Bank restructuring and bank efficiency the case of vietnam

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY

NGUYEN HUU HUAN

BANK RESTRUCTURING AND BANK EFFICIENCY
- THE CASE OF VIETNAM

DOCTORAL THESIS IN ECONOMICS

Ho Chi Minh City – 2019


MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY

NGUYEN HUU HUAN

BANK RESTRUCTURING AND BANK EFFICIENCY
- THE CASE OF VIETNAM
Industry: Banking and Finance
Industry ID: 93.40.201

DOCTORAL THESIS IN ECONOMICS
Instructor: AsPro.Dr Tran Huy Hoang
AsPro.Dr Vo Xuan Vinh

Ho Chi Minh City – 2019


i

STATEMENT OF AUTHORSHIP
I’m hereby declare that this submission is my own work and except where
due reference is made; this thesis contains no material previously published or
written by another person(s).
This thesis does not contain material extracted in the whole or in part from
thesis or report presented for another degree of diploma in University of Economics
Ho Chi Minh city or in any other education institution.

Nguyen Huu Huan
July 2019


ii

TABLE OF CONTENT
STATEMENT OF AUTHORSHIP ................................................................ i
LIST OF TABLES ......................................................................................... vi
LIST OF FIGURES ......................................................................................vii
ABBREVIATION ........................................................................................ viii
ABSTRACT ................................................................................................... ix
TÓM TẮT LUẬN ÁN ......................................................................................x
CHAPTER 1. INTRODUCTION .............................................................1
1.1 OVERVIEW......................................................................................1
1.2 MOTIVATIONS AND RESEARCH QUESTIONS ........................3
1.2.1 The method of bank restructuring ...............................................3
1.2.2 The structure and performance relationship in the banking
system

.....................................................................................................4

1.3 RESEARCH OBJECTIVES .............................................................5
1.4 DATA AND METHODOLOGY ......................................................6
1.4.1 Data .............................................................................................6
1.4.2 Methodology ...............................................................................6
1.5 STRUCTURE OF THE THESIS ......................................................7
CHAPTER 2. LITERATURE REVIEW .................................................8
2.1.

INTRODUCTION .........................................................................8

2.2.

BACKGROUND ...........................................................................8

2.2.1. Background knowledge about restructuring...............................8
2.2.2. Efficiency Theory .....................................................................16
2.2.3. The related hypothesis ..............................................................22


iii

2.3.

METHOD OF BANK RESTRUCTURING AND EFFICIENCY .
.....................................................................................................24

2.3.1. The relationship between bank restructuring and efficiency....24
2.3.2. Bank restructuring methods and bank efficiency .....................28
2.4.

THE STRUCTURE AND PERFORMANCE RELATIONSHIP

IN BANKING SYSTEM ...................................................................................33
2.5.

CHAPTER SUMMARY .............................................................37

CHAPTER 3. BANK RESTRUCTURING - THE CASE OF
VIETNAM ............................................................................................................40
3.1.

INTRODUCTION OF THE BANKING SYSTEM- THE CASE

OF VIETNAM ...................................................................................................40
3.1.1. Context......................................................................................40
3.1.2. Introduction of the Bank Restructuring in Vietnam .................41
3.1.3. Types of bank restructuring in Vietnam ......................................43
3.1.3.1. The change of bank ownership ..............................................43
3.1.3.2. Vietnam’s bank restructuring .................................................47
3.1.3.3. M&A Domestic banks sections ..............................................50
3.1.3.4. Establishment of Asset Management Company ....................57
3.1.3.5. Loosen room for foreign investors .........................................59
3.2.

CHAPTER SUMMARY .............................................................61

CHAPTER 4. DATA AND METHODOLOGY ....................................62
4.1.

INTRODUCTION .......................................................................62

4.2.

DATA AND SAMPLE ................................................................62

4.3.

