Bankers say the higher capital requirement imposed by the central bank may prove counterproductive by bringing even more risk to the banking system.

Hoang Van Toan, chairman of Dai Tin Bank (TRUSTBank), said the bank has secured approval to raise its registered capital to VND3 trillion from the current VND2 trillion.

The capital increase is to meet a new regulation that requires commercial banks to raise their capital to at least VND3 trillion (US$158.7 million) by the end of this year, which is triple the current minimum level of VND1 trillion. The central bank had said the measure is aimed at ensuring the safety of financial institutions.

However, Toan said capital increase does not necessarily mean improved safety.

The capital adequacy ratio has been standardized in accordance with international regulations to reflect the safety of a bank. So if the central bank wants to toughen safety standards, it can just raise the ratio for local banks to, for instance, 12 percent, he said.

Once a required ratio has been set, banks can either raise capital or downsize their operations. Those unable to meet the capital adequacy ratio can be forced to close or merge with other banks, Toan said.

The State Bank of Vietnam had said last month that it will raise the capital adequacy ratio for financial institutions and banks to 9 percent from 8 percent, starting on October 1. It also announced its intention to require higher capital requirements in the future. The plan is to increase the minimum capital requirement to VND5 trillion ($263.8 million) by 2012 and further double it in 2015.

But Thomas Tobin, CEO of HSBC Vietnam, said such requirements were too much and too soon.

Tobin said the Banking Work Group, which comprises 30 international financial companies operating in Vietnam, agreed that it was necessary to have minimum capital requirements to protect the market as well as the clients, but said the levels must be considered carefully.

A minimum chartered capital is required to ensure new banks are able to operate safely and grow, and large capital is also needed when the market is not stable. But after all, the capital level should match the size of each bank, he said.

Another banker who wished to remain unnamed said forcing banks to raise capital in a very short time was like upgrading small boats and making them go out to the big sea. “Will it be safer that way?” the banker asked.

The bankers warned that after commercial banks raised their capital, they may want to expand their business and take higher risks to ensure profits. This would increase the risk for the whole banking system, for instance, if small banks try to attract deposits too quickly and then struggle to find clients for loans, they said.

The general director of a bank in Ho Chi Minh City suggested banks without enough capital are given more time to improve their business. During that time their operations can be restricted to certain cities and provinces, he said.

This is a measure that can be taken before compelling small banks to merge, he said.