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Governance of Vietnam’s financial institutions in accordance with international standards until 2020

In this article, using a combination of risk-related factors, we address the governance of financial institutions, mainly Vietnam’s commercial banks, in light of such international standards as of Basel II and III. | Tram Thi Xuan Huong et. al. / Journal of Economic Development 23(1) 50-76 50 Governance of Vietnam’s Financial Institutions in Accordance with International Standards until 2020 TRAM THI XUAN HUONG University of Economics HCMC – txhuong@ueh.edu.vn NGUYEN PHUC CANH University of Economics HCMC – canhnguyen@ueh.edu.vn NGUYEN TU NHU University of Economics HCMC – nhunt@ueh.edu.vn ARTICLE INFO ABSTRACT Article history: In this article, using a combination of risk-related factors, we address the governance of financial institutions, mainly Vietnam’s commercial banks, in light of such international standards as of Basel II and III. Additionally, we employ multiple regression approach to shed light on the effect of each type of risk on bank performance and propose a few recommendations for effectively governing the commercial banking system of Vietnam until 2020. Received: Aug. 27 2014 Received in revised form: Jan. 30 2015 Accepted: Dec. 30 2015 Keywords: Financial institutions, risk management, Basel standards, Z-score. Tram Thi Xuan Huong et. al. / Journal of Economic Development 23(1) 50-76 51 1. Introduction The activity of financial institutions governance is fundamental to efficient and safe operations of the financial system in the market economy (Rose, 2011). Effective administration of financial institutions helps meet the optimal cost of capital flow, thus enabling the economy to achieve potential production levels (Saundra & Marcia, 2012). There has, as reported in the 2010 World Economic Forum, been a gradual shift to risk management in strategies of most countries as well as financial institutions across the world. Risk control is one key strategic objective in governing financial institutions; hence, appropriate and long-term risk management strategies should be defined from both macro (financial system) and micro (each financial institution’s operation) perspectives. Remarked by KPMG (2012), the demand for risk management in Asian countries .