METHODOLOGY FOR RQ1, RQ2 ...........................................67

4.3.1. Data Envelopment Analysis .....................................................68
4.3.1.3. The Three-Stage Data Envelopment Analysis .......................71
4.3.1.4. Conclusion..............................................................................72
4.3.2. Model ...........................................................................................72


iv

4.3.2.1. RQ1: The effect of restructuring methods on banking
performance

................................................................................................72

4.3.2.2. RQ2: The effects of reform to structure and performance .....74
4.3.3. Variables and descriptive statistics ..............................................76
4.3.3.1. Variables.................................................................................76
4.3.3.2. Descriptive statistic ................................................................80
4.4.

ROBUSTNESS TEST .................................................................84

4.4.1. SFA regression .........................................................................84
4.4.2. Hausman test ............................................................................86
4.5.

CHAPTER SUMMARY .............................................................87

CHAPTER 5. RESULTS AND DISCUSSION OF THE RESULTS ..89
5.1.

INTRODUCTION .......................................................................89

5.2.

EMPIRICAL RESULTS FOR RQ1 ............................................89

5.2.1. Stage 1: Initial results ...............................................................89
5.2.2. Stage 3: DEA results on adjusted data .....................................97
5.3.

EMPIRICAL RESULTS FOR RQ2 ............................................99

CHAPTER SUMMARY ......................................................................105
CHAPTER 6. CONCLUSION ..............................................................107
6.1.

INTRODUCTION .....................................................................107

6.2.

REVIEW OF RESEARCH QUESTIONS, HYPOTHESES AND

FINDINGS

...................................................................................................107

6.2.1. RQ1: How restructuring measures, which were introduced as
the government intervention, merger and acquisition of the commercial
banks and privatization of the state-owned commercial banks, affect the
performance of the commercial banks in the studied period? .....................107
6.2.2. RQ2: What are the effects of reform on Vietnam's commercial
bank structure and performance? .................................................................108
6.3.

CONTRIBUTIONS ...................................................................109

6.4.

IMPLICATIONS .......................................................................110


v

6.5.

LIMITATIONS .........................................................................111

6.6.

FUTURE RESEARCH DIRECTIONS .....................................111

PUBLICATION ...........................................................................................113
REFERENCES ...........................................................................................114
APPENDIX .................................................................................................125
APENDIX A - List of banks in the study ...................................................125
APPENDIX B - Model for testing the relationship of bank restructuring
and efficiency ..........................................................................................................126
APPENDIX C - Model for testing on structure and performance............129


vi

LIST OF TABLES
Table 2.1: Summary of the two research questions and their hypotheses ................38
Table 3.1: Types of bank in 2003-2007 ....................................................................42
Table 3.2: Joint stock commercial bank after 2007 ..................................................44
Table 3.3: The operational status of state bank before and after privatization .........45
Table 3.4: Banks self-restructured successfully ........................................................47
Table 3.5: Result after banking restructuring............................................................48
Table 3.6: M&A of Vietnamese banks .....................................................................50
Table 3.7: Result after banking after the merger of the authorized capital...............51
Table 3.8: Banking bond and bad debt statement in 2013 and 2014 ........................57
Table 4.1: Restructuring measures of Vietnamese banks .........................................63
Table 4.2: The control variables include six country specific factors and bank
characteristic..............................................................................................................78
Table 4.3: Variables and definition in using model of testing structure and
performance of banking system ................................................................................79
Table 4.4. Descriptive statistics of step 1 and step 3 DEA’s variables .....................81
Table 4.5: Variables used to estimate the structure-performance interaction. ..........82
Table 5.1: SFA regression step 2 ..............................................................................95

