exposure or transaction;

d) The guarantor must have a lower credit risk weight than the guaranteed party or have a better credit rating than the guaranteed party;

dd) The guarantor must not be a parent company, subsidiary or affiliate of the guaranteed party.

4. Where the exposure is not fully guaranteed, the bank may only adjust for the portion of the exposure balance that is guaranteed.

Article 29. Credit risk mitigation by the credit derivative product

1. A bank may only adjust the value of an exposure by credit derivative products if the following conditions are satisfied:

a) The credit events as agreed upon by the parties must, at a minimum, include the following cases:

(i) The customer fails to perform the committed obligations on time, and the credit derivative product is effective at the time the event occurs, with a grace period consistent with the grace period of the underlying obligation;

(ii) The customer becomes bankrupt, fails to perform, or is unable to perform the committed obligations when due, and similar cases;

(iii) The customer is required to restructure the committed obligations (including interest waiver or reduction);

b) There must be no discrepancy between the underlying obligation of the customer or counterparty and the reference obligation of the credit derivative product;

c) The credit derivative product must not terminate before the grace period of the underlying obligation expires;

d) The identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. The protection buyer must have the right or the ability to notify the protection seller upon the occurrence of the event.

2. The bank must calculate the counterparty risk-weighted assets (RWA_CCR) in accordance with Clause 4, Article 8 of this Circular with respect to the issuer of the credit derivative product for the portion of the exposure for which credit risk is mitigated by the credit derivative product.

3. Value of the credit derivative product adjusted for maturity mismatch (CD*) shall be calculated according to the following formula:

CD* = CD x (t - 0.25) / (T - 0.25)

In which:

- CD: Value of the credit derivative product;

- T: Determined as the minimum value between 5 years and the residual maturity of the exposure or transaction, expressed in years;

- t: Determined as the minimum value between T (expressed in years) and the residual maturity of the on-balance-sheet liability, expressed in years.

4. The haircut appropriate for currency mismatch between the exposure, transaction and credit derivative product (H_fxcd) shall be 8%.

Chapter III

RISK-WEIGHTED ASSETS UNDER THE INTERNAL RATING-BASED APPROACH

Section 1

CALCULATION OF TOTAL RISK-WEIGHTED ASSETS

Article 30. Total credit risk-weighted assets (RWA)

1. Total risk-weighted assets (RWA) include the total customer risk-weighted assets (RWA_CR) and total counterparty credit risk-weighted assets (RWA_CCR), calculated according to the following formula:

RWA = RWA_CR + RWA_CCR

In which:

- RWA_CR: Total customer risk-weighted assets;

- RWA_CCR: Total counterparty risk-weighted asset.

2. Calculation of counterparty risk-weighted asset (RWA_CCR) shall be applicable to:

a) Proprietary trading transactions;

b) Repo and reverse repo transactions;

c) Derivative product transactions for hedging risks;

d) Foreign exchange or financial asset trading transactions aimed at serving the demands of customers or counterparties specified at Point d, Clause 24, Article 2 of this Circular.

3. Transactions for which counterparty credit risk has been calculated shall not be subject to customer credit risk when calculating the capital adequacy ratio. Counterparty risk-weighted assets (RWA_CCR) shall be calculated in accordance with the guidance provided in Appendix II to this Circular.

Section 2

CALCULATION OF TOTAL CUSTOMER RISK-WEIGHTED ASSETS UNDER THE INTERNAL RATING-BASED APPROACH

Article 31. Application of the internal rating-based approach to asset types

1. A bank shall classify assets in the statement of financial position in accordance with this Circular and the bank’s internal regulations, except for the assets specified in Clause 3, Article 30 of this Circular, as follows:

a) Assets in the statement of financial position shall be classified into four asset types: Enterprise exposures, retail exposures, purchased receivables, and other assets;

b) Each asset type shall be classified into asset groups in accordance with Articles 37, 38, and 39 of this Circular;

c) A bank may classify each asset group into sub-groups in accordance with its internal regulations.

2. A bank may choose to apply the internal rating-based approach or the standardized approach to each asset group or sub-group specified at Points b and c, Clause 1 of this Article, in accordance with its operations. Where a bank applies the internal rating-based approach to an asset group or sub-group, such approach must be applied to all exposures in that asset group or sub-group, except for exposures in the asset group or sub-group that must apply the standardized approach as provided in this Circular.

3. A bank may apply the internal rating-based approach to each asset type specified in Articles 37, 38, and 39 of this Circular, provided that the asset type selected for application of the internal rating-based approach must meet the minimum coverage ratio of 70% on a separate basis (excluding subsidiaries in the case of commercial banks), as follows:

In which:

- RWA_CR (IRB) means customer risk-weighted assets for assets applying the internal rating-based approach;

- RWA_CR (SA) means customer risk-weighted assets for assets applying the standardized approach.

4. A bank must maintain the minimum coverage ratio prescribed in Clause 3 of this Article from the date the State Bank approves the application of the internal rating-based approach.

Article 32. Transitional period for the application of the Internal rating-based approach

A bank shall implement the transition to the application of the internal rating-based approach as follows:

1. The bank must implement the Plan for the implementation of the internal rating-based approach submitted to the State Bank as prescribed at Point a, Clause 3, Article 7 of this Circular.

2. The bank must hire an independent audit organization that meets the requirements prescribed by the State Bank regarding independent audits of banks to assess compliance with the requirements related to the internal rating-based approach as provided in this Circular (including the internal credit rating system, systems, capital calculation tools serving the internal rating-based approach, coverage ratio, and output floor ratio).

3. The Board of Directors, Members’ Council of the commercial bank, or the General Director (Director) of the foreign bank branch must conduct self-assessments of compliance with the requirements related to the internal rating-based approach as provided in this Circular (including the internal credit rating system, systems, capital calculation tools serving the internal rating-based approach, coverage ratio, and output floor ratio).

4. During the transitional period, the bank must submit to the State Bank the assessment report of the independent audit organization as specified in Clause 2 of this Article (if any) and the bank’s report as specified in Clause 3 of this Article, together with related documents, before April 15 annually.

Article 33. Dossier and procedures for approval of the application of the internal rating-based approach

1. The dossier for requesting approval of the application of the internal rating-based approach shall comprise:

a) A written request for approval of the application of the internal rating-based approach, using the form prescribed in Appendix VIII hereto;

b) The bank’s report on the assessment of compliance with the requirements of the internal rating-based approach as prescribed in Clause 3, Article 32 hereof;

c) Documents on the bank’s internal credit rating system, including:

(i) Internal regulations and procedures on the implementation of the internal credit rating system (including contents on the design, operation, validation, audit, model supervision, and adjustment of the internal credit rating system);

(ii) Approval documents related to the internal credit rating system;

(iii) Internal regulations and procedures on information technology systems and data governance serving the internal rating-based approach, including contents on quality standards, data cleansing, and data extraction;

d) Report on the implementation of the internal credit rating system, which shall include at a minimum:

(i) Model validation results (pre-implementation validation reports, periodic and ad-hoc reports);

(ii) Model supervision results;

(iii) Internal audit results;

(iv) Review results of the department performing the function of customer credit risk control;

(v) Results of the calculation of capital adequacy ratio, coverage ratio, and output floor ratio;

(vi) Reports on the use of third-party models (if any);

dd) Report of the independent audit organization assessing compliance with the requirements related to the internal rating-based approach as prescribed in Clause 2, Article 32 hereof;

e) Internal regulations or reports on the structure, functions, and duties of parties involved in the implementation of the internal credit rating system and capital calculation under the internal rating-based approach;

g) Documents evidencing the integration and use of the internal credit rating system in credit approval, risk management, internal capital allocation, and reporting;

h) Regulations and procedures on capital calculation (credit risk-weighted assets, market risk, operational risk, and capital adequacy ratio) under the internal rating-based approach;

i) Summary of the situation and results achieved by the bank during the transitional period to the internal rating-based approach;

k) Other documents and regulations evidencing compliance with the requirements related to the internal rating-based approach as prescribed in this Circular.

2. The State Bank shall approve the application of the internal rating-based approach of the bank according to the following procedures:

a) A bank wishing to apply the internal rating-based approach shall prepare a dossier in accordance with Clause 1 of this Article and submit it to the State Bank via postal service or directly at the headquarters of the State Bank (Single-Window Section), or submit it online via the National Public Service Portal or the Public Service Portal of the State Bank (if available). In case of online submission through the National Public Service Portal or the State Bank’s Pubic Service Portal (if any), e-dossiers shall be digitally signed in accordance with the law on carrying out administrative procedures on electronic environment. In case where the National Public Service Portal or the State Bank’s Pubic Service Portal fails to receive or exchange electronic information due to an incident or error, the declaration, submission, receipt, result return, exchange and feedback of information shall be conducted by postal service or conducted directly at the Single-window section of the State Bank. Documents in the e-dossier must be electronic versions scanned from the originals (in PDF format);

b) Within 12 months from the date of receipt of a complete and valid dossier from the bank, the State Bank shall issue a written approval of the request to apply the internal rating-based approach. In case of refusal, the State Bank shall issue a written reply, clearly stating reasons.

3. To serve the approval process, where necessary, the State Bank shall:

a) Directly work with the bank;

b) Request the bank to update, submit additional dossier, or provide information.

4. After the State Bank has approved the application of the internal rating-based approach for one or several asset types, if the bank wishes to apply the internal rating-based approach for another asset type, the bank shall comply with the provisions specified at Points a and b, Clause 3, Article 7, Article 32 of this Circular, and this Article.

5. After being approved by the State Bank to apply the internal rating-based approach, in the event of exceptional circumstances resulting in significant changes in operations, the bank shall report in writing to the State Bank on the application of the standardized approach, specifying the expected date of application.

6. Based on the results of inspection, examination, and supervision, where the State Bank assesses that the bank fails to comply with the requirements for the internal rating-based approach under this Circular, depending on the nature and level of risk, the State Bank may request such bank to suspend or terminate the application of the internal rating-based approach.

Article 34. Adjustment of the internal rating-based approach

1. In the event that a bank anticipates substantial changes to the calculation of customer risk-weighted assets under the internal rating-based approach after being approved to apply such approach, the bank must report in detail to the State Bank on the amendments and supplements before implementation, and the expected time of implementation of such amendments and supplements.

2. Where necessary, the State Bank may require:

a) The minimum period during which the internal credit rating system before and after the adjustment or amendment must be maintained in parallel;

b) The period for integrating the amended and supplemented internal credit rating system into the processes of credit approval, risk management, internal capital allocation, and reporting;

c) The bank to hire an independent auditing organization to assess compliance with the provisions of this Circular regarding the amendments and supplements.

Article 35. Output floor ratio

1. The total customer risk-weighted assets under the internal rating-based approach as prescribed in this Circular shall be at least equal to the output floor ratio multiplied by the total customer risk-weighted assets under the standardized approach as prescribed in this Circular.

2. The bank must maintain a minimum output floor ratio of 72.5% from the date the bank is approved to apply the internal rating-based approach.

Section 3

CLASSIFICATION OF CUSTOMER RISK-WEIGHTED ASSETS UNDER THE INTERNAL RATING-BASED APPROACH

Article 36. Defaulted customers

1. A defaulted customer is a customer in respect of whom one or more of the following events occur:

a) An off-balance sheet commitment or exposure is classified as a non-performing loan according to the debt classification results after adjustment of the debt classification results and off-balance sheet commitments based on information provided by the National Credit Information Centre of Vietnam in accordance with the regulations of the State Bank on asset classification in the operations of commercial banks, non-bank credit institutions, and foreign bank branches;

b) An exposure at the bank has been handled by utilizing provisions for risk handling in accordance with the law;

c) An exposure at the bank has been written off in accordance with the law;

d) An exposure at the bank has been granted an extension of the repayment term, except where the exposure has been rescheduled and retained in the same debt group in accordance with the regulations of the Government, the Prime Minister, and the State Bank;

dd) An exposure at the bank is a corporate bond for which the repayment term has been extended or the payment method has been changed from cash to other assets in accordance with the law on corporate bonds;

e) An exposure at the bank has been sold at a price lower than its on-balance sheet book value in accordance with the law on debt trading activities of banks, except in cases of sale and purchase under a restructuring plan approved by a competent authority in accordance with the law;

g) An exposure has been purchased at a price lower than the principal debt balance of the purchased exposure in accordance with the law on debt trading activities of banks, except in cases of sale and purchase under a restructuring plan approved by a competent authority in accordance with the law;

h) A petition for initiation of bankruptcy proceedings has been filed against the customer in accordance with the law;

i) The customer does not fall under the provisions at Points a, b, c, d, dd, e, g, and h of this Clause, and the bank assesses that the customer is unable to fully perform its obligations in accordance with the bank’s internal regulations.

