Ho Chi Minh City, 5 November 2025
On 30 June 2025, the State Bank of Vietnam (SBV) issued Circular No. 14/2025/TT-NHNN on capital adequacy ratios applicable to commercial banks and foreign bank branches (“Circular 14/2025”), replacing Circular No. 41/2016/TT-NHNN (“Circular 41/2016”). Built upon the foundation of its predecessor while aligning more closely with Basel III principles, the new regulation refines not only the technical calculation of the capital adequacy ratio (CAR) but also codifies key Basel III standards on capital quality, transparency, and risk governance. This marks a significant step toward modernizing Vietnam’s banking supervision framework.
Highlights
Circular 14/2025 introduces several notable changes from Circular 41/2016 by incorporating concepts aligned with the Basel III framework:
| Circular 41/2016 | Basel III Standards | Circular 14/2025 | ||
| Tier 1 Core Capital/ Common Equity Tier 1 | Ratio | N/A | ≥ 4.5% | ≥ 4.5% |
| Formular | N/A | Common Equity Tier 1 (CET 1) / RWA | Tier 1 Core Capital / [RWA + 12,5 x (KOR + KMR)] | |
| Tier 1 Capital | Ratio | N/A | ≥ 6% | ≥ 6% |
| Formular | N/A | [CET 1 + (Additional Tier 1 Capital – Regulatory Adjustments 1)] / RWA | [Tier 1 Core Capital + (Additional Tier 1 Capital – Regulatory Adjustments 1)] / [(RWA + 12,5 x (KOR + KMR)] | |
| Capital Adequacy Ratio (CAR) | Ratio | ≥ 8% | ≥ 8% | ≥ 8% |
| Formular | Capital (Equity) / [(RWA + 12,5 x (KOR + KMR)] | [Tier 1 Capital + (Tier 2 Capital – Regulatory Adjustments 2)] / RWA | [Tier 1 Capital + (Tier 2 Capital – Regulatory Adjustments 2)] / [(RWA + 12,5 x (KOR + KMR)] | |
| Capital Conservation Buffer (CCB) | N/A | CCB is set at 2.5% of RWA.
CCB is designed to constrain capital distributions only, not the operation of the bank. |
Consistent with the Basel III framework, the CCB is derived from the remaining portion of the Tier 1 Core Capital Ratio after meeting the minimum capital adequacy requirements (including the Tier 1 Core Capital Ratio, Tier 1 Capital Ratio, and CAR). It represents the minimum buffer that a bank must maintain to remain eligible for profit distribution. Specifically:
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| Countercyclical Capital Buffer (CCyB) | N/A | CCyB is an extension of the CCB, ranging from 0% to 2.5% of RWA. It is designed to ensure that capital requirements for banks reflect the macro-financial environment in which they operate, thereby enhancing the resilience of the banking sector across economic cycles. | Consistent with the Basel III framework, the CCyB under Circular 14/2025 is to be determined by the Governor of the State Bank of Vietnam (SBV) from time to time, within a range of 0% to 2.5%, depending on prevailing macroeconomic and credit conditions. | |
Assessment
In general, Circular No. 14/2025 introduces several key regulatory upgrades that bring Vietnam’s capital adequacy framework closer to Basel III standards:
First, the Circular fundamentally reshapes the capital structure by introducing separate ratios for Tier 1 Core Capital and Tier 1 Capital while tightening eligibility criteria for all capital components. Compared to Circular 41/2016, the new framework not only retains the traditional two-tier structure, Tier 1 and Tier 2 Capital, but also tightens the quality standards for eligible capital to enhance banks’ resilience. Specifically, Tier 1 is now divided into Core Tier 1 and Additional Tier 1 with stricter conditions on permanence and conversion upon insolvency, while Tier 2 capital is subject to more rigorous standards on maturity, loss recognition, and amortization. This marks a clear shift toward Basel III alignment, addressing long-standing weaknesses in the capital structure and reducing reliance on formalistic capital elements.
Second, the Circular introduces, for the first time, key capital buffers including the CCB and the CCyB. Profit distribution is now directly tied to full compliance with both minimum capital and buffer requirements. Banks failing to maintain sufficient buffers will be restricted from distributing profits, thereby incentivizing capital retention and enhancing resilience to market shocks. This change goes beyond technical adjustment, it reflects a strategic move toward preventive supervision, stronger financial discipline, and more sustainable corporate governance shifting from reactive supervision to proactive, risk-based capital management aligned with Basel III standards.
Finally, Circular 14/2025 refines the Risk-Weighted Asset (RWA) calculation methodology, introducing a more risk-sensitive approach. Instead of broad, uniform risk weights as in Circular 41/2016, the new framework differentiates exposures by asset type, collateral quality, Loan-to-Value (LTV) ratio, and repayment sources. For example, loans for social housing with low LTV may carry a 20% risk weight, while high-risk or non-qualifying exposures can reach 150%. This granular approach improves the accuracy of risk measurement and strengthens the link between asset quality and capital adequacy.
Conclusion
Circular No. 14/2025 marks a major step in Vietnam’s banking reform, shifting from a formalistic to a substance-based supervisory approach aligned with Basel III standards. By tightening capital recognition, revising risk-weighted asset calculations, and raising collateral quality requirements, it aims to enhance system resilience and promote a more stable, sustainable capital structure. That said, the new framework also poses capital challenges, as banks must strengthen their capital base and maintain larger buffers, a short-term strain that should ultimately reinforce long-term financial stability and market confidence.