Table 5.2: Condition numbers - testing for multicollinearity .................................100
Table 5.3: Hausman test results ..............................................................................100
Table 5.4: Market-power vs. efficient-structure .....................................................101
Table 5.5: Necessary condition estimation for ES hypothesis in stage 1 ...............102
Table 5.6: The quiet life hypothesis-estimation ......................................................103


vii

LIST OF FIGURES
Figure 3.1. Result after the merger of the authorized capital………………………55
Figure 3.2. Result after banking consolidation and merger in 2015……………….57
Figure 5.1. Average banking efficiency scores in step 1 and step 3 DEA .................. 90
Figure 5.2. The comparing of performances between non-restructured banks
and restructured banks) ............................................................................................... 92


viii

ABBREVIATION
2SLS: Two-stage least squares
CBs: Commercial banks
DEA: Data Envelopment Analysis
DMU: Decision unit
ESS: Scale-efficiency hypothesis
ESX: X-efficiency hypothesis
GLS: Generalized least squares
IMF: International monetary fund
NPL: Non performing loan
OLS: Ordinary Least Square

QLH: Quiet-life hypothesis
RMP: Relative market power
ROA: Return on asset
ROE: Return on Equity
RQ1: Research question 1
RQ2: Research question 2
SBV: State Bank of Vietnam
SCP: Structure, Conduct and Performance paradigm
SEFF: Scale-efficient hypothesis
SFA: Stochastic Frontier Analysis
VAMC: Vietnam Asset Management Company
XEFF: X-Efficiency


ix

ABSTRACT
The relationship between bank restructuring and bank efficiency is an
attractive area that attracts a lot of attention from both academic and industry
practitioners. Vietnam offers an interesting case to analyse this link, however, this
problem remains unexplored. This thesis investigates the association between bank
restructuring and bank efficiency in Vietnamese banking system. The thesis uses the
Data Envelope Approach and the Stochastic Frontier approach. Our sample of data
includes 26 commercial banks for the period 1999-2015.
The finding indicates that the government's restructuring policies in the first
phase the government's restructuring policy did not benefit the banks implementing
the restructuring methods. As for the effect of different restructuring methods, the
privatization of state-owned commercial banks, state intervention and mergers and
acquisitions (M&As) do not substantially improve efficiency. Moreover, it appears
that bank efficiency is declining during the restructuring period not only because of

transition costs, but also because of changes in other environmental variables, such
as financial crisis or the slowdown in the domestic economy.
The thesis contributes to the banking literature by examining the allocative
and technical efficiency of Vietnamese banking system in the recent period (20012015). This shows that reducing government control over the banking system makes
the system more competitive. On the other hand, it makes domestic banks more
vulnerable to competitive factors and effects of the global crisis. Due to the thesis,
the results of the advantage indicated are the keys to finding better solutions for the
restructuring of the banking system. Furthermore, it is necessary to consider the
privatization rate to create the restructuring theory from the privatization of stateowned commercial banks. The thesis has significant political implications. Bank
restructuring is an important program for emerging countries to build a prudential
financial system. Evaluating the relationship between restructuring program and
bank efficiency is important in order to successfully implement government policy.


x

TÓM TẮT LUẬN ÁN
Mối quan hệ giữa tái cấu trúc ngân hàng và hiệu quả hoạt động của ngân
hàng luôn là mối quan tâm lớn của cả các nhà khoa học lẫn các doanh nghiệp và các
nhà làm chính sách. Chính vì thế, việc đánh giá mối quan hệ này và đo lường tính
hiệu quả của quá trình tái cấu trúc hệ thống Ngân hàng thương mại Việt Nam trong
thời gian qua là một yê cầu bức thiết.
Luận án nghiên cứu về mối quan hệ giữa các biện pháp tái cấu trúc hệ thống
NHTM và quá trình tái cấu trúc ngân hàng thương mại tác động đến hiệu quả hoạt
động của các ngân hàng cũng như toàn bộ hệ thống NHTM ở Việt Nam, một nền
kinh tế mở nhỏ và đang trong quá trình chuyển đổi để hội nhập.
Luận án sử dụng các phương pháp DEA, SFA, Random effect, Fixed effect,
2SLS để nghiên cứu 26 NHTM Việt Nam trong khaong3 thời gian từ năm 1999 đến
năm 2015. Kết quả nghiên cứu cho thấy, các biện pháp và quá trình tái cấu trúc
NHTM ở Việt Nam chưa thực sự mang lại hiệu quả, vì còn mang tính hình thức và