2. When a customer is deemed defaulted as prescribed in Clause 1 of this Article, all exposures of such customer at the bank shall be identified as defaulted exposures.

3. Defaulted exposures as prescribed in Clause 2 of this Article shall determine the customer risk-weighted assets in the same manner as non-performing loans under the standardized approach.

4. A bank may consider and assess that a customer no longer falls within the defaulted customer status on the basis of an assessment of the customer’s repayment capacity, which must be specifically provided for in the bank’s internal regulations, including at least the following contents:

a) Conditions for assessing that a customer no longer falls within the defaulted customer status, in which the following minimum conditions must be satisfied:

(i) For exposures prescribed at Point b, Clause 1 of this Article, the customer has fully settled all overdue obligations and is assessed by the bank as having the ability to make timely payments of any remaining obligations not yet due (if any) under the agreement with the bank;

(ii) For exposures prescribed at Point c, Clause 1 of this Article, the bank must have completed the loss handling in accordance with the law, and all other exposures of such customer at the bank (if any) have been fully settled for all overdue obligations, and the customer is assessed by the bank as having the ability to make timely payments of any remaining obligations not yet due (if any) under the agreement with the bank;

(iii) For exposures prescribed at Point d, Clause 1 of this Article, the exposures with extended repayment terms prescribed at Point dd, Clause 1 of this Article, and the purchased exposures prescribed at Point g, Clause 1 of this Article, the bank shall provide regulations on the period for considering and assessing that the customer no longer falls within the defaulted customer status on the basis that such exposure has been classified into a debt group other than non-performing loans in accordance with regulations on asset classification in the operations of the bank;

(iv) For exposures where the payment method has been changed from cash to other assets in accordance with the law on corporate bonds as prescribed at Point dd, Clause 1 of this Article, the customer has fully settled all overdue obligations and is assessed by the bank as having the ability to make timely payments of any remaining obligations not yet due (if any) under the agreement with the bank;

(v) For exposures prescribed at Point e, Clause 1 of this Article, the selling bank must have transferred the rights and obligations related to the debt to the debt purchaser and completed the financial settlement for the sold debt in accordance with the law, and all other exposures of such customer at the bank (if any) have been fully settled for all overdue obligations, and the customer is assessed by the bank as having the ability to make timely payments of any remaining obligations not yet due (if any) under the agreement with the bank;

(vi) For exposures prescribed at Point h, Clause 1 of this Article, there must be a court decision not to initiate bankruptcy proceedings or a court decision to terminate bankruptcy proceedings, and the customer has fully settled all overdue obligations and is assessed by the bank as having the ability to make timely payments of any remaining obligations not yet due (if any) under the agreement with the bank;

b) The process, responsibilities, and authority of individuals and units in the assessment and decision-making regarding the customer no longer falling within the defaulted customer status must be public and transparent, and conflicts of interest must be controlled in accordance with the principle that the individuals and units conducting the assessment must be independent from the individuals and units making the decision;

c) Dossiers and documents evidencing compliance with the conditions and standards and reflecting the implementation of the process, responsibilities, and authority as prescribed at Points a and b of this Clause.

Article 37. Enterprise exposure

1. A enterprise exposure means an exposure to an enterprise having legal person status, excluding credit institutions and foreign bank branches, and includes the following groups:

a) Small- and medium-sized enterprise exposures;

b) Specialized lending;

c) Other exposures other than those specified at Points a and b of this Clause.

2. Specialized lending

a) Specialized lending means a credit extension to an enterprise having legal person status for the purposes specified at Points b(i) and b(ii) of this Clause (including credit extensions during the operational stage) that fully satisfies the following conditions:

(i) The customer is an enterprise established solely for the purpose of implementing a project, operating machinery and equipment, trading in goods, or income-producing real estate projects formed from the credit extension proceeds, without engaging in any other business activities;

(ii) Being secured by the project, machinery and equipment, goods, or income-producing real estate projects formed from the credit extension proceeds, and the entire repayment source is generated from the business or operation of such project, machinery and equipment, and goods;

b) Specialized lending shall be conducted in the following forms:

(i) Credit extensions prescribed in Clause 3, Article 18 of this Circular;

(ii) Income-producing real estate finance being credit extensions to implement income-producing real estate projects (such as offices, commercial centers, urban areas, mixed-use buildings, warehouses, hotels, industrial parks, etc.);

c) A bank must stipulate in the credit extension contract and adopt measures to control all payments and disbursements in accordance with Clause 4, Article 18 of this Circular.

3. A bank may select either the standardized approach or the foundation internal rating-based approach for the exposures prescribed at Points a and c, Clause 1 of this Article.

4. A bank shall apply the standardized approach to the exposures prescribed at Point b, Clause 1 of this Article and determine the credit risk weight in accordance with the guidance in Section 2, Chapter II and Appendix VI to this Circular.

Article 38. Retail exposures

1. A retail exposure means an exposure to an individual (including sole proprietorships, households, cooperative groups, and other organizations without legal person status), comprising the following groups:

a) Residential mortgage loans as prescribed in Clause 3 of this Article;

b) Qualifying revolving retail exposures (QRRE) as prescribed in Clause 4 of this Article;

c) Other retail credit exposures as prescribed in Clause 5 of this Article.

2. A bank may classify retail exposures into groups or sub-groups consisting of multiple exposures with similar risk characteristics for the purpose of assessing, measuring risk, and estimating the PD, LGD, and EAD parameters of the retail exposure group.

3. Residential mortgage loans mean exposures to individuals, including:

a) Real estate exposures mortgaged by social house as prescribed at Point a(i), Clause 2, Article 16 of this Circular;

b) Real estate exposures mortgaged by qualifying residential house as prescribed at Point a(ii), Clause 2, Article 16 of this Circular.

4. Qualifying revolving retail exposures (QRRE) mean credit extensions to individuals that fully satisfy the following characteristics:

a) The credit extension is revolving in nature, with an uncommitted limit (such as the bank having the right to adjust the limit, the right to cancel unilaterally, or the right to automatically cancel the commitment when the customer breaches conditions or experiences a deterioration in the ability to perform obligations), and has no collateral (such as credit cards, overdrafts);

b) Outstanding balances may fluctuate within the credit limit determined by the bank. The maximum limit for all qualifying revolving retail exposures to a single customer is VND 1 billion;

c) Revolving retail credit exposures have a loss rate volatility narrower than the loss rate volatility of other retail credit exposures;

d) Loss rate data for qualifying revolving retail exposures must be stored for the purpose of analyzing the volatility of the loss rate.

5. Other retail credit exposures are exposures to individuals, including:

a) Loans to individuals for the purpose of agricultural and rural development as prescribed in Article 20 of this Circular;

b) Exposures to other individuals, excluding the exposures specified at Point a of this Clause and Points a and b, Clause 1 of this Article.

6. A bank may select either the standardized approach or the advanced internal rating-based approach for the retail exposures prescribed in Clause 1 of this Article.

Article 39. Purchased receivables

1. Purchased receivables are exposures arising from the banking operation of purchasing receivables (including credit extensions) from other credit institutions or foreign bank branches in accordance with the law. Purchased receivables include the following groups:

a) Purchased enterprise receivables, which are exposures arising from the banking operation of purchasing enterprise receivables from other credit institutions or foreign bank branches;

b) Purchased retail receivables, which are exposures arising from the banking operation of purchasing retail receivables from other credit institutions or foreign bank branches;

c) Mixed purchased receivables, which include multiple purchased enterprise receivables and purchased retail receivables.

2. The purchased receivables shall be treated as follows:

a) For purchased enterprise receivables: The bank shall apply the standardized approach or the foundation internal rating-based approach in the same manner as for enterprise exposures as prescribed in Article 37 of this Circular;

b) For purchased retail receivables: The bank shall apply the standardized approach or the advanced internal rating-based approach in the same manner as for retail exposures as prescribed in Article 38 of this Circular;

c) For mixed purchased receivables, the bank must classify and allocate the corresponding value to each purchased enterprise receivable or each group/sub-group of purchased retail receivables in accordance with the bank’s internal regulations in order to apply the corresponding method specified at Point a and Point b of this Clause. Where classification cannot be made, the bank shall apply a credit risk weight of 200% and calculate customer risk-weighted assets according to the standardized approach as prescribed in Chapter II of this Circular.

Article 40. Other assets

For other assets specified in Articles 37, 38 and 39 of this Circular, the customer risk-weighted assets shall be calculated under the standardized approach.

Section 4

METHOD OF DETERMINING COMPONENTS FOR CALCULATING CUSTOMER RISK-WEIGHTED ASSETS OF ENTERPRISE EXPOSURES UNDER THE INTERNAL RATING-BASED APPROACH

Article 41. Customer risk-weighted assets of enterprise exposures

1. The bank shall calculate the PD parameter corresponding to the customer’s rating and use the LGD, EAD, and M parameters in accordance with this Circular.

2. The bank shall calculate the risk-weighted assets of enterprise exposures as follows:

a) Formula:

RWA = SRW_i Χ EAD_i

In which: The risk weight (RW_i) and the exposure value (EAD_i) are determined according to the PD and LGD parameters corresponding to each portion of the exposure value in accordance with Articles 42, 43, 44, 45, 46, and 47 of this Circular;

b) Risk weight (RW):

RW = K x 12.5

c) Capital requirement (K)

d) Correlation coefficient (R)

dd) Maturity adjustment (b)

b = [0.11852 - 0.05478 × ln (PD)]²

In which:

- N(x) is the cumulative distribution function for a standardized normal random variable.

- G(z) is the inverse cumulative distribution function for a standardized normal random variable.

3. Adjustment according to the enterprise size for small- and medium-sized enterprises

a) The bank may adjust the correlation coefficient to replace the correlation coefficient (R) stipulated at Point d, Clause 2 of this Article as follows:

(i) For small- and medium-sized enterprises operating in the agriculture, forestry, and fishery sectors; and the industry and construction sectors

(ii) For small- and medium-sized enterprises operating in the trade and service sectors

In which: S is the total annual revenue from sale of goods and provision of services, calculated in billion VND;

The bank shall determine the total annual revenue from sale of goods and provision of services of a small- and medium-sized enterprise as stipulated in this Clause based on data from the annual financial statement (consolidated financial statement if required by law) audited at the latest date for enterprises subject to independent audit; the audited annual financial statement (if any) or the annual financial statement submitted to the tax office (with evidence of submission to the tax office) at the latest date for enterprises not subject to independent audit in accordance with the law;

b) The total annual revenue from sale of goods and provision of services under Point a(i) of this Clause ranges from VND 20 billion to VND 200 billion, and under Point a(ii) of this Clause ranges from VND 30 billion to VND 300 billion.

Where S is less than VND 20 billion for enterprises specified at Point a(i) of this Clause or less than VND 30 billion for enterprises specified at Point a(ii) of this Clause, or where a small- and medium-sized enterprise has been newly established for less than 01 year and has no information on the total annual revenue from sale of goods and provision of services, S shall be determined, for the purpose of calculating the correlation coefficient, as VND 20 billion for enterprises specified at Point a(i) of this Clause or VND 30 billion for enterprises specified at Point a(ii) of this Clause, respectively.

Where S exceeds VND 200 billion for enterprises specified at Point a(i) of this Clause or exceeds VND 300 billion for enterprises specified at Point a(ii) of this Clause, S shall be determined, for the purpose of calculating the correlation coefficient, as VND 200 billion or VND 300 billion, respectively.

Article 42. PD parameter of enterprise exposures

1. The PD parameter of an enterprise exposure shall be determined as the higher value between the one-year PD of the internal credit rating level assigned to such exposure and 0.05%.

2. The bank shall use the PD of the guarantor or the issuer of the derivative product as prescribed in Articles 45 and 46 of this Circular to calculate the customer risk-weighted assets in accordance with Article 41 of this Circular.

Article 43. LGD parameter of enterprise exposures

1. The LGD parameter of an enterprise exposure shall be determined as follows:

a) For exposures that are subordinated debt of enterprises, an LGD of 75% shall apply;

b) For exposures not specified at Point a of this Clause and without the application of risk mitigation techniques, the bank shall apply LGD as follows:

(i) For exposures to securities companies and insurance companies, an LGD of 45% shall apply;

(ii) For exposures to other enterprises, an LGD of 40% shall apply;

c) For exposures not specified at Point a of this Clause and with the application of risk mitigation techniques, the bank shall determine the LGD parameter in accordance with Articles 44, 45, and 46 of this Circular.

