The Prime Minister has told the State Bank of Vietnam (SBV) to consider lowering the foreign currency holdings in the banking system in an effort to fight dollar speculation by commercial banks.

The shortage of U.S. dollars on the market since early this year has been attributed to speculative dollar holdings among not only enterprises and individuals but also banks that are allowed to keep dollars in their accounts.

In the Government meeting on April 7, the Prime Minister asked the central bank to issue new regulations on the foreign currency holdings of banks with an aim to cut short their positions.

This time, banks’ foreign currency holdings are confined to 30%, meaning a bank with equity of VND100 billion can hold the dollar equivalent of a maximum VND30 billion. The ratio was regulated in 2002 when credit institutions’ equity remained low.

However, banks’ equity has strongly increased now, so many experts have suggested the central bank lower the foreign currency holdings at banks to limit speculation to help stabilize the foreign exchange market.

Deputy central bank governor Tran Minh Tuan in a meeting here in late February said that as a bank with equity of VND10 trillion could hold some US$150 million, ten banks of that size could hold up to US$1.5 billion, thus aggravating the dollar shortage.

A member of the National Financial Supervisory Commission said the commission had suggested the Government lower credit institutions’ foreign currency holdings to 20%. However, the ratio will be decided by the central bank, he added.

A private banker said that if banks’ foreign currency position is lowered, their profits will be impacted as their activity in money dealings will be restricted.

Meanwhile, the foreign exchange director of a foreign bank said that for the time being, a reduction in banks’ foreign currency positions would not affect their business much. It is because most banks do not keep the foreign currency position at 30% given the stable foreign exchange market now.

The foreign exchange market has turned more stable, closing the gap between the official and unofficial forex rates between Vietnam’s dong and the U.S. dollar. The dollar on the unofficial market on Thursday fell by VND50 to VND20,950 while the price quoted at banks was VND20,925.

The Government has also asked the central bank to take more measures to stabilize the foreign exchange market and reduce dollarization in the country. Those measures include reducing the amount of foreign currencies a person can carry abroad undeclared from US$7,000 to US$5,000.

Source: Saigon Economic Times.