các biện pháp vẫn chưa quyết liệt.
Luận án đã bổ sung thêm vào lý thuyết tái cấu trúc NHTM ở các quốc gia có
nền kinh tế mở nhỏ, trong đó chỉ ra rằng các quốc gia có nền kinh tế mở, nhỏ sẽ dễ
bị tổn thương hơn trong quá trình tái cấu trúc, đồng thời việc lựa chọn thời điểm tái
cấu trúc để hội nhập cũng là một vấn đề cần phải được xem xét thận trọng, vì nó có
tác động lớn đến hiệu quả của việc tái cấu trúc. Tái cấu trúc ngân hàng là một
chương trình quan trọng để các nước mới nổi xây dựng một hệ thống tài chính ổn
định và bền vững. Do đó việc đánh giá sự liên kết giữa chương trình tái cấu trúc và
hiệu quả ngân hàng là rất quan trọng để đạt được việc thực hiện thành công chính
sách của chính phủ.


1

CHAPTER 1. INTRODUCTION
1.1

OVERVIEW
Banking system is a crucial factor that controls capital flows in the economy and

contributes to promote economic and social development of the nation. In more than
sixty years of construction and development of four state-commercial banks, thirty
joint-stock commercial banks, joint-venture banks and banks with 100% foreign
capital, the banking system in Vietnam is gradually developing a perfect structure.
In 2006, Vietnam joined WTO and started to open the market economy.
Restructuring the banking system is a necessity in this time, stemming from the
economic situation and the demands of the people. However, under the impact of the
global financial crisis, Vietnam banking system soon faced with a number of risks and
challenges to the daily evaluation of bank performance, which has deteriorated over the
years as a consequence of profit slump, low credit growth, and rising bad debts.

Therefore, together with restructuring banking system to build a healthy economy, the
central bank and commercial banks have been implementing measures to restructure
the banking system to overcome these difficulties and improve the operational
efficiency of the entire system and individual banks because of the impacts of 2008
global financial crisis. With the aim of assessing the situation to restructure the banking
system in Vietnam in recent years, the subject is based on previous studies on the
restructuring the banking system of other countries. The content of the specific
research topic includes references of the previous studies on restructuring to build, to
choose the model and the proposed research methodology; analyse the situation of
Vietnam’s restructuring banking system through quantitative research models from
which to propose recommendations and solutions to improve efficiency in the process
of restructuring the banking system on a sustainable and effective basis.


2

There is a close relationship between bank restructuring and efficiency. It is
proved through a number of researches in many economies in the world. With different
restructuring measures, the results of the linkage between bank restructuring and
efficiency may be positive or negative. The result depends on which kind of economy
that country has, the status of that economy and what problems that economy suffered.
A number of researches have proved that the association between bank restructuring
and efficiency is positive; For example, after the banking restructuring, the bank
efficiency in Turkey was significant improved (Zaim, 1995). Accordingly,
privatization is a good measure to increase banking efficiency; mergers and
acquisitions also has positive effect on cost and profit efficiency. However, some other
researchers said that the banking restructuring did not have any impact on the operating
efficiency, it was suggested to even contribute to its fall; For example, Elyasiani and
Mehdian (1995) indicated that the performance efficiency of the United States’ banks
was unaffected after the banking restructuring. Therefore, this thesis needs to research

the linkage between bank restructuring and efficiency to investigate whether this
relationship in an emerging economy like Vietnam’s is positive or negative.
This thesis focuses on studying the restructuring process of the Vietnamese
banking system from 2007 to 2015, and assessing different financial structure of the
system before and during the implementation stage of the restructuring process. More
specifically, it examines how the restructuring measures affect the performance of the
commercial banks and whether the process of restructuring in the sample period
increases the operational efficiency of the banks or not. It also explores the effect of
reform on Vietnam’s bank structure and performance. Besides, different structures of
the banking system are investigated between pre (2001-2006) and during restructuring
period (2007-2015), the quiet-life, efficient structure, market structure conduct and
performance hypothesis are tested to find the consequence.