2. The mitigation techniques specified at Point c, Clause 1 of this Article shall be implemented by one or a combination of the following measures:

a) Collateral;

c) Third-party guarantee;

c) Credit derivative products.

3. The mitigation techniques provided for in Clause 2 of this Article must adhere to the following principles:

a) The principles prescribed at Points a, b, c, d, and dd, Clause 3, Article 25 of this Circular;

b) Where multiple eligible credit risk mitigation techniques as prescribed in Clause 2 of this Article and in Articles 44, 45, and 46 of this Circular are used for one or more exposures, the bank may allocate the value portion of each mitigation technique corresponding to the value of the exposure in accordance with the agreement between the relevant parties (if any) and the bank’s internal regulations, in order to separately calculate the LGD parameter for each mitigation technique value as prescribed in Articles 44, 45, and 46 of this Circular. This must ensure that the total value portions allocated to the exposures do not exceed the total value of the eligible mitigation techniques and do not exceed the EAD of each exposure. This principle also applies in cases where, within each risk mitigation technique, there are multiple collaterals, multiple guarantors, or multiple credit derivative products mitigating a single exposure, or where one risk mitigation technique is applied to multiple exposures.

Article 44. LGD parameter of enterprise exposures secured by collaterals

1. For exposures secured by collateral eligible for LGD calculation as prescribed in this Clause, the bank shall determine the LGD in accordance with Clause 2 of this Article. Eligible collateral for LGD calculation includes:

a) Collateral satisfying the conditions specified in Article 26 of this Circular;

b) Collateral being qualifying collateral as prescribed at Point a, Clause 3, Article 16 of this Circular, and the collateral must be insured against loss or damage;

c) Other collateral not falling under the provisions of Points a and b of this Clause, which fully meets the following conditions:

(i) Being physical collateral that is not real estate and having a market price for such collateral;

(ii) The bank has the priority right of payment ahead of all other lenders from the proceeds of the sale of the collateral, except in the case of syndicated credit extension as prescribed by law, and has internal regulations on determining the collateral value, the frequency of valuation and monitoring changes in the collateral value, and the process of direct inspection and verification of collateral being raw materials, goods in the course of production, finished goods, inventories, machinery, equipment, and merchandise;

(iii) The credit extension contract or security contract must describe in detail the collateral in accordance with the law, include an agreement on the rights of the secured party to inspect and re-determine the collateral value periodically and extraordinarily;

(iv) Not exceeding 01 year from the date on which the bank becomes entitled to dispose of the collateral in accordance with the agreement and the law.

2. The LGD parameter after applying risk mitigation by multiple types of collateral as provided in Clause 1 of this Article shall be calculated according to the following formula:

In which:

- E: The exposure value after deduction of the value of the guarantee of the guarantor used for risk mitigation as provided in Article 45 of this Circular (G_l*), the value of the credit derivative product used for risk mitigation as provided in Article 46 of this Circular (CD_n*) (if any);

- E_Si: The portion of the exposure value secured by the adjusted value of the collateral (C_i*), calculated according to the formula E_Si = C_i*, and SE_Si ≤ E;

- E_u : The remaining value of the unsecured exposure, which is the difference between the value of the exposure and the adjusted value of the collateral, calculated according to the formula E_u = E - SE_Si;

- LGD_Si: The LGD applied to the portion of the exposure value secured by the i^th collateral as provided in Clause 4 of this Article;

- LGD_u : The LGD applied to the exposure value not subject to any risk mitigation techniques as provided at Point b, Clause 1, Article 43 of this Circular.

3. The value of collateral used for risk mitigation is the adjusted value of the collateral (C_i*), calculated according to the following formula:

In which:

- C_i*: The adjusted value of the i^th collateral used for risk mitigation;

- C_i: Value of the i^th collateral;

- T: Determined as the minimum value between 5 years and the residual maturity of the exposure or transaction, expressed in years;

- t_i: Determined as the minimum value between T (expressed in years) and the residual maturity of the i^th collateral, expressed in years;

- H_ci: The haircut of the i^th collateral determined under Clause 4 of this Article;

- H_fxci : The currency mismatch haircut of 8%.

4. The haircut (H_c) of collateral and the corresponding LGDs applied to the formulas specified in Clauses 2 and 3 of this Article are as follows:

5. For exposures secured by collateral that is not eligible collateral for LGD calculation as provided in Clause 1 of this Article, the bank shall determine LGD in the same manner as exposures not applying any risk mitigation techniques as prescribed at Point b, Clause 1, Article 43 of this Circular.

Article 45. PD and LGD parameters of enterprise exposures secured by third-party guarantees

1. Mitigation of customer credit risk by guarantees shall be applied when fully meeting the following conditions:

a) Complying with regulations on mitigation of customer credit risk by guarantees under the standardized approach as provided in Article 28 of this Circular;

b) The guarantor must have a PD parameter lower than the PD parameter of the guaranteed party, except where the bank does not apply the internal rating-based approach as provided in this Circular to determine the PD parameter for the guarantor.

2. In cases where the bank does not apply the internal rating-based approach as provided in this Circular to determine the PD and LGD parameters of the exposure for one or several guarantors, the bank may choose to implement one of the following two methods:

a) Determine the customer risk-weighted assets under the standardized approach for the guaranteed exposure (including the implementation of risk mitigation under the standardized approach);

b) Determine the customer risk-weighted assets under the internal rating-based approach for the guaranteed exposure, but without risk mitigation by third-party guarantees.

3. For guarantee measures fully satisfying the conditions specified in Clause 1 of this Article, the determination of PD and LGD parameters for calculating customer risk-weighted assets under Article 41 of this Circular shall be carried out as follows:

a) Where the guarantor does not use collateral or uses collateral that does not meet the eligibility conditions specified at Point b, Clause 1, Article 43, and Clause 5, Article 44 of this Circular to secure the exposure, the bank shall:

(i) For the portion of the exposure value guaranteed, use the PD and LGD parameters of the guarantor;

(ii) For the remaining value portion of the exposure not guaranteed and not secured by other risk mitigation techniques, use the PD and LGD parameters of the guaranteed party;

b) Where the guarantor uses eligible collateral as specified in Clause 1, Article 44 of this Circular to secure the exposure, the bank shall:

(i) Determine the PD parameter in accordance with Point a of this Clause;

(ii) Be allowed to use the LGD parameter for exposures secured by collateral as provided in Clause 4, Article 44 of this Circular as a substitute for the LGD parameter of the guarantor.

4. In cases involving multiple guarantors, the bank shall determine the PD and LGD parameters in accordance with the following principles:

a) PD parameter: The bank must allocate the value of the exposure by each guarantor, and the PD value of each guarantor shall be determined based on the portion of the guarantee value according to the agreement between the parties and relevant laws. Where allocation cannot be made according to the agreement between the related parties, the bank must use the highest PD value among the PD values of the guarantors;

b) LGD parameter: The LGD value shall be determined under the principles set forth in this Article and Point b, Clause 3, Article 43 of this Circular.

5. The guarantee value of the guarantor used for risk mitigation shall be the adjusted value, calculated according to the following formula:

In which:

- G_l*: Adjusted guarantee value of the l^th guarantor used for risk mitigation;

- G_l: Guarantee value of the l^th guarantor;

- PD_gtorl: PD of the l^th guarantor determined under Article 42 of this Circular;

- PD: PD of the guaranteed party determined under Article 42 of this Circular;

- T: Determined as the minimum value between 5 years and the residual maturity of the exposure or transaction, expressed in years;

- t_l: Determined as the minimum value between T (expressed in years) and the residual maturity of the l^th guarantee measure, expressed in years;

- H_fxl: The currency mismatch haircut of 8%.

Article 46. PD and LGD parameters of enterprise exposures when using credit derivative products

1. Mitigation of customer credit risk by credit derivative products shall be applied when fully meeting the following conditions:

a) Complying with regulations on mitigation of customer credit risk by credit derivative products under the standardized approach as provided in Article 29 of this Circular;

b) The issuer of the credit derivative product must have a PD parameter lower than the PD parameter of the party using the credit derivative product, except where the bank does not apply the internal rating-based approach as provided in this Circular to determine the PD parameter for the issuer of the credit derivative product.

2. In cases where the bank does not apply the internal rating-based approach as provided in this Circular to determine the PD and LGD parameters of the exposure for one or several issuers of credit derivative products, the bank may choose to implement one of the following two methods:

a) Determine the customer risk-weighted assets under the standardized approach for the exposure mitigated by credit derivative products (including the application of risk mitigation under the standardized approach);

b) Determine the customer risk-weighted assets under the internal rating-based approach for the exposure with credit derivative products, but without applying risk mitigation by credit derivative products.

3. For credit derivative products fully satisfying the conditions specified in Clause 1 of this Article, the determination of PD and LGD parameters for calculating customer risk-weighted assets under Article 41 of this Circular shall be carried out as follows:

a) For the portion of the exposure value corresponding to the value of the credit derivative product used for risk mitigation (CD*), the PD and LGD parameters shall be those of the issuer of the credit derivative product;

b) For the remaining value of the exposure not secured by any risk mitigation techniques, the PD and LGD parameters shall be those of the party using the credit derivative products.

4. The value of the credit derivative product used for risk mitigation is the adjusted value, calculated according to the following formula:

In which:

- CD_n*: Adjusted value of the n^th credit derivative product used for risk mitigation;

- CD_n: Value of the n^th credit derivative product;

- T: Determined as the minimum value between 5 years and the residual maturity of the exposure or transaction, expressed in years;

- t_n : Determined as the minimum value between T (expressed in years) and the residual maturity of the on-balance-sheet liability, expressed in years;

- : The currency mismatch haircut of 8%.

5. In cases involving multiple credit derivative products, the bank shall determine the PD and LGD parameters in accordance with the following principles:

a) PD parameter: The bank must allocate the value of the exposure by each credit derivative product, and the PD value of each issuer of credit derivative product shall be determined based on the portion of the credit derivative product value according to the agreement between the parties and relevant laws. Where allocation cannot be made according to the agreement between the related parties, the bank must use the highest PD value among the PD values of the issuers of credit derivative products;

b) LGD parameter: The LGD value shall be determined under the principles set forth in this Article and Point b, Clause 3, Article 43 of this Circular.

Article 47. EAD parameter of enterprise exposures

1. The total customer exposure (EAD) means the exposure value (including principal balance; interest receivable, and fees receivable (if any) currently recognized as income as prescribed by law) of the bank, calculated according to the following formula:

EAD_i = EADon_i - L_i* x (1- H_fxl ) + EADoff_i x CCF_i

In which:

- EAD_i: Value determined based on the historical price of the i^th exposure after applying on-balance sheet netting as a risk mitigation technique. In case EAD_i < 0, EAD_i shall be determined as 0;

- EADon_i: Value of the on-balance-sheet portion of the i^th exposure;

- EADoff_i: Value of the off-balance sheet commitment portions of the i^th exposure;

- CCF_i: Credit conversion factor of the off-balance sheet commitment portion of the i^th exposure as prescribed in Clause 2 of this Article;

- L_i* and H_fxl: Determined in accordance with Clauses 2 and 3, Article 27 of this Circular when meeting the conditions specified in Article 25 and Clause 1, Article 27 of this Circular; or L_i* shall be determined as 0 when such conditions are not met.

2. Credit conversion factor (CCF)

a) For off-balance-sheet enterprise exposures, the bank shall convert them into on-balance-sheet items according to the credit conversion factors prescribed in Article 10 of this Circular;

b) The value of the off-balance-sheet commitment portion subject to the credit conversion factor shall be the lower of the value of the committed but undrawn credit limit and the additional credit limit that the bank may extend to the customer in accordance with the bank’s internal regulations. In case there is an additional credit limit that the bank may extend for the off-balance-sheet commitment, the bank must have adequate management and monitoring procedures for such limit;

b) The value of the off-balance-sheet commitment portion subject to the credit conversion factor shall be the lower of the value of the committed but undrawn credit limit and the actual credit limit that the bank may extend to the customer in accordance with the bank’s internal regulations. In case there is an additional credit limit that the bank may extend for the off-balance-sheet commitment, the bank must have adequate management and monitoring procedures for such limit.

Article 48. M parameter of enterprise exposures

M parameter of enterprise exposures is 2.5 years.

