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 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 EFFICIENCY
- THE CASE OF VIETNAM
Industry: Banking and Finance
Industry ID: 83.40.201

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


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TABLE OF CONTENT
STATEMENT OF AUTHORSHIP ................................................................ i
LIST OF TABLES .......................................................................................... v
LIST OF FIGURES ....................................................................................... vi
ABBREVIATION ..........................................................................................vii
ABSTRACT ................................................................................................. viii
TÓM TẮT LUẬN ÁN .................................................................................... ix
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 ..................................................................................... 5

1.4.1

Data ........................................................................................................................... 6

1.4.2

Methodology ............................................................................................................. 6

1.5

STRUCTURE OF THE THESIS ..................................................................................... 6

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 .................................................................................................. 15

2.2.3.

The related hypothesis ........................................................................................... 21

2.3.

METHOD OF BANK RESTRUCTURING AND EFFICIENCY ............................ 23

2.3.1.

The relationship between bank restructuring and efficiency ................................. 23

2.3.2.

Bank restructuring methods and bank efficiency ................................................... 27

2.4. THE STRUCTURE AND PERFORMANCE RELATIONSHIP IN BANKING SYSTEM
................................................................................................................................... 32
2.5.

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

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


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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 .......................................................................... 49

3.1.3.4.

Establishment of Asset Management Company ................................................. 56

3.1.3.5.

Loosen room for foreign investors ...................................................................... 58

3.2.

CHAPTER SUMMARY ........................................................................................... 60

CHAPTER 4. DATA AND METHODOLOGY ......................................................... 61
4.1.

INTRODUCTION ..................................................................................................... 61

4.2.

DATA AND SAMPLE .............................................................................................. 61

4.3.

METHODOLOGY FOR RQ1, RQ2.......................................................................... 66

4.3.1.

Data Envelopment Analysis ................................................................................... 67

4.3.1.3.

The Three-Stage Data Envelopment Analysis .................................................... 70

4.3.1.4.

Conclusion .......................................................................................................... 71

4.3.2.

Model ......................................................................................................................... 71

4.3.2.1.

RQ1: The effect of restructuring methods on banking performance ................... 71

4.3.2.2.

RQ2: The effects of reform to structure and performance .................................. 73

4.3.3.

Variables and descriptive statistics ............................................................................ 75

4.3.3.1.

Variables ............................................................................................................. 75

4.3.3.2.

Descriptive statistic ............................................................................................. 79

4.4.

ROBUSTNESS TEST ............................................................................................... 83

4.4.1.

SFA regression....................................................................................................... 83

4.4.2.

Hausman test .......................................................................................................... 85

4.5.

CHAPTER SUMMARY ........................................................................................... 86

CHAPTER 5. RESULTS AND DISCUSSION OF THE RESULTS ...................... 88
5.1.

INTRODUCTION ..................................................................................................... 88

5.2.

EMPIRICAL RESULTS FOR RQ1 .......................................................................... 88

5.2.1.

Stage 1: Initial results ............................................................................................ 88

5.2.2.

Stage 3: DEA results on adjusted data ................................................................... 96

5.3.

EMPIRICAL RESULTS FOR RQ2 .......................................................................... 98

CHAPTER SUMMARY ........................................................................................................ 104

CHAPTER 6. CONCLUSION ................................................................................... 106
6.1.

INTRODUCTION ................................................................................................... 106

6.2.

REVIEW OF RESEARCH QUESTIONS, HYPOTHESES AND FINDINGS ...... 106

iv
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? ........... 108
6.2.2.
performance?

RQ2: What are the effects of reform on Vietnam's commercial bank structure and
............................................................................................................................. 109

6.3.

CONTRIBUTIONS ................................................................................................. 110

6.4.

IMPLICATIONS ..................................................................................................... 111

6.5.

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

6.6.