3

1.2

MOTIVATIONS AND RESEARCH QUESTIONS
This section highlights the current literature to identify potential gaps from

which the objectives and the research questions are raised. Accordingly, it is structured
into three sections: the method of bank restructuring (Section 1.2.1) and the structure
and performance relationship in the banking system (Section 1.2.2).

1.2.1

The method of bank restructuring
Restructuring program is established to solve problems of distressed banks

(McComb, Gruben, & Welch, 2002). There are four main restructuring methods
including merging domestic banks, giving permission to foreign bank entries, state
intervention and the privatization of state-owned commercial banks. Hawkin and
Turner (1999) showed that domestic merger was often the least costly way of
restructuring the banking system. Moreover, Berger et al (1999) indicated that mergers
helped to increase efficiency if greater diversification improved the risk – return tradeoffs. Krishnasamy et al. (2004) studied production efficiency of Malaysia’s postmerger banks in 2000–2001 and discovered that technology was a crucialfactor for
increasing the productivity. Unite and Sullivan (2003) also said that in Asia, it was
easy for foreign banks to raise their presence and operate. Daniel (1997) showed
thatgovernments can improve banks’ ability effectively by several methods. For
instance, in Indonesia, the government created a recapitalization program where the
owners provided 20% of the capital shortfall (Fane and McLeod, 2002). In Korea, the
government purchased non-performing loans, subordinated debt, or subscribed to new
capital to assist private banks’ recapitalization efforts. Baer (1994) and Baer and Nazmi
(2000) pointed out that the inefficient operation of state-commercial banks accelerated
the process of recession in Brazil.


4

Tran et al (2015) investigate impact of Restructuring on Efficiency of Vietnam’s
Commercial Banks, the empirical findings show that rises and falls in banking
efficiency. However, this paper did not separate the impact of bank restructuring and
environment factors on bank efficiency.
The studies presented above carried out the research about restructuring
methods in many countries with different economies. However, it rarely study has
examined the influence of the bank restructuring methods on the restructuring process
in a small transitioning economy like Vietnam, especially the previous studies did not
separate the impact of Bank restructuring and Environment factors such as financial
crises and weakness domestic economy on Bank efficiency. This motivates the
formation of Research Question 1 (RQ1).

RQ1: How the restructuring measures such as the government intervention,
merger and acquisition of commercial banks and privatization of state-owned
commercial banks affect the performance of the commercial banks in the study
period in Vietnam?

1.2.2

The structure and performance relationship in the banking system
Chen, Skully and Brown (2005) studied banks in China and argued that large

state-owned banks and smaller banks operated more effectively than average banks.
Also, Fu and Heffernan (2009) reported that from 1985 to 2002, the Chinese banking
system followed the Quiet life hypothesis theory. Furthermore, the study of Berger and
Hannan (1997) about banks in the United States produced similar results to the studies
conducted in China by Fu and Heffernan (2009), providing evidence that banks were
also in compliance with the Quiet life hypothesis theory. The findings of Molyneux
and Forbes (1995) suggested that European banks followed traditional structures
(Structure conduct performance) while Goldberg and Rai (1996) argued that banks in


5

high concentration countries followed the market power hypothesis and the X-efficient
hypothesis. Ho and Baxter (2011) study Vietnam Banking sector, their results show
that the reform Vietnamese banking include a restructuring of the banking system, a
gradual opening to foreign investment, the partial privatization of state-owned banking
institutions, and measures to strengthen the capitalization of Vietnamese banks.
None of these studies, on another hand, use hypotheses to examine the effects of
the first-stage reform on the bank structure and the performance, especially with a
economy like Vietnam. Thus, this thesis aims at discovering this relationship. These

research gaps motivate Research Question Two (RQ2), stated as following:
RQ2: What are the effects of reform on Vietnam's commercial bank structure
and performance?