Section 5

METHOD OF DETERMINING COMPONENTS FOR CALCULATING CUSTOMER RISK-WEIGHTED ASSETS OF RETAIL EXPOSURES UNDER THE INTERNAL RATING-BASED APPROACH

Article 49. Customer risk-weighted assets of retail exposures

1. Banks must calculate the PD, LGD, and EAD parameters when calculating the custom risk-weighted assets of retail exposures.

2. Banks shall calculate the customer risk-weighted assets of housing mortgage loans as prescribed at Point a, Clause 1, Article 38 of this Circular as follows:

a) Formula:

RWA = RW x EAD

b) Risk weight (RW): RW = K x 12.5

c) Capital requirement (K):

In which:

- N(x) is the cumulative distribution function for a standardized normal random variable;

- G(z) is the inverse cumulative distribution function for a standardized normal random variable;

d) Correlation coefficient (R): R = 0.15.

3. Banks shall calculate the customer risk-weighted assets of qualifying revolving retail exposures as prescribed at Point b, Clause 1, Article 38 of this Circular as follows:

a) Formula:

RWA = RW x EAD

b) Risk weight (RW): RW = K x 12.5

c) Capital requirement (K):

In which:

- N(x) is the cumulative distribution function for a standardized normal random variable;

- G(z) is the inverse cumulative distribution function for a standardized normal random variable;

d) Correlation coefficient (R): R= 0.04.

4. Banks shall calculate the customer risk-weighted assets of other retail credit exposures as prescribed at Point c, Clause 1, Article 38 of this Circular as follows:

a) Formula:

RWA = RW x EAD

b) Risk weight (RW): RW = K x 12.5

c) Capital requirement (K):

In which:

- N(x) is the cumulative distribution function for a standardized normal random variable;

- G(z) is the inverse cumulative distribution function for a standardized normal random variable;

d) Correlation coefficient (R):

Article 50. PD parameter of retail exposures

The PD parameter of retail exposures, determined for the purpose of calculating customer risk-weighted assets under Article 49 of this Circular, shall be the greater of the PD value calculated by the bank and the PD floor value. The PD floor is prescribed as follows:

1. The PD floor of qualifying revolving retail exposures is 0.1%;

2. The PD floor of other retail exposures not falling under Clause 1 of this Article is 0.05%.

Article 51. LGD parameter of retail exposures, LGD parameter of retail exposures secured by collateral

1. The LGD parameter of retail exposures, determined for the purpose of calculating customer risk-weighted assets under Article 49 of this Circular, shall be the greater of the LGD value calculated by the bank and the LGD floor value specified in Clause 3 of this Article.

2. Eligible collateral for calculating the LGD of retail exposures includes:

a) Collateral fully satisfying the conditions specified at Points a, b and c, Clause 1, Article 44 of this Circular;

b) Social houses fully satisfying the conditions specified in Clause 4, Article 16 of this Circular.

3. The LGD floor shall be determined as follows:

a) LGD floor for retail exposures fully secured by eligible collateral specified in Clause 2 of this Article

b) LGD floor for other retail exposures partially secured by eligible collateral specified in Clause 2 of this Article

In which:

- E: Exposure value;

- E_Si: The portion of the exposure value secured by the adjusted value of the i^th collateral, determined in accordance with Clause 2, Article 44 of this Circular;

- E_u : The remaining value of the unsecured exposure, determined in accordance with Clause 2, Article 44 of this Circular;

- LGD_{Si floor}: LGD applied to the portion of the exposure value secured by the i^th collateral as provided at Point a of this Clause;

- LGD_{u floor}: LGD applied to the unsecured exposure value as provided at Point c of this Clause;

c) LGD floor for unsecured retail exposures or retail exposures secured by ineligible collateral specified in Clause 2 of this Article

4. Minimum requirements for estimating the LGD parameter:

a) The bank must take into account economic factors to capture the relevant risks when estimating the LGD as follows:

(i) The estimated LGD shall not be lower than the long-run average LGD. The long-run average LGD is calculated based on the average economic loss of all defaults observed in the data source for the group or sub-group of such retail exposures;

(ii) The bank must take into account the possibility that the LGD may be higher than the long-run default-weighted average LGD during periods in which credit losses are significantly higher due to economic downturns. The LGD estimate adjusted to reflect economic downturn conditions (downturn LGD) shall be calculated based on appropriate methods (such as using the average of loss severities observed during economic downturn periods with high credit losses; forecasts based on more conservative assumptions; or other similar methods);

b) The bank must adopt a more conservative LGD estimate in cases where the degree of dependency between the customer’s risk and the risk of the collateral or guarantor is significant, or where there is a currency mismatch between the exposure and the collateral;

c) The LGD estimate shall not be based solely on the market value of the collateral but shall also be based on historical recovery rates (if available) so as to reflect the possibility of not being able to control or dispose of the collateral promptly. Where the LGD estimate is based on the market value of the collateral, the bank must have internal regulations on collateral management and risk management in conformity with the provisions in Section 8 of this Chapter;

d) The minimum data observation period for estimating the LGD for retail exposures is five consecutive years up to the most recent point in time at which the bank uses such data to estimate the LGD.

Article 52. PD and LGD parameters of retail exposures when using third-party guarantees and credit derivative products

1. The bank may adjust the PD or LGD estimates to reflect the effect of mitigating customer credit risk when using third-party guarantees or credit derivative products, provided that all of the following conditions are fully satisfied:

a) The adjustment of the PD or LGD estimate must be applied in a consistent manner for all exposures with the same type of guarantee or the same type of credit derivative product;

b) The bank shall not take into account the effect of simultaneous default of the customer and the guarantor (or the seller of the credit derivative product) (the effect of double default);

c) The adjusted PD or LGD estimate shall not be lower than the PD or LGD of the guarantor or the seller of the credit derivative product.

2. Minimum requirements for assessing the effect of guarantees and credit derivative products:

a) For the use of guarantees:

(i) The use of customer credit risk mitigation by guarantee shall be applied when fully meeting the conditions specified in Clause 1, Article 45 of this Circular;

(ii) Each group or sub-group of retail exposures and the guarantor must be rated both at the time of credit extension and at periodic rating in compliance with the minimum requirements specified in Section 8 of this Chapter. The bank must regularly monitor the status of the guarantor and the guarantor’s capacity and willingness to perform its obligations;

(iii) The bank must have specific criteria for adjusting the PD or LGD to reflect the effect of the guarantee, in a manner consistent with the minimum requirements, ensuring consideration of all relevant information. Such criteria must be reasonable and explainable in terms of the guarantor’s ability and willingness to repay; the repayment term; the correlation between the guarantor’s repayment capacity and the customer’s; and other residual risks (such as currency mismatches between the exposures and the guarantees, etc.);

b) For the use of credit risk mitigation by credit derivative products:

(i) The use of customer credit risk mitigation by credit derivative products shall be applied when fully meeting the conditions specified in Clause 1, Article 46 of this Circular;

(ii) The bank must have specific criteria for adjusting the PD or LGD, including cases where the credit derivative products cover a part of the exposure (partial protection) or where there is a currency mismatch between the credit derivative products and the underlying obligation, etc.;

(iii) The bank must take into account the payment structure of the credit derivative product and prudently assess the impact of such structure on the extent and timing of recovery as well as other residual risks.

Article 53. EAD parameter of retail exposures

1. The EAD parameter of retail exposures, determined for the purpose of calculating customer risk-weighted assets under Article 49 of this Circular, shall be the greater of the EAD value calculated by the bank and the EAD floor value. The EAD floor value is the sum of the on-balance sheet portion value of the exposure and 50% of the off-balance sheet commitment portion value multiplied by the credit conversion factor (CCF) applied under the standardized approach in accordance with Articles 8 and 10 of this Circular.

2. The bank may only reduce its self-estimated EAD value of the exposure and the EAD floor value prescribed in Clause 1 of this Article in cases where the exposure is subject to credit risk mitigation by on-balance sheet netting that fully meets the conditions specified in Articles 25 and 27 of this Circular.

3. For retail exposures (including credit cards) where the bank cannot determine the point in time when the customer will be disbursed or will conduct additional transactions in the future (such as cash withdrawals, transfers, payments, etc.), the bank must take into account historical data and projections regarding the possibility that the customer may be disbursed or conduct additional transactions prior to default when estimating EAD.

4. Minimum requirements for EAD estimation:

a) The bank must establish a process for estimating EAD for the off-balance sheet commitment portion;

b) The bank must estimate the long-run default-weighted average EAD as follows:

(i) The estimation of the long-run default-weighted average EAD means the estimation of the EAD over a sufficiently long period, with the addition of a margin of conservatism appropriate to the potential margin of error in the estimation;

(ii) Where the bank assesses a proportional trend between default frequency and EAD value, the bank must estimate EAD with a margin of conservatism greater than the margin prescribed at Point b(i) of this Clause;

c) The bank must estimate an EAD adjusted to reflect downturn economic conditions (downturn EAD). Downturn EAD estimation shall be carried out by considering the use of factors affected by downturn economic conditions in the model, internal data, external data, and more prudent assumptions of the economic downturn period, etc. Where the downturn EAD estimate is more prudent than the long-run default-weighted average EAD estimate, the bank must use the downturn EAD estimate;

d) The criteria for estimating EAD must be reasonable, intuitive, and representative of the factors influencing EAD. The selection of criteria must be based on reliable internal analysis and the bank’s experience in estimating EAD for the factors affecting EAD. The estimation of EAD must use all relevant and material information;

dd) The bank must review the EAD estimate at least annually and on an ad hoc basis when additional material information arises;

e) The bank must manage retail exposures for the purpose of estimating EAD as follows:

(i) Establish internal regulations, systems, and procedures to monitor and manage exposures (including current outstanding amounts, committed credit limits for each customer, and each credit rating grade);

(ii) Consider measures to prevent customers from receiving further disbursement or conducting additional transactions in cases where the customer has not defaulted but has breached other contractual commitments;

g) The EAD estimate must be based on reference data reflecting the characteristics of the exposure, the customer, and the management measures applied to the exposure and the customer. The estimation must be based on segments with similar characteristics. Where the reference data cannot be divided into homogeneous groups, the bank must apply an appropriate method to differentiate the various characteristics in such reference data. Where there is a change in product structure in the reference data, the bank must consider the impact of such change on the EAD estimate, ensuring that the impact is either immaterial or has been mitigated during the estimation process. Where such impact is material and has not been mitigated, the bank must adjust the EAD estimate in accordance with the effects of such change;

h) Reference data for EAD estimation shall at least include the following information: Unpaid principal amount or loan limit; interest receivable; fees receivable (if any);

i) The minimum data observation period for estimating the EAD for retail exposures is five consecutive years up to the most recent point in time at which the bank uses such data to estimate the EAD.

Section 6

METHOD OF DETERMINING COMPONENTS FOR CALCULATING CUSTOMER RISK-WEIGHTED ASSETS FOR PURCHASED RECEIVABLES UNDER THE INTERNAL RATING-BASED APPROACH

Article 54. Customer risk-weighted assets for purchased receivables

1. Customer risk-weighted assets for purchased receivables shall be determined as follows:

RWA_PR = RWA_DfR + RWA_DR

In which:

- RWA_PR: Custom risk-weighted assets for purchased receivables;

- RWA_DfR: Risk-weighted assets for default risk of purchased receivables;

- RWA_DR: Risk-weighted assets for dilution risk of purchased receivables.

2. The default risk of purchased receivables means the risk arising when the customer (being the customer of the receivable) is unable to fulfill the obligation in respect of the receivable.

3. The dilution risk of purchased receivables means the risk arising when the value of the purchased receivable is reduced under the agreement between the seller of the receivable and the customer in the underlying contract (such as an agreement on the return of goods sold, disputes over product quality, discounts for the buyer upon payment, or other similar arrangements).

Article 55. Risk-weighted assets for default risk of purchased receivables

1. The bank shall calculate the risk-weighted assets for default risk of purchased enterprise receivables specified at Point a, Clause 2, Article 39 of this Circular in the same manner as calculating the customer risk-weighted assets for enterprise exposures in accordance with Chapter II of this Circular and Section 4 of this Chapter.

2. The bank shall calculate the risk-weighted assets for default risk of purchased retail receivables specified at Point b, Clause 2, Article 39 of this Circular in the same manner as calculating the customer risk-weighted assets for retail exposures in accordance with Chapter II of this Circular and Section 5 of this Chapter.

Article 56. Risk parameters for default risk of purchased receivables under the internal rating-based approach

1. For purchased enterprise receivables, the bank shall estimate the PD parameter and use the LGD, EAD, and M parameters in accordance with the provisions of Section 4 of this Chapter.

