Financial Institutions and Banking

Financial Institutions & Banking

(i) Banking reform in Vietnam toward market and international financial integration

In recent years, there have been strict effects coming from inflation and economic recession, State Bank of Vietnam (SBV) and Commercial Banks (CB) in Vietnam have to put into operation the tasks of banking reform in Vietnam toward market and international financial integration as follows:

It can be seen in Asian Commercial Bank (ACB) in Vietnam that there are cross-shareholdings       between ACB and non-financial corporations, or international financial institutions, or between ACB and Sacombank. Not only did the event happen in Vietnam, but the said banks have set up representative offices in other countries. They use offices to gain experience in new markets (e.g. derivatives), to be in a good position to take advantage of any regulatory reform in Japan, which finally came with ‘‘Big Bang’’ in 1996.  

(ii) Reform in operation and governance

Mervyn King has a simple rule for banking reform. "The only way we can sustain a large financial sector is if it does not pose a burden on the taxpayer," the Governor of the Bank of England told the Treasury Select Committee (TSC) last week. Unfortunately, it's a simple rule that's not so simple to apply. Regulators across the world are busy turning conventional thinking on its head in an effort to fix a system that has been built on the premise of free taxpayer guarantees. "

To the above-mentioned factors, Vietnamese banks are in the tasks of reform their operations and governance pursuant to the guidelines from SBV to get rid of banking risks in their domestic and international operations. It is known that, “Most  studies  show  that  the  banking  sector  underperforms  compared  to  other  sectors; and  a  few  argue  banks  are  in  an  irreversible  decline.  Some go further, claiming that governments’ (or central banks’) control over interest rates, and therefore price stability, is under threat”.  All commercial banks in Vietnam reform their operation and governance system. They have applied the lesson learnt from The Goldman Sachs case which reviews the lessons learned in the prolonged transition from being a small, private investment bank to  a  shareholder  bank,  and  the  implications  it  had  for  governance  and  performance.  It covers a diverse set of topics such as the differences between relationship and transactional banking, how diversification into off-balance sheet banking may still leave a bank exposed to volatile interest rates, and corporate culture. They know how to apply new sophisticated Information Technology into their operations and governing system. They have launched the strategy of Just-In-Time (JIT) that means they offer the right products with the accurate quantity at the right time to the right place. And above all, they have to reform with the approach called the three-pronged approach – "three-legged stool". The first leg is reform of capital and liquidity. The second, creating a system that allows an orderly failure of banks deemed "too big to fail". The third is a fundamental rethink of how banks are structured, which may mean anything from breaking them up to changing their funding models.

(iii) Vietnamese bank restructuring - progress & orientation

Vietnamese banks have to restructure their organizations and strategies so that they can integrate to the worldwide operations and business. The top-down process starts with global target earnings and risk limits converted into signal to business units. These signals include target revenues, risk limits and guidelines applicable to business unit policies. The monitoring and reporting of risks in bottom-up oriented, starting with transactions, and ending with consolidated risks, income and volumes of transactions. The process involves the entire banking hierarchy from top to bottom, to turn global targets into signals to business units, and from bottom to top, to aggregate risks and profitability and monitor them. Vietnamese Banks have been in their orientation of changes their management on many respects of operations such as Asset–Liabilities Management (ALM). The core functions of a bank are more efficiently carried out by a command organizational structure, because loans and deposits are internal to a bank. Such a structure is also efficient if banks are participating in organized markets. These ideas were developed and extended by  Alchian  and  Demsetz  (1972),  who  emphasized  the  monitoring  role  of  the  firm  and its  creation  of  incentive  structures.  Williamson (1981) argued that under conditions of uncertainty, a firm could economize on the costs of outside contracts. Recapitalization and new procedures designed to improve loan restructuring, provisioning and better corporate governance.

(iv) Opportunities for Vietnamese banks

If certain banks trade in international banking services, it is best explained by appealing to the principle of competitive advantage. Banks are exploiting opportunities for competitive

advantage  if  they  offer  their  customers  a  global  portfolio  diversification  service  and/or global credit risk assessment. The same can be said for the provision of international money transmission facilities, such as global currency/debit/credit facilities. The Web will offer banks great opportunities. And Vietnamese banks should know how to change threats into opportunities.  They are by no means independent, and include electronic and financial innovations including the introduction of ‘‘e-cash’’, the growth of ‘‘non-banks’’ and the trend towards consolidation within national banking sectors. The  reorganization  of  the  banking  system  after  1992,  with  its  emphasis on  corporate governance and profitability, is indicative of a move away from government interference with the day to day management of bank activities. However, the nationalized banks continue to control a large portion of deposits and loans, giving the state an option to interfere with how they are run. The influence of powerful local governments on the lending policies of credit coops is unhealthy. Nor does there appear to be any mechanism that allows new private banks to enter the system.