1.3

RESEARCH OBJECTIVES
There have been several previous studies examining the restructuring of the

banking system, but no study has shown a return on a special economy similar to that
of Vietnam. Vietnam's economy is a mixed economy and has many economic
components. Although Vietnamese economy operates base on a market economy, it is
only recognized by the World Trade Organization as a low-level, transitioning
economy. In order to integrate into the regional and the world economy, the
development of monetary and banking market is taken for granted. The legal system in
this major is still complicated and has many limitations but it is gradually being
improved and simplified. It has been trying to promote the credit market - banking, the
development of banks, and the diversification of banking products and services and the
reduction in bad debt. In order to achieve these objectives, the State-bank has adopted
many measures to improve and develop the banking system, including the restructuring
of Vietnamese banking system. Therefore, our research aims to discover how


6

positively the restructuring has affected the banking system in Vietnam. Specifically,
this thesis wants to discover how it impacts on the banking performance and what the
effects of reform on Vietnam's commercial bank structure and performance are.

1.4

DATA AND METHODOLOGY
This section summarizes the data and methodology used to test the developed

hypotheses to help answering the two research questions and the empirical findings of
this thesis.

1.4.1

Data
The research data were collected from credible sources like Orbis Bank Focus

and IMF1. The first stage of data collection is to identify the source of the research
data, forms and the way to conduct investigations. Then raw data is collected after
being counted, synthesised, selected, edited, encoded and analysed, evaluated, and use
tables, graphs and so on to illustrate the content analysis. This will specify the nature of
the collected data to ensure the reliability for the research results.

1.4.2

Methodology
The thesis uses DEA2 and SFA3 methods to determine the performance of

commercial banks recently. Besides, the thesis used Random effect, Three-Stage DEA
to answer the previously mentioned research question. In order to examine the
hypotheses of RQ1, Three-Stage DEA was used with the consideration of the
environmental effects. Next, panel data was employed and, DEA, GLS4 and OLS5

1

International monetary fund

2

Data envelopment analysis

3

Stochastic Frontier Analysis

4

General Least Squares


7

approaches were applied to estimate the equations in RQ2. According to Greene
(2003), using panel data would allow us to know the difference among behaviour,
individuals or time periods. Finally, a Hausman test was used to identify the optimal
model.

1.5

STRUCTURE OF THE THESIS
The rest of the thesis is structured as following. Chapter 2 reviews the previous

literature on restructuring. This discussion helps to derive testable hypotheses related to
the two research questions. Next, Chapter 3 presents the banking case of Vietnam in
the study period. The sample data and methodology used to test the hypotheses related

to the three research questions are presented in Chapter 4. The empirical results for the
hypothesis testing of the three research questions are reported in Chapter 5. Finally,
Chapter 6 concludes the thesis.

5

Ordinary Least Squares


8

CHAPTER 2. LITERATURE REVIEW
2.1. INTRODUCTION
Chapter 1 provided an outline of this thesis and identified its two research
questions. In Chapter 2, the literature review is presented. This chapter reviews the
academic literature related to these three thesis research questions and develops
hypotheses to test and answer them. Section 2.2 reviews the literature relating to
factors that impact the bank efficiency. The theoretical issues and literature pertaining
to bank restructuring and efficiency are discussed in Section 2.3. Next, Section 2.4
overviews the previous literature on method of bank restructuring. Finally, Section 2.5
summarizes these hypotheses and their corresponding research questions. In particular,
the research is based on the theory of structured finance bank (Waxman, 1998;
Dziobek and Ceyla, 1998).