2. For purchased retail receivables, the bank shall estimate the PD, LGD, and EAD parameters in accordance with the provisions of Section 5 of this Chapter. The estimation must exclude assumptions regarding rights of recourse or guarantees from the seller or other parties.

Article 57. Risk-weighted assets for dilution risk of purchased receivables

1. A bank shall not be required to calculate the risk-weighted assets for dilution risk of purchased receivables in the following cases:

a) Purchased receivables applying the standardized approach;

b) Purchased receivables applying the internal rating-based approach where the underlying contract of such purchased receivables does not contain any agreement giving rise to dilution risk, or the term for implementing such agreement has expired before the bank purchases the receivables.

2. A bank shall calculate the risk-weighted assets for dilution risk as follows:

a) Estimate the one-year expected loss ratio for dilution risk (expressed as a percentage of the value of the purchased receivables). The bank shall not use any assumption regarding rights of recourse or guarantees from the seller or other parties in respect of purchased retail receivables when estimating the expected loss ratio;

b) Determine the risk-weighted assets for dilution risk in accordance with the formula prescribed in Article 41 of this Circular for purchased enterprise receivables and the formula prescribed in Article 49 of this Circular for purchased retail receivables.

Article 58. Risk parameters for calculating risk-weighted assets for dilution risk of purchased receivables under the internal rating-based approach

The determination of risk parameters for purchased enterprise receivables and purchased retail receivables to calculate risk-weighted assets for dilution risk as prescribed at Point b, Clause 2, Article 57 of this Circular shall be as follows:

1. The PD_DR parameter shall be the probability of dilution risk, determined as the expected loss ratio prescribed at Point a, Clause 2, Article 57 of this Circular.

2. LGD_DR = 100%.

3. The EAD_DR parameter shall be determined in accordance with Article 47 of this Circular for purchased enterprise receivables and Article 53 of this Circular for purchased retail receivables.

4. The M parameter for purchased enterprise receivables

a) The M parameter shall be 2.5 years, except as provided at Point b of this Clause;

b) The M parameter shall be 01 year where the bank expects the purchased receivables to be settled within 01 year.

Article 59. Techniques for mitigating customer credit risk of purchased receivables

1. Where a bank applies a guarantee or credit derivative product to mitigate dilution risk or default credit risk of purchased receivables, such guarantee or credit derivative product must satisfy the provisions of Articles 28 and 29 of this Circular when applying the standardized approach, or Articles 45, 46, and 52 of this Circular when applying the internal rating-based approach.

2. Principles for applying risk mitigation techniques in the form of guarantees or credit derivative products shall be as follows:

a) For purchased enterprise receivables, the bank shall mitigate default credit risk or dilution risk in accordance with the scope of risk mitigation of the third-party guarantee or credit derivative product by using the PD and LGD parameters of the guarantor or the party selling credit derivative products in place of the credit risk weight of the purchased receivable;

b) For purchased retail receivables, the bank shall mitigate dilution risk by using the PD and LGD parameters of the guarantor or the party selling credit derivative products in place of the credit risk weight of the purchased receivable;

c) Where the guarantor or party selling credit derivative products covers only part of the dilution risk or default credit risk, the bank shall use the PD and LGD parameters prescribed at Points a and b of this Clause corresponding to the portion of the value of the technique used for risk mitigation. The portion of the value of the purchased receivable not subject to risk mitigation shall apply the PD and LGD parameters of the customer.

Section 7

PROVISIONS ON EXPECTED LOSSES AND RISK PROVISIONS

Article 60. Calculation of expected losses

1. Expected loss (EL) is the total expected loss of exposures for which each exposure is subject to the calculation of customer risk-weighted assets under the internal rating-based approach as prescribed in this Circular and the bank’s internal regulations.

2. The expected loss of each exposure shall be determined according to the following formula:

EL = PD x LGD x EAD

In which: The PD, LGD, and EAD parameters of each exposure are determined in accordance with the provisions of this Chapter.

Article 61. Calculation of risk provisions

Provisions for risks mean the total of specific provisions, general provisions, provisions for losses on investments (if any), and provisions for doubtful debts (if any) that the bank has made in accordance with law, for exposures which are customer risk-weighted assets under the internal rating-based approach prescribed in this Circular and the bank’s internal regulations.

Article 62. Handling of the difference between expected losses and risk provisions

The bank shall compare the expected losses determined in accordance with Article 60 of this Circular and the risk provisions determined in accordance with Article 61 of this Circular. In case of any difference, the bank shall proceed as follows:

1. In case the risk provisions are lower than the expected losses, when calculating the components of equity as the basis for determining the capital adequacy ratio under this Circular, the bank shall deduct 50% of the difference from Tier 1 core capital and the remaining 50% from Tier 2 capital within 02 years from the date on which the State Bank approves the application of the internal rating-based approach. From the third year onwards, the bank shall deduct the entire difference from Tier 1 core capital.

2. In case the risk provisions are higher than the expected losses, when calculating the components of equity as the basis for determining the capital adequacy ratio in accordance with this Circular, the bank may add the difference to Tier 2 capital, but not exceeding 0.6% of the value of customer risk-weighted assets calculated under the internal rating-based approach.

Section 8

MINIMUM REQUIREMENTS FOR THE INTERNAL RATING-BASED APPROACH

Article 63. Components and compliance with minimum requirements

1. A bank applying the internal rating-based approach must establish risk estimates and comply with the minimum requirements set forth in this Section. On an annual basis, the bank must assess its compliance with these requirements and report in accordance with Clause 2, Article 75 of this Circular.

2. The internal rating system, processes, and risk estimates must ensure:

a) Reasonable assessment of the customer, transaction characteristics, risk differentiation, accurate, consistent, reliable risk estimation, and conformity with international practices;

b) Consistent and appropriate use in the bank’s operations.

3. The minimum requirements set forth in this Section shall apply to all types, groups, and sub-groups of assets when implementing the internal rating-based approach.

Article 64. Design of the internal credit rating system

1. The internal credit rating system comprises all methods, processes, control measures, data collection, and information technology systems intended to support the assessment of customer credit risk, rating, quantification of probability of default, and loss estimation.

2. For each asset type, a bank may use multiple internal credit rating systems. The bank may develop internal credit rating systems by industry or market segment. In case of choosing to use multiple internal credit rating systems, the bank must clearly state in the dossier the reason for applying a particular internal credit rating system to each customer and must ensure that such application accurately reflects the customer’s risk level. The bank shall not transfer a customer to another internal credit rating system in an unreasonable manner so as to reduce capital requirements as prescribed.

3. Rating standards

a) For enterprise exposures

The internal credit rating system must have standards and guidelines for assessing the customer’s default risk. The customer’s default risk reflects the customer’s probability of default (PD):

(i) Different exposures of the same customer shall share the same rating, even if the exposures have different characteristics, except in the following cases:

- Exposures of a customer denominated in multiple currencies;

- Exposures to which a customer credit risk mitigation technique is applied in the form of a guarantee or a credit derivative product;

(ii) The bank’s customer credit risk management policy must provide and describe the customer’s credit risk at each internal rating through the probability of default (PD) and the criteria for classifying customers into different ratings. Customers with lower credit quality must be assigned to higher-risk ratings;

b) For retail exposures

(i) The internal credit rating system applicable to retail exposures must be able to assess the risk characteristics of both the customer and the exposure;

(ii) The bank must be able to classify retail exposures into specific segments and ensure that its internal credit rating system is capable of differentiating risks among groups of retail exposures, classifying retail exposures into groups with similar characteristics according to the level of customer credit risk, and accurately and consistently estimating the risk parameters of each group of retail exposures;

(iii) When segmenting retail exposures, the bank shall take into account the following factors:

- Customer risk characteristics: customer types, demographic information (such as age, occupation), etc.;

- Exposure risk characteristics: product type, collateral (including loan-to-value ratio, seasoning effect, guarantees, credit derivative products, priority level of the exposure in relation to the collateral), etc.;

- Delinquency status of the exposure.

4. Rating structure

a) For enterprise exposures

(i) The bank must allocate enterprise exposures into rating grades in accordance with its internal regulations;

(ii) The obligor rating structure shall be developed as follows:

The bank must prescribe at least 7 rating grades for non-defaulted customers and 1 rating grade for defaulted customers. In cases where the credit quality of customers frequently changes, the bank may be required to establish more than the minimum number of rating grades for customers;

- The bank must specify in detail the criteria for assessing the customer’s risk at each rating grade and estimate the probability of default (PD) of the customer at that rating grade. The assessment criteria for each rating grade shall include the definition of the level of default risk and the criteria used to distinguish the level of customer credit risk at each rating grade. Rating grades with “plus” or “minus” signs shall qualify as separate rating grades only where the bank has developed a full description of such rating grades, the criteria for rating, and the estimated probability of default of such rating grades;

- Where the bank’s lending portfolio is concentrated in a specific market segment or within a certain risk range, the bank must fully develop the rating grades within such range to avoid excessive concentration of customers in certain rating grades. In cases of significant concentration of customers in one or several rating grades, the bank must use scientific evidence and historical data to ensure that all customers concentrated in such rating grade have the same probability of default and that the default risk of all customers falls within the PD band of that rating grade;

b) For retail exposures

(i) The bank must estimate the PD, LGD, and EAD of each group of retail exposures. The grouping must ensure that the number of exposures in each group is sufficiently large to allow for the estimation and validation of the risk parameters at the group level;

(ii) The bank must allocate retail exposures into groups so as to avoid excessive concentration in any single group.

5. Rating criteria

a) The bank must develop definitions, procedures, and specific rating criteria, and divide the internal credit rating system into different rating grades to distinguish the level of risk of each rating grade, and the internal credit rating system must fully meet the following criteria:

(i) The descriptions of each rating grade and the rating criteria must be sufficiently detailed to ensure consistent assignment of the same rating to customers and exposures with similar levels of risk. This requirement must be implemented consistently within the bank;

(ii) The definitions and criteria for each rating grade must be specified in detail in writing to enable other independent units within the bank (such as internal audit) and the supervisory agency to clearly understand, review, and assess the appropriateness of each rating grade;

(iii) The rating criteria must be consistent with the bank’s internal regulations on standards and conditions for credit extension, debt rescheduling, and the purchase, sale, and handling of non-performing loans;

b) The bank must use all relevant, up-to-date, and useful information on the customer available to the bank for the purpose of obligor rating and the exposure rating. Where the available information is deemed insufficient, the bank shall act with greater prudence in obligor rating. Where the bank uses the rating of an independent credit rating enterprise as the principal factor for determining the internal rating, the bank must ensure that other relevant information is also taken into consideration.

6. Scope of rating

a) The period of information and data used by the bank in the rating process must be at least 01 year;

b) Obligor rating must reflect the ability and willingness of the customer to perform its obligations when adverse economic conditions or unforeseeable events occur. The economic conditions considered in the rating must be consistent with current economic conditions and with economic conditions that may arise during a business cycle of the sector, industry, or geographical area;

c) The estimation of the probability of default for customers with a high leverage ratio or customers whose assets consist mainly of traded assets must reflect the profitability of the customer’s assets during periods of significant volatility such as a crisis period;

d) The bank must maintain a prudent approach in assessing the impact of economic conditions and future events that may affect the financial situation of the customer. In case the information is insufficient, the bank must conduct the assessment in a prudent manner.

7. Internal regulations on model governance used for obligor rating or exposures rating and estimation of risk parameters PD, LGD, and EAD must satisfy the following requirements:

a) The bank must promulgate internal regulations on model governance, which must at least include the following contents:

(i) Identification, assessment, monitoring, and control of model risks at each stage of the model lifecycle (such as design, operation, use, validation, supervision, model adjustment, etc.);

(ii) Specific criteria for determining the level of model risk, the sequence of review and handling of cases that fail to meet the requirements for each identified level of model risk;

(iii) Selection and use of external models (if any);

(iv) Functions and duties of individuals and departments participating in model governance, including the supervisory responsibilities of the Board of Directors, Members’ Council, and the General Director (Director), and the responsibilities of individuals and departments approving the model;

(v) Requirements on information storage regarding model governance and reporting regime;

(vi) Other requirements related to model risk management in accordance with law;

b) Model governance regulations must be formulated and regularly updated in conformity with the overall risk management activities of the bank, market conditions, products and strategies, the operations of the bank, and industry practices;

c) The bank must review model governance regulations at least annually in order to ensure that the model is appropriately used and risk is managed effectively.