FUTURE RESEARCH DIRECTIONS ................................................................... 112

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


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LIST OF TABLES
Table 2.1: Summary of the tworesearch questions and their hypotheses ............................ 37
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 ...................................................................... 47
Table 3.6: M&A of Vietnamese banks ................................................................................ 49
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 ................................... 56
Table 4.1: Restructuring measures of Vietnamese banks .................................................... 62
Table 4.2: The control variables include six country specific factors and bank characteristic
............................................................................................................................................. 77
Table 4.3: Variables and definition in using model of testing structure and performance of
banking system .................................................................................................................... 78
Table 4.4. Descriptive statistics of step 1 and step 3 DEA’s variables................................ 80
Table 4.5: Variables used to estimate the structure-performance interaction. ..................... 81
Table 5.1: SFA regression step 2 ......................................................................................... 94
Table 5.2: Condition numbers - testing for multicollinearity .............................................. 99
Table 5.3: Hausman test results ........................................................................................... 99

Table 5.4: Market-power vs. efficient-structure ................................................................ 100
Table 5.5: Necessary condition estimation for ES hypothesis in stage 1 .......................... 101
Table 5.6: The quiet life hypothesis-estimation................................................................. 102
Table 6.1: Research questions, related hypotheses and results .......................................... 106


vi

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 ................ 89
Figure 5.2. The comparing of performances between non-restructured banks and
restructured banks) ............................................................................................ 91


vii

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


viii

ABSTRACT
The link between bank restructuring and bank efficiency is an appealing area
that draws strong attention from both academic and industry practitioners. Vietnam
offers an interesting case to analyze this link however this issue remains unexplored.
This thesis investigates the association between bank restructuring and bank
efficiency in Vietnamese banking system. The thesis employ the Data Envelopment
Approach and Stochastic Frontier approach. Our data sample includes 26 commercial
banks covering the period 1999-2015.
The finding indicates that the government’s restructuring policies in the first
stage did not benefit the banks implementing the restructuring methods. Regarding to
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. Besides, it is found that the bank efficiency declines
during the restructuring period not only because of the transition cost but also due to
the changes of other environment variables, such as financial crisis or domestic

economy slowdown.
The thesis contributes to the banking literature by examining the allocative and
technical efficiency of Vietnamese banking system in the recent period (2001-2015).
It shows that decreasing the government's control of 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 world crisis. Through the thesis,
the indicated advantage results are keys to find better solutions for restructuring the
banking system. Furthermore, the rate of privatization also needs to be considered to
create the restructuring theory from the privatization of state-owned commercial
banks. The thesis has relevant policy implications. Bank restructuring is an important
program for emerging countries to build a prudential financial system. Evaluating the
association between restructuring program and


ix

bank efficiency is important to achieve a successful implementation of government
policy.
Key words: Restructuring, Bank efficiency, Integration, Financial crisis,
Economy

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 q 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 cịn 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


x
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 cơng chính sách của chính
phủ.
Từ khóa: Tái cấu trúc, Hiệu quả hoạt động ngân hàng, Hội nhập, Khủng hoảng
tài chính, Nền kinh tế


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 jointstock 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 trade-offs. Krishnasamy
et al. (2004) studied production efficiency of Malaysia’s post-merger 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.
The studies presented above carried out the research about restructuring methods
in many countries with different economies.However, no study has examined the


4
influence of the bank restructuring methods on the restructuring process in a small

transitioning economy like Vietnam. 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 high
concentration countries followed the market power hypothesis and the X-efficient
hypothesis.
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
particular 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?

5

1.3

RESEARCH OBJECTIVES
There have been a number of 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 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.

6

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
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
1

International monetary fund

2

Data envelopment analysis

3

Stochastic Frontier Analysis

4

General Least Squares

5

Ordinary Least Squares


7
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.


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
speaking, 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 microcredit 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 society in one country.
According to some studies, restructuring commercial banks has two characteristics:


10
- 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
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


11
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:
- 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.


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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
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


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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
participate in the process of rescuing the banks or not? However, there are three issues
which the economists completely agree with:
- The restructuring, in theory, can be carried out successfully without the contribution of
the taxpayers.
- If the debt contract is not renegotiated, the use of tax money is needed, however, in a
number of plans which can proceed with the strategy that will cost more than other
strategies.