2.2. BACKGROUND
2.2.1. Background knowledge about restructuring
The definition of restructuring commercial-banking system
Definition
Waxman (1998) show that restructuring the banking system only solved the
problems of one of the aforementioned components of the system or a bank which was

likely to go bankrupt, but the banking system still operated effectively. Generally,
restructuring the banking system is the process of restructuring all the components of
the system, including: i) central banks; ii) commercial banking system; iii) banking
systematic social policy and development banks and iv) a system of micro-credit
organizations.


9

Pazarbasioglu and Dziobek (1997) supposed that restructuring the banking
system was to recover the solvency and the profitability, to increase the capacity of the
banking system and to improve the efficiency of the banking operation. In this
statement, the restructuring includes financial restructuring, restructuring activities and
corresponding safety monitoring with three goals. Alexander (1997) suggested that "A
restructuring program for a banking system typically includes a series of measures on
macroeconomics, effect of institutions and law. It has important implications for
macroeconomics, monetary policy, balance of payments, stability and development of
the macro economy; it shows the efficiency and transparency of public policy, and
future activities on the financial markets".
In conclusion, the restructuring of the banking system, which is a long process,
including a number of legal measures, financial institutions, is deployed step by step in
order to change and overcome structural weaknesses in the banking system structure to
put the system into reasonable and effective operation mechanisms, to increase the
labour and businesses, especially small and medium enterprises accessing probability
to banking services, to build a firm basis for healthy development of the banking
system and also the economy in particular. The subjects of the restructuring are banks
in all forms such as State Bank of Vietnam (SBV), commercial banks (CBs), domesticinvested banks and foreign- invested banks.
Features of the restructuring of commercial banks
Restructuring commercial-banking system is different from restructuring of
other sectors like trade, services and telecommunications. The impact of restructuring

of other majors is not widespread because the commercial-banking system does
business with special commodity and currency trading while the activities of
commercial banks are closely related to all other sectors of the economy and the


10

society in one country. According to some studies, restructuring commercial banks has
two characteristics:
- Drastic restructuring in work: The activities’ influence of commercial banks spreads
widely and therefore a weak banking system will lead to the weakening of all other
fields. Eventually with just a banking collapse, the risk of bankruptcy of the whole
system is high and wide spread like the domino phenomenon. Therefore, restructuring
the banking system requires drastic and radical implementation.
- Restructuring the national bank’s status: Since the banking system is closely related
to all economic areas, so restructuring banking system on its own will not be able to
achieve its objectives. Thus, restructuring banking system needs to ensure
participation, active cooperation and efficient management of various state agencies.
The causality of the restructuring
Kithinji, Mwangi and Ogutu (2017) supposed that the economy can only be
healthy if there was an existence of the support for a healthy banking system. In
another word, before the evolution of the global financial crisis and the intrinsic
difficulties of the economy, restructuring banking system is a needed job. If a banking
system in crisis entails risk of economic and social crisis or a major bank in crisis, it
would be in danger of spreading to the whole system. Then it would be difficult for the
economy of a country to develop a stable and healthy banking system with such
potentially unstable and inefficient operation.
Restructuring the banking system is in demand when the current state of banks
faces with many structural problems in the banking activities which are ineffective and
even stagnant with weak capital, short of liquidity and asset quality deterioration on the

verge of disintegration and bankruptcy. These problems stem from the internal
weaknesses of the banking system. Nevertheless, there are some wrong structural