8. Minimum requirements for models used for obligor rating or exposures rating and estimation of risk parameters PD, LGD, and EAD include:

a) Maintaining a standardized process for model input data, including assessment of the accuracy, completeness, and appropriateness of data, and data adjustments if necessary;

b) Ensuring that the sample data selected for model development is representative of the overall population of customers and exposures of the model’s input data;

c) Ensuring that model input parameters are reasonable;

d) Establishing written regulations guiding the combination of human rating results and model outputs. Human assessments must take into account all relevant information not considered in the model;

dd) Establishing guidance on human review of model rating results, including procedures for identifying and limiting errors arising from model weaknesses and for improving model quality;

e) Establishing a model validation process, which must be conducted regularly throughout the model’s operation. The model validation process must include at least monitoring of model performance and stability, review of model relationships, and comparison of model results with actual outcomes. The validation process must assess all characteristics of the model (such as discriminatory power, ranking order, rating stability, etc.);

g) The model must have good predictive ability and must not distort capital requirements. The model’s output estimates at obligor rating levels or exposure rating levels must be validated to ensure accuracy and absence of material misstatement of estimated values;

h) Assigning individuals or departments to review information relevant to the model (including information outside the scope of the model) and to ensure that the model is appropriately applied.

9. Written regulations on the development of the internal credit rating system:

a) A bank must promulgate internal regulations on the design and operation of the internal credit rating system, which must at least include the following contents:

(i) Portfolio differentiation;

(ii) Rating criteria;

(iii) Roles and responsibilities of the parties involved in the obligor rating and exposure rating;

(iv) Exceptions in rating and the party competent to approve exceptions;

(v) Frequency of review of rating levels;

(vi) Oversight by senior management over the rating process;

(vii) Reasons for the selection of criteria or analyses proving that the criteria and rating process are capable of differentiating risks. Such criteria and processes must be periodically reviewed to ensure appropriateness with the bank’s current credit extension portfolio and external conditions;

(viii) Archiving of past changes in the internal credit rating system, including changes required by the State Bank;

(ix) Organizational structure and procedures for performing rating (including internal control of the rating process);

(x) Definitions of defaulted customers, losses, and the requirement to use such definitions consistently within the bank;

b) A bank must promulgate internal regulations on the methodology of statistical models used in the rating process, which must at least include the following information:

(i) Details of theories, assumptions, statistical and mathematical methods used in rating, allocation of estimated results by rating grade, by individual customer, by exposure or group of exposures, and information sources used for model estimation;

(ii) Statistical processes for model validation (including out-of-time and out-of-sample performance tests);

(iii) Circumstances under which the model does not operate effectively;

c) In case a bank purchases a model from a third party or hires a third party during the model development stage, or uses ratings provided by a third-party model, the bank must comply with the provisions of this Circular. The bank must explain or ensure that the third party coordinates in explaining to the State Bank the compliance with the provisions of Clauses 7 and 8 of this Article and other provisions of this Circular upon request.

Article 65. Operation of the internal credit rating system

1. Scope of rating

a) For enterprise exposures, all customers, guarantors, and sellers of credit derivative products recognized as credit risk mitigation measures must be rated;

b) For retail exposures, a bank must classify exposures into groups and assign ratings to such groups;

c) The rating under Point a and Point b of this Clause must be an integral part of the credit extension approval process.

2. Ensuring the integrity of the rating process

a) Rating and periodic reassessment of rating results must ensure integrity. Credit extension policies and procedures must provide for control measures to ensure the independence of the rating process;

b) Minimum requirements for enterprise exposures:

(i) A bank must prescribe the frequency of reassessment of rating results at least annually and on an ad hoc basis depending on the customer’s risk level. Exposures to high-risk customers or problematic exposures must be reassessed more frequently. Where material information arises concerning a customer or an exposure, the bank must carry out a reassessment process of the rating result;

(ii) A bank must have an effective process for collecting and updating relevant and material information on the customer’s financial condition, and characteristics of the exposure that may affect LGD and EAD (such as the condition of collaterals, etc.). Based on such information, the bank must have a process to promptly update the customer’s rating;

c) Minimum requirements for retail exposures:

(i) A bank must periodically reassess the loss characteristics and delinquency status of each exposure group;

(ii) A bank must reassess the status of customers within each group to ensure the accuracy of the classification of exposures into groups. The bank may conduct representative sample assessments of exposures within a group.

3. Adjustment of rating levels

a) For the expert judgment-based rating approach, a bank must clearly provide for cases where the responsible individual may adjust the rating results, including the manner, scope, and subjects using the adjusted results;

b) For the model-based rating approach, a bank must have guidelines and supervisory procedures for cases where expert judgment adjusts the model rating results, excludes model parameters, or replaces model input values;

c) The bank’s guidelines as provided at Point a and Point b of this Clause must include regulations on the individual or unit in charge of approving such adjustments. The bank must identify and independently monitor exposures with adjusted rating results as a basis for subsequent evaluation.

4. Data retention

a) A bank must collect and retain essential data on customers and characteristics of exposures to ensure that:

(i) Information and data effectively support the bank’s internal credit risk measurement and management process, meet minimum requirements, and serve as a basis for reporting to the State Bank;

(ii) Information and data are sufficiently detailed to allow for re-rating of obligors and exposures that have been rated in the past;

(iii) A bank must collect and retain data that meet disclosure requirements;

b) For enterprise exposures, a bank must retain:

(i) Historical rating data on customers, guarantors, or sellers of credit derivative products recorded as credit risk mitigation techniques. Such data include rating results, rating dates, rating methods, key information and data used for rating, and individuals, units in charge of rating, or the model selected for rating;

(ii) Default data, at a minimum including information on customers, defaulted exposures, time of default, circumstances of default occurrence, time of recovery, and recovery value;

(iii) Data on estimated PD, actual default rates corresponding to rating grades, and actual migration data to assess the predictive power of the internal credit rating system;

(iv) Other relevant information additionally collected, such as data on losses and recovery history of enterprise exposures, etc.;

c) For retail exposures, a bank must retain:

(i) Data used in the process of classifying exposures into groups, including data on customers, transaction risk characteristics, and delinquency data;

(ii) Estimated risk parameter data on PD, LGD, and EAD for groups of exposures;

(iii) Data on groups of exposures within one year prior to default and actual LGD and EAD values for defaulted retail exposures.

5. Stress testing

a) A bank must conduct a stress testing process in its internal capital adequacy assessment. Stress testing must cover at least the following contents:

(i) Identifying events or possible future changes in the economy that may adversely affect the bank exposures;

(ii) Assessing the bank’s capital adequacy resilience under such changes;

(iii) Scenarios employed such as economic or sectoral downturns, market risk events, and liquidity conditions;

b) A bank must perform credit risk stress testing to assess the impact of specific conditions on the capital adequacy ratio determined under the internal rating-based approach;

c) When conducting stress testing as prescribed at Point a and Point b of this Clause, a bank must take into account the following sources of information:

(i) The bank’s data allowing for estimation of rating migrations of certain exposures;

(ii) Information on the impact of deterioration in credit activities (if any) on ratings to construct a stress scenario with greater deterioration;

(iii) The bank’s assessment of evidence of rating migration in independent credit ratings, including the bank’s mapping of its own rating grades to the rating grades of independent credit rating enterprises;

d) A bank shall conduct the stress testing prescribed at Point a and Point b of this Clause by methods consistent with the bank’s characteristics, ensuring compliance with the State Bank’s regulations on stress testing.

Article 66. Governance and supervision

1. The Board of Directors, Members’ Council (for commercial banks), or the General Director (Director) (for foreign bank branches) shall have the following responsibilities and powers:

a) To understand the objectives and significance of the internal credit rating system (including the use of the internal credit rating system, estimation of risk parameters, and stress testing);

b) To review and approve significant contents of the internal credit rating system in accordance with the bank’s internal regulations;

c) To supervise the General Director (Director) (for commercial banks) in the implementation and maintenance of the internal credit rating system.

2. Responsibilities and powers of the General Director (Director):

a) To have a detailed understanding of the design and operation of the internal credit rating system;

b) To promulgate internal procedures related to the internal credit rating system;

c) To maintain the appropriateness and utilization of the internal credit rating system;

d) To periodically report to the Board of Directors, Members’ Council (for commercial banks), and to report to the parent bank (for foreign bank branches) on significant matters of the internal credit rating system in accordance with the bank’s internal regulations;

dd) To supervise individuals and departments in performing tasks related to the internal credit rating system (including rating, customer credit risk control, validation, utilization of the internal credit rating system, and stress testing).

3. There must be an individual or department submitting to the General Director (Director) for reporting to the Board of Directors, Members’ Council (for commercial banks), or reporting to the General Director (Director) (for foreign bank branches), at least on an annual basis, in accordance with internal regulations, on the following contents:

a) Information on internal ratings, estimation of risk parameters, and results of stress testing must be integrated into the internal risk management reports in accordance with the bank’s internal regulations;

b) With respect to customer credit risk, the report must at least include the following contents:

(i) Risk dossiers by each rating grade for customers and exposures in the case of enterprise exposures, or for groups of exposures in the case of retail exposures;

(ii) Rating migration;

(iii) Changes in the estimation of risk parameters for customers and exposures in the case of enterprise exposures, or for groups of exposures in the case of retail exposures;

(iv) Comparison of actual values with estimated values of PD, LGD, and EAD;

(v) Changes over time in capital requirements under the internal rating-based approach;

(vi) Results of customer credit risk stress testing;

(vii) Validation results;

(viii) Reports from internal audit and the unit performing the function of customer credit risk control regarding significant issues in the internal credit rating system.

4. Customer credit risk control

a) The bank must establish a unit in charge of customer credit risk control, which shall be responsible for the design or selection, implementation, and operation of the internal credit rating system. This unit performing the customer credit risk control function must be organizationally independent from the unit in charge of credit extension;

b) The tasks of the unit performing the customer credit risk control function shall at least include:

(i) Inspecting and supervising rating grades;

(ii) Conducting customer credit risk stress testing;

(iii) Preparing summary reports and analyses of the internal credit rating system, including historical default data classified by rating at the time of default and one year prior to default, rating migration analysis, and monitoring trends of key rating criteria;

(iv) Ensuring the reliability and consistency of risk parameter estimations, including the implementation of processes to verify that rating definitions are applied consistently within the bank;

(v) Reviewing and recording changes in the rating process, including the reasons for such changes;

(vi) Reviewing rating criteria to assess the risk predictive capacity of such criteria. Changes in the rating process, rating criteria, or each rating parameter must be recorded and stored for the review and assessment activities of the State Bank;

(vii) Participating in model governance throughout the model lifecycle;

(viii) Being responsible for monitoring and periodically assessing the impact of the results and changes of the models used in the rating process on the measurement of customer credit risk.

5. Internal audit and independent audit

a) The operation of the bank’s internal credit rating system must be reviewed by internal audit or independent audit at least annually. The review results must be fully documented and stored;

b) The minimum scope of review shall include:

(i) The operation of the unit performing the credit risk control function;

(ii) The estimation of PD, LGD, and EAD;

(iii) The compliance with the minimum requirements of the internal rating-based approach.

Article 67. Application of the internal credit rating system

1. Scope of application

a) A bank must not use its internal credit rating system solely for the purpose of calculating customer risk-weighted assets. The bank’s internal credit rating system must be utilized and play an important role in other activities, at a minimum including: credit approval, risk management, internal capital allocation, and reporting;

b) A bank is not required to use exactly the same risk parameter estimates (such as PD, LGD) when calculating customer risk-weighted assets for customer credit risk as well as for other internal purposes. The bank must specifically provide for the use and storage of information on such differences in accordance with its internal regulations.

2. A bank must use the internal credit rating system for the purposes provided at Point a, Clause 1 of this Article in a manner that ensures compliance with the requirements prescribed in this Section for at least two consecutive years immediately prior to the time of submitting the dossier for approval of the application of the internal rating-based approach under Article 7 of this Circular. In case a bank amends its internal credit rating system in a manner that is less prudent, the two-year period shall be recalculated from the time the amended internal credit rating system is put into use.