11

reasons such as unclear strategies and plans, inefficient management team work is,
unsuitable financial structure, lacks of necessary system’s risk control tools, weak
human resource management, ineffective coordination activities due to irrational
structure, or weak banking system. For such rapid growth, it is easy to overlook small
details when establish a bank and expand the branch network. In another word, when a
bank does not have enough resource to be trained to manage the administration, it is
easy to lead to fraud and loss of property, for instance, lack of transparency in financial
report such as concealing or carrying forward, not accounting properly credit provision
expenses and so on. So, the government needs to restructure banking system through
the restructuring of banks and financial institutions. Without screening and
restructuring soon, the service disruption of the mass credit system is likely to happen
and difficult to control.
Moreover, elements from the macroeconomic regulatory policies which are
inefficient and predict able may lead to misleading and loose regulation, which would
result in ineffective banking system. For example, when there is a fast-growing
economy, if the government encourages the banks to increase credit without a
reasonable restraint policy, this would lead to lax bank lending which would result in
increasing NPL ratio and inefficient debt (NPL), and cause loss of liquidity to banks,
which can affect the entire system.
The objective of the restructuring
According to Alexander (1997), because of the financial crisis, it is necessary to
implement a restructuring for banking system to recover its functions in order to
continue to supply banking services to the economy normally.
In order to do that, the necessary tasks are:

12

- Maintaining the stability of the banking system to ensure the liquidity, the payments
and the operation of the banking system and the whole economy.
- Finding solutions for problems in a timely manner to prevent them from spreading.
- Restoring public financial intermediaries. This is the most basic goal of the
restructuring in order to ensure the stability with confidence towards the banking
system. When it is restructured, the liquidity of the entire system would be stable; the
level of bank credit would improve the confidence of all economic sectors for the
banking system.
- Minimizing the cost of restructuring for the central bank, deposit insurance or
government. Along with the objective of strengthening the banking system,
restructuring also aims at reducing costs related to the central bank, the deposit
insurance or the government to bring the most efficient restructuring process.
Conditions for a successful restructuring
It is only really necessary when the activities of credit organizations deviate
from their basic functions in the economy or the arising problems become threatening
or there is a risk of system collapse.
- When carried out, the restructuring should be viewed under different angles,
established a clear set of criteria which answers appropriately why it is needed to
restructure, which aspects need restructuring, how the banks will operate after the
restructuring, whether the banks will handle bad loans and prudent deployed on a
voluntary principle with a roadmap and specific steps.
- It must have an appropriate legal framework to allow the government to intervene in
the restructuring to ensure that the deposit insurance system has sufficient capital to
handle the crisis and can be used quickly and effectively. Beside liquidity issue, the
intervention process of the government will also raise a number of legal issues relating
to the existing shareholders due to corresponding laws that need to adjust. At the same

13

time, it is necessary to guarantee that the merger will guide the banks to better
development and does not interfere with the system. Daniel said that the government
can directly improve the recovery of banks by purchasing debts from weak banks.
This is a complicated process, so that the role of the central bank has to be
shown strongly and the intervention must be carried out quickly and in time (not an
important factor, related to the solution). The government must get a clear and
comprehensive process to monitor and evaluate the on - going bad debt situation and
the loss of liquidity in the banking system and avoid the passive situation. The
supervisory staffs need to be trained, equipped with the right set of skills to implement
the law and management. The supervisory authorities must be able to have full access
to the accurate information, to ensure that the restructuring is effective, transparent
with timely adjustments.
The general theory of the commercial-banking system restructuring
When the banking system has trouble and is in danger, the selection of policy is
feasible and effective to restore and reconstructing the system is an important matter to
suggest. Some of those recommendations have been implemented around the world.
Maseno (2014) shows that the addition to the system of capital through equity or
hybrids acquired the assets of the bank or the nationalization of the system. However,
various options in restructuring the banking system are rarely compared with each
other base on specific criteria and science.
There is controversy surrounding this issue as the bank's bad assets should be
sold before or after refinancing. Should hybrid securities or common stock in financial
restructuring for banks be used? Is it possible to carry out bank restructurings without
resorting to bankruptcy process or not using taxpayer money? People are required to