Article 68. Estimation of risk parameters

1. General requirements for the estimation of risk parameters:

a) A bank shall use the internal rating-based approach to estimate PD for enterprise exposures for each obligor rating grade, and estimate PD for groups of retail exposures;

b) The estimation of PD must be based on the observed historical average one-year default rate;

c) A bank must incorporate all relevant, available, and material data, information, and methods in estimating risk parameters. The estimates must be based on historical data and past experience and must not rely solely on expert judgment. Changes in practices relating to credit extension methods or debt recovery processes during the observation period must be taken into account in the estimation process. The bank’s estimates must timely reflect the impacts of technical advancements, new data, and other relevant information (if any). The bank must review and re-assess its estimates at least annually;

d) In estimating risk parameters, a bank may use one or a combination of data sources, including internal data, external data, and pooled data sources. In cases of combining data sources, a bank must use all relevant and material data sources that are representative of the bank’s long-term historical data;

dd) The population of exposures represented in the data used for estimation, and the credit extension standards applied when the data were generated, must be equivalent to or comparable with the bank’s actual exposure portfolio and credit extension standards. A bank must take into account the economic or market conditions relating to the data that are consistent with current conditions or reasonably predictable future conditions. The number of exposures in the sample and the time span of the data used must be sufficient to ensure the accuracy and robustness of the estimates. Estimation techniques must ensure compliance with the requirements of out-of-sample tests;

e) A bank must establish a margin of conservatism with respect to errors in the estimation of PD, LGD, and EAD. Where methods and data are not yet satisfied, or the scope of errors may be greater, a bank must apply a greater margin of conservatism;

g) The definition of loss used for the estimation of LGD shall be economic loss. When measuring economic loss, all relevant factors must be taken into account (including both direct and indirect costs related to the recovery of credit extensions);

h) In addition to satisfying the general requirements under this Clause, the estimation of PD for enterprise exposures must comply with the minimum requirements specified in Clause 2 of this Article and Article 42 of this Circular, and the estimation of PD, LGD, and EAD for retail exposures must comply with the minimum requirements specified in Clause 3 of this Article and Articles 50, 51, 52, and 53 of this Circular.

2. Minimum requirements for the estimation of PD for enterprise exposures

a) When estimating the average PD for each rating grade, a bank must use relevant information and techniques in accordance with long-run estimation experience. The estimation of PD must be based on a long-run average of one-year default rates for borrowers in the grade;

b) A bank may choose to use one or a combination of the methods specified at Points c, d, and dd of this Clause when estimating PD;

c) Use of past internal default data as follows:

(i) A bank may use past default information and data to estimate PD. Such use must ensure consideration of differences between data from past and current rating systems;

(ii) A bank must apply a higher margin of conservatism to the estimation of PD in cases where information is unavailable or where changes in credit approval regulations materially affect the estimation of PD;

(iii) Where the bank’s internal rating system and criteria for assessment of data collection are comparable with those of another bank, the bank may collect data from such other bank for PD estimation;

d) Comparison with external data as follows:

(i) A bank may compare its internal ratings with the ratings of independent credit rating enterprises or the National Credit Information Center of Vietnam, and may use the assessment results of such organizations when estimating customers’ PD;

(ii) When comparing rating grades, a bank must compare the criteria or factors used in its ratings with those used by the independent credit rating enterprise or the National Credit Information Center of Vietnam in order to eliminate inconsistent elements;

(iii) A bank must establish written regulations guiding the comparison of its internal ratings with the results of the independent credit rating enterprise or the National Credit Information Center of Vietnam. Where there are differences in the definition of defaulted customers between the bank and the independent credit rating enterprise, the bank must adjust the PD estimation accordingly;

dd) Statistical modeling of default data as follows:

A bank may use the average estimated PD of each customer within a rating grade, where the PD estimate is the result calculated by a statistical model;

e) A bank may use expert judgment to supplement PD estimation methods, including in cases of limited information;

g) The historical data collection period for each data source (including internal data, external data, pooled data sources, or combinations thereof) must be at least 05 consecutive years up to the most recent point in time used by the bank for PD estimation. In case a bank has important, relevant, and longer-than-05-year data sources, it must use such data sources to estimate PD. The data period must include a combination of years with favorable and adverse economic conditions.

3. Minimum requirements for the estimation of PD for retail exposures are as follows:

a) Data sources

(i) A bank must use internal data as the primary source of information for estimation;

(ii) A bank may use external data sources or data from statistical models for PD estimation when fully meeting the following conditions:

- The process of assigning each retail exposure into a group is consistent with the process used by the external data source;

- The risk dossier of customers at the bank is comparable with the information of the external data source.

b) A bank may estimate the long-run average PD by one of the following methods:

(i) Estimating the long-run average PD based on the ratio of long-run expected losses to the long-run default-weighted average LGD. In this case, the LGD estimation must meet the minimum requirements provided in this Circular;

(ii) Other methods as prescribed under the bank’s internal regulations.

c) The historical data collection period of a data source must be at least 05 consecutive years up to the most recent point in time used by the bank for PD estimation. In case a bank has important, relevant, and longer-than-05-year data sources, it must use such data sources to estimate PD. The data period must include a combination of years with favorable and adverse economic conditions relevant to the portfolio.

Article 69. Validation of internal estimates

1. A bank must establish effective validation procedures and content to verify the accuracy and consistency of the internal credit rating system, processes, and the estimation of all relevant risk parameters.

2. A bank must regularly compare actual default rates with the estimated PD for each grade and ensure that the actual default rate falls within the expected range of each grade. A bank applying the advanced internal rating-based approach must additionally perform similar analyses for LGD and EAD estimates. A bank must have documents on methodologies and data used for such comparisons. The analyses and documents must be updated at least annually.

3. A bank must conduct comparisons with relevant external data sources (if any). The analyses must be based on data consistent with the bank’s portfolio and must be updated regularly. The internal assessment of the performance of the internal credit rating system must be based on long-run historical data.

4. A bank’s quantitative validation methods and other validation methods must not be systematically altered according to the economic cycle. Any changes to methodologies and data (including data sources and time periods) must be specifically and fully recorded.

5. A bank must establish specific and rigorous internal standards regarding cases where the actual values of risk parameters significantly deviate from the estimated values, leading to a review of such estimates. These standards must take into account business cycles and the systematic variation of historical default probabilities. Where actual values consistently exceed estimated values, the bank must adjust its estimates in accordance with historical data on defaults and losses.

Chapter IV

REGULATORY CAPITAL FOR OPERATIONAL RISK

Article 70. Regulatory capital for operational risk

1. Regulatory capital for operational risk (K_OR) shall be determined according to the following formula:

K_OR = BIC x ILM

In which:

- K_OR: Regulatory capital for operational risk;

- BIC: Business indicator component;

- ILM: Internal loss multiplier.

2. The business indicator component (BIC) shall be determined the following formula:

In which:

a) The classification of business indicators and the determination of marginal coefficients (α_i) shall be specified in the following table:

For example: Given a BI = VND 20,000 billion, the BIC = 600 x 12% + (18,000 - 600) x 15% + (20,000 - 18,000) x 18% = VND 3,042 billion;

b) The business indicator (BI_i) shall be determined according to the following formula:

BI = ILDC + SC + FC

(i) In which:

- BI: Business indicator;

- ILDC: Interest, leases and dividend component;

- SC: Services component;

- FC: Financial component.

(ii) The components of the above formula (ILDC, SC, FC) shall be determined based on the three-year average up to the time of calculating the operational risk capital requirements of the detailed components in accordance with the guidance provided in Appendix III to this Circular.

3. The internal loss multiplier (ILM) shall be determined as follows:

a) Formula:

In which: LC means the loss component;

b) ILM shall be determined as 1 when the business indicator of the bank falls into one of the following conditions:

(i) BI ≤ VND 600 billion;

(ii) BI > VND 600 billion and the loss data series for measuring operational risk has a length of less than 05 years.

c) For the calculation of the loss component (LC), the bank must ensure the following requirements:

(i) The bank does not fall into the cases specified at Point b of this Clause;

(ii) The calculation timeframe shall be determined as follows:

- For the operational loss data series with a length of 10 years or more, the bank shall use the last 10 years as the calculation timeframe;

- For the operational loss data series with a length from 05 years to less than 10 years, the bank shall use the actual length of operational loss data as the calculation timeframe. In case the remaining period of the data length by year is 06 months or more, it shall be rounded to 01 year;

(iii) Operational loss data for the calculation of LC must meet the requirements specified in Articles 71 and 72 of this Circular;

(iv) A commercial bank with subsidiaries may use the LC calculated based on separate loss data (excluding subsidiaries) when calculating the merged capital adequacy ratio;

(v) LC shall be determined as follows:

- The bank shall collect data and determine the net operational loss value on a quarterly basis by subtracting the recovered value recorded in the same quarter from the operational loss value recorded in such quarter;

- The bank shall determine the annual net operational loss value by aggregating the quarterly net loss values of four consecutive quarters;

- The bank shall determine the average annual net operational loss value of the calculation timeframe by dividing the total annual net operational loss values of the years within the calculation timeframe by the total number of years calculated;

- LC shall equal 15 times the average annual net operational loss value of the calculation timeframe.

Article 71. Operational loss data

1. Banks must collect all operational loss data where the net operational loss value of an event within the calculation timeframe amounts to VND 12 million or more.

2. The net operational loss value of a loss event shall be determined as the total operational loss values recorded minus the recoveries received (including insurance payouts) for such loss event. Banks must use the values calculated according to the accounting date.

3. The total operational loss value includes:

a) The costs recorded directly into the items of the Statement of Profit and Loss and the write-downs of assets arising from operational risk events caused by the bank;

b) Expenses incurred as a consequence of the operational loss event, including external expenses directly related to the operational risk event (such as direct legal expenses related to the event and fees paid for consultancy, lawyers, or service providers, etc.) and the repair or replacement expenses incurred to restore the condition prior to the occurrence of the operational risk event;

c) Losses arising from the operational risk event with specific financial impact, recorded in temporary accounts and not yet reflected in the Statement of Profit and Loss (pending losses);

d) Losses arising from the operational risk event that have not yet been recorded in the accounting period, affecting the cash flow and financial statements of such accounting period. Where the unrecorded period of the operational risk event exceeds 01 year and gives rise to legal risks (time-related losses).

4. The following components must be excluded when calculating the total loss amount:

a) Costs of general maintenance contracts for tangible fixed assets;

b) Costs for business enhancement after operational risk losses: upgrades, improvements, initiatives, and risk assessment improvements;

c) Costs of purchasing operational risk insurance.

Article 72. Collection and processing of operational loss data

1. Banks must promulgate comprehensive internal regulations on the process of identifying, collecting, and processing operational loss information.

This process must be reviewed by the internal audit department before the loss data is used in calculating capital for operational risk and must be periodically reviewed and assessed by the internal audit department or an independent auditor.

2. Loss data must be linked to the bank’s current business activities, information systems, data, and risk management processes.

3. In cases where the bank’s activities simultaneously give rise to both credit risk and operational risk, the bank is not required to collect such operational loss data.

4. In cases where the bank’s activities simultaneously give rise to both market risk and operational risk, the bank must collect such operational loss data.

5. The following information must be collected for operational loss data:

a) Reference dates of the operational loss event, including:

(i) The occurrence date, which is the date the event begins;

(ii) The discovery date, which is the date the bank becomes aware of the event;

(iii) The accounting date, which is the date or dates on which the operational loss event occurs, leading to the loss being recorded in the bank’s profit and loss accounts. For pending losses, the accounting date is the date recorded in the suspense account;

b) The total value of the operational loss;

c) The recoveries of the operational loss;

d) A description of the causes and factors affecting the loss event.

6. The bank shall use the accounting date to compile the operational loss dataset. For losses arising from legal events, the bank must use the latest date, which is the accounting date, to record the loss.

7. Losses arising from the same operational risk event or from operational risk events over time that have been accounted for over several years must be allocated to the corresponding years in accordance with accounting principles.

8. In cases where the bank conducts business acquisitions to become a subsidiary, or mergers and consolidations, the scope of losses and the components of the business indicator used to calculate capital requirements for operational risk must include the acquired, merged, or consolidated enterprises, including the period prior to the acquisition, merger, or consolidation in accordance with this Chapter.

Chapter V

REGULATORY CAPITAL FOR MARKET RISK

Article 73. Internal regulations on determining market risk positions for market risk management

1. To determine the regulatory capital for market risk, a bank must have internal regulations ensuring at least the following contents:

a) Conditions and criteria for determining items within the scope of the trading book to calculate risk positions in the trading book, ensuring the distinction between transactions in the trading book and the banking book and the transfer of items between the trading book and the banking book;

b) Transaction data must be accurately, fully, and promptly recorded into the bank’s risk management database system and accounting book system;

c) Identification of the sales departments directly executing the transaction;

d) Regulations on the responsibility of the internal audit department to periodically review and assess items in the trading book and the banking book;

dd) A proprietary trading strategy for each type of currency, financial instrument, and derivative product, ensuring no purchase or sale restriction or risk-hedging capability;

e) Market risk limits under the regulations of the State Bank on the bank’s internal control system must be reviewed and assessed at least annually or at the time of major changes affecting market risk positions;

g) The process of managing market risk positions must ensure full compliance with the following conditions:

(i) Market risk positions must be identified, measured, monitored, and strictly controlled;

(ii) A separate department must carry out proprietary trading transactions, in which tellers may independently execute transactions within the scope of limits and proprietary trading strategies; there must be a department responsible for managing and accounting for monitoring proprietary trading transactions and items in the trading book;

(iii) Risk positions and risk measurement results must be reported to competent authorities in accordance with the bank’s risk management regulations;

(iv) All financial positions in the trading book must be measured and valued at market prices or market data at least once per working day to determine profit, loss, and market risk positions;

(v) Input market data must be collected as much as possible from sources appropriate to the market and must be regularly reviewed and assessed for suitability of such input market data;

h) Methods for measuring market risk (including a full description of assumptions and parameters used); methods for measuring market risk must be reviewed and assessed annually and upon extraordinary changes affecting market risk positions;

i) Process of monitoring risk positions and compliance with market risk limits under the bank’s proprietary trading strategy;

k) Principles and calculation methods for regulatory capital for market risk in compliance with Appendix IV attached hereto.

2. Accounting in the trading book and the banking book

a) Transactions in the trading book and the banking book must be recorded in the bank’s accounting system and reconciled with the data recorded by the sales department (transaction log or other recording forms);

b) A bank may only reclassify and transfer an item from the trading book to the banking book when such item no longer meets the conditions and criteria under the bank’s internal regulations specified at Point a, Clause 1 of this Article;

c) A bank shall not transfer financial instruments from the banking book to the trading book.

3. The promulgation, amendment, and supplementation of the internal regulations specified in Clause 1 of this Article must be approved by the competent authorities of the bank. Such internal regulations must be reviewed by the internal audit department at least annually in accordance with the regulations of the State Bank on the internal control system of banks.

4. A bank shall submit the regulations specified in Clause 1 of this Article to the State Bank (via the Credit Institutions Supervision Department or the Regional State Bank branch) for supervision prior to implementation. Where necessary, the State Bank (the Credit Institutions Supervision Department or the Regional State Bank branch) shall provide written opinions to the bank for amendment and supplementation of such regulations.

Article 74. Regulatory capital for market risk

1. Regulatory capital for market risk (K_MR) shall be determined according to the following formula:

K_MR = K_IRR+ K_ER + K_FXR + K_CMR + K_OPT

In which:

- K_IRR: Regulatory capital for interest rate risk, except options;

- K_ER: Regulatory capital for equity risk, except options;

- K_FXR: Regulatory capital for foreign exchange risk (including gold), except options;

- K_CMR: Regulatory capital for commodity risk, except options;

- K_OPT: Regulatory capital for options.

2. Regulatory capital for interest rate risk (K_IRR) shall be determined according to the following formula:

In which, the regulatory capital for interest rate risk shall be calculated under instructions given in Appendix IV to this Circular.

3. Regulatory capital for equity risk (K_ER) shall be determined according to the following formula:

In which, the regulatory capital for equity risk shall be calculated under instructions given in Appendix IV to this Circular.

4. The regulatory capital for foreign exchange risk (K_FXR) shall apply only in cases where the total net foreign exchange position (including gold) of a bank exceeds 2% of the bank’s equity. The regulatory capital for foreign exchange risk and the total net foreign exchange position (including gold) shall be calculated in accordance with the guidance in Appendix IV to this Circular.

5. Regulatory capital for commodity risk (K_CMR) shall be calculated under instructions given in Appendix IV to this Circular.

6. Regulatory capital for options (K_OPT) shall apply only when the total value of option transactions exceeds 2% of the bank’s equity. The regulatory capital for options (K_OPT) shall be calculated in accordance with the guidance in Appendix IV to this Circular.

Chapter VI

REPORTING AND INFORMATION DISCLOSURE REGIME

Article 75. Reporting regime

1. Banks shall report the capital adequacy ratio in accordance with regulations of the State Bank on statistical reporting regime applicable to credit institutions and foreign bank branches.

2. In addition to reporting as prescribed in Clause 1 of this Article, banks applying the internal rating-based approach shall report as follows:

a) During the transition period to the internal rating-based approach until the State Bank approves the application of the internal rating-based approach, banks must submit reports as prescribed in Clause 4, Article 32 of this Circular;

b) From the date the State Bank approves the application of the internal rating-based approach, banks shall prepare reports assessing compliance with the requirements related to the internal rating-based approach as prescribed in this Circular on an annual basis and submit such reports to the State Bank (the Credit Institutions Supervision Department or the Regional State Bank branch) before April 15 each year.

Article 76. Disclosure of information

1. Banks shall disclose information on the capital adequacy ratio in accordance with the contents prescribed in Appendix V attached hereto, at least once every 06 months within the following deadlines:

a) The deadline for semi-annual information disclosure shall be no later than 75 days from the end of the first 06 months of the financial year;

b) The deadline for annual information disclosure shall be no later than 120 days from the end of the financial year.

2. Banks must promulgate internal regulations on the information disclosure process, which must at least include the following contents:

a) Specific provisions on the forms (such as publications or posting on the website, etc.) of disclosure of information on the capital adequacy ratio, ensuring publicity, transparency, and convenient access for individuals and organizations with related interests;

b) Disclosed information must be consistent with the data in the financial statements at the same time;

c) Procedures and methods for collecting information (both qualitative and quantitative contents) on the capital adequacy ratio as prescribed in this Circular;

d) Procedures for checking the accuracy, completeness, and updates of the disclosed information as prescribed in this Circular;

dd) Full provisions on responsibilities, powers, and coordination of the individuals and departments concerned in carrying out the information disclosure;

e) The procedures must be disseminated to the relevant individuals and departments;

g) The procedures must be reviewed at least annually.

3. Banks shall submit the internal regulations specified in Clause 2 of this Article to the State Bank (via the Credit Institutions Supervision Department or the Regional State Bank branch) within 10 days from the date of issuance, amendments, supplementation or replacement.

Chapter VII

RESPONSIBILITIES FOR IMPLEMENTATION ORGANIZATION

Article 77. Responsibility of the State Bank Inspectorate

1. To conduct examination and inspection of the compliance with this Circular by commercial banks and a number of foreign bank branches as prescribed by law and as assigned by the Governor of the State Bank.

2. Based on the results of inspection and examination, depending on the nature and level of risk, to recommend the Credit Institutions Supervision Department or the Regional State Bank branches to implement the provisions specified in Clause 8, Article 5 and Clause 6, Article 33 of this Circular.

Article 78. Responsibility of the Credit Institutions Supervision Department

1. To conduct supervision and inspection of the compliance with this Circular by commercial banks and a number of foreign bank branches as prescribed by law and as assigned by the Governor of the State Bank.

2. To submit to the Governor of the State Bank for decision on the application of the capital adequacy ratio as prescribed in Clause 8, Article 5 of this Circular to commercial banks.

3. To decide on the application of the capital adequacy ratio as prescribed in Clause 8, Article 5 of this Circular for a number of foreign bank branches as assigned.

4. To approve the repurchase and principal repayment by commercial banks of additional Tier 1 capital instruments.

5. From the effective date of this Circular to before January 1, 2030, to receive written registration for the application of the standardized approach enclosed with the report prescribed in Clause 2, Article 7 of this Circular from commercial banks and a number of foreign bank branches as assigned.

6. With respect to the application of the internal rating-based approach by commercial banks and certain foreign bank branches as assigned:

a) To receive written registration for the application of the internal rating-based approach as prescribed in Clause 3, Article 7 of this Circular;

b) To receive reports and monitor the transition to the internal rating-based approach under Article 32 of this Circular;

c) To submit to the Governor of the State Bank for approval of the application of the internal rating-based approach as prescribed in Clause 2, Article 33 of this Circular for commercial banks, or to issue a written reply in case of refusal;

d) To approve the application of the internal rating-based approach as prescribed in Clause 2, Article 33 of this Circular for certain foreign bank branches as assigned, or to issue a written reply in case of refusal;

dd) To receive reports on the request for application of the standardized approach as prescribed in Clause 5, Article 33 of this Circular, or to receive and process reports on the adjustment of the internal rating-based approach as prescribed in Article 34 of this Circular;

e) To require suspension or termination of the application of the internal rating-based approach under Clause 6, Article 33 of this Circular.

7. To handle arising issues relating to the application of the standardized approach and the internal rating-based approach of commercial banks and certain foreign bank branches as assigned.

8. To formulate reporting templates on the capital adequacy ratio for banks in accordance with the State Bank's regulations on statistical reporting regime.

9. To receive and approve reporting templates on the capital adequacy ratio of commercial banks and certain foreign bank branches as assigned.

Article 79. Responsibility of the Department of Banking System Safety

To submit to the Governor of the State Bank for decision on the application of the countercyclical capital buffer (CCyB) as prescribed in Clause 6, Article 5 of this Circular.

Article 80. Responsibility of other units under the State Bank

1. The Forecast and Statistics - Monetary and Financial Stabilization Department shall submit to the Governor of the State Bank guidance on statistical reporting on the capital adequacy ratio as prescribed in this Circular.

2. The Information Technology Department and National Credit Information Centre of Vietnam shall coordinate in reviewing and assessing the internal rating-based approach developed by banks in accordance with this Circular so that the Credit Institutions Supervision Department and the Regional State Bank branches may perform their tasks as prescribed in Clause 4, Article 78 of this Circular and Point c, Clause 3 of this Article.

3. Regional State Bank branches shall:

a) Conduct inspection, examination, and supervision of the compliance with the provisions of this Circular by foreign bank branches as assigned by the Governor of the State Bank;

b) Decide on the application of the capital adequacy ratio as prescribed in Clause 8, Article 5 of this Circular for foreign bank branches as assigned;

c) From the effective date of this Circular to before January 1, 2030, receive written registration for the application of the standardized approach enclosed with the report prescribed in Clause 2, Article 7 of this Circular from foreign bank branches as assigned;

d) With respect to the application of the internal rating-based approach by foreign bank branches as assigned:

(i) Receive written registration for the application of the internal rating-based approach as prescribed in Clause 3, Article 7 of this Circular;

(ii) Receive reports and monitor the transition to the internal rating-based approach under Article 32 of this Circular;

(iii) Approve the application of the internal rating-based approach as prescribed in Clause 2, Article 33 of this Circular, or issue a written reply in case of refusal;

(iv) Receive reports on the request for application of the standardized approach as prescribed in Clause 5, Article 33 of this Circular, or receive and process reports on the adjustment of the internal rating-based approach as prescribed in Article 34 of this Circular;

(v) Require suspension or termination of the application of the internal rating-based approach under Clause 6, Article 33 of this Circular;

dd) Handle arising issues relating to the application of the standardized approach and the internal rating-based approach of foreign bank branches as assigned;

e) Receive and approve reporting templates on the capital adequacy ratio of foreign bank branches as assigned.

Chapter VIII

IMPLEMENTATION PROVISIONS

Article 81. Implementation responsibility

Heads of units under the State Bank, commercial banks, foreign bank branches, and concerned organizations and individuals shall implement this Circular.

Article 82. Effect

1. This Circular takes effect from September 15, 2025, except for the cases specified in Clause 2 of this Article.

2. During the period from the effective date of this Circular until December 31, 2029, in cases where banks do not register for the implementation of the standardized approach as prescribed in Article 7 of this Circular or have not yet been approved by the State Bank to apply the internal rating-based approach as prescribed in Article 33 of this Circular, they shall comply with the Circulars specified at Points a, b, and c, Clause 3 of this Article.

3. From January 1, 2030, the following provisions shall be annulled:

a) Circular No. 41/2016/TT-NHNN dated December 30, 2016, of the Governor of the State Bank of Vietnam, prescribing prudential ratios for operations of banks and/or foreign bank branches;

b) Clause 2, Article 1 of Circular No. 26/2022/TT-NHNN dated December 31, 2022, of the Governor of the State Bank of Vietnam, amending and supplementing a number of articles of Circular No. 22/2019/TT-NHNN of November 15, 2019, of the Governor of the State Bank of Vietnam, prescribing limits and prudential ratios in operations of banks and foreign bank branches;

c) Circular No. 22/2023/TT-NHNN dated December 29, 2023, of the Governor of the State Bank of Vietnam, amending and supplementing a number of articles of Circular No. 41/2016/TT-NHNN dated December 30, 2016, of the Governor of the State Bank of Vietnam, prescribing prudential ratios for operations of banks and foreign bank branches./.