Nguyen Duy Phong, a Ho Chi Minh City-based analyst at ACB Securities Inc. wrote in a research note obtained today. Five-year yields fell two basis points, or 0.02 percentage point, to 12.71 percent, according to a daily fixing from banks compiled by Bloomberg. The dong was unchanged at 20,550 per dollar as of 3:35 p.m. in Hanoi, according to prices from banks compiled by Bloomberg. The central bank set the reference rate at 20,618 today, unchanged from June 10, its website showed. The currency is allowed to trade up to 1 percent on either side of the official rate. The central bank has recently introduced a series of new rules to support the local currency. A stabilized currency market has allowed the State Bank of Vietnam to buy 1.2 billion US dollars in May for its foreign exchange reserves. A report published on the government website Saturday says the central bank had already made a net purchase of $877 million in the first four months of the year (Extracted from www.thanhnien.news.online)

(v) Challenges to Vietnamese banks

Vietnamese banks are looking forward to the promulgation of a healthy business environment, a set of required standards and conditions to be applied for banks in operating in Vietnam so that they can avoid facing risk in banking as follows:

Bessis said in “Risk Management in Banking that Banking risks are:

Credit; Interest rate; Market; Liquidity; Operational; Foreign exchange; and other risks: country risk, settlement risk; performance risk, …”

The dong’s recent stability will likely be temporary and it will resume weakening by year-end, Credit Suisse Group AG said Thursday as it cut its growth forecast for Vietnam.

The dong will weaken 1.4 percent to 20,900 per dollar by year-end and reach 21,400 by the end of 2012, according to the prediction, which said the currency’s recent steadiness was driven more by administrative measures than monetary tightening. “There are many reasons to believe that this is only a temporary phenomenon before another episode of instability,” wrote Santitarn Sathirathai, a Singapore-based economist at Credit Suisse. “A combination of higher inflation, slower growth, and signs of financial distress are likely to spark concerns among investors in the coming months.” The dong, which was devalued in February for the fourth time since 2009, has traded between 20,346 and 20,760 per dollar this month, a range of less than 2 percent, according to data compiled by Bloomberg. Vietnam’s central bank said this month it would increase the reserve-requirement ratio on US dollar deposits by a percentage point, while also cutting the interest rate cap on dollar deposits by individuals to 2 percent from 3 percent and for institutions to 0.5 percent from 1 percent. The currency has benefited from a tighter monetary policy, and from the curbing of trading in gold and foreign exchange outside the banking system, the International Monetary Fund said last week. Increasing dollar-reserve ratios and capping dollar-deposit rates have driven the relative calm in the Vietnamese currency, Sathirathai wrote. The currency’s stability may provide a “false sense of security,” he wrote.

Surging inflation

Vietnam’s inflation rate reached 19.78 percent in May, the highest since 2008. The economy will probably expand by about 5.6 percent in the first half, Deputy Minister of Planning & Investment Cao Viet Sinh said last week. The government expects the pace of expansion to accelerate in the second half, and is forecasting full-year growth of 6 percent, down from an original target of 7 to 7.5 percent. Credit Suisse expects “the negative impact on growth” from tightening measures to become more visible in the third quarter, with some companies “running into financial distress.”

“While a lack of quality data makes it difficult to gauge the extent to which banks and firms might be facing difficulties, news from local media suggests that several firms’ balance sheets are being squeezed,” wrote Sathirathai. “It is likely to be only a matter of time before we see this in the macro data.”

Entrenched expectations

The dong still faces entrenched expectations that it may weaken, Benedict Bingham, the IMF’s senior resident representative in Vietnam, said at a conference last week. Those expectations are driven by concern over whether Vietnam will sustain its current monetary-policy stance, whether the government is committed to cutting its fiscal deficit, and over “vulnerabilities in the corporate and banking sector,” he said. The recent measures discouraging the use of the dollar “will not prevent funds from leaving the country when the macro fundamentals are in question,” Sathirathai wrote. “It is too early to argue that the worst is behind us.” (Extracted from www.thanhnien.news.online)

Vietnamese banks are in the above-mentioned challenges.    

(vi) Development orientation of Vietnam’s commercial banks system toward 2020

Banks in emerging markets are engaged in the core activities of intermediation and the

provision of liquidity. But they have a different agenda from those in the developed world because most face a different set of challenges. No single model of banking applies to all

‘‘emerging markets’’, though many share similar problems such as shortages in capital and trained labor. They have their fair share of crises, too. In addition, there are different forms of banking. Islamic banking is one of the most important. Though not limited to emerging markets, Islamic banking has developed most in countries such as Pakistan, Iran and Malaysia.

Vietnamese Banks should pay attention to key managerial issues in banking: financial risk management and the prudential regulation of banks. Though there is risk in any business operation, banks face a number of risks that are typical of most non-financial firms. The management of market and credit risk is singled out for special attention, examining

issues such as whether techniques like risk adjusted return on capital (RAROC) and value at risk (VaR) quantify and contain risk. The chapter concludes with a review of how risk management is organised in a major bank and the key tools it employs. Appropriate risk management techniques, both on- and off-balance sheet, are absolutely crucial to banks’ profitability, and their long-term survival. The way a bank manages its risk and how it is regulated are increasingly interdependent. In 2001 the government and central bank announced a reform plan for the banking sector, including improved supervision by the central bank, the application of more sophisticated risk management techniques, greater corporate governance/transparency, setting up credit bureaux so all banks have access to credit histories, and a deposit insurance scheme for private banks. The development partners urged the government to provide better social protections to poor and vulnerable people during periods of economic instability and high inflation. International development partners hailed Vietnam's initial success in restoring economic stability, on Thursday, and called for further reforms from 2011 to 2020.   

References

Bessis, J. (2002). Risk Management in Banking. John Wiley & Son, England, pp. 13-22

Alchian, A. and H. Demsetz (1972), ‘‘Production, Information Costs and Economic      Organisation’’, American Economic Review, 62, 777–795.

Williamson, O. (1981),  ‘‘The   Modern    Corporation:    Origins,  Evolution,   Attributes’’,      Journal  of Economic Literature, 19, 1537–1568.

  

www.acb.com.vn (Press Release) Retrieved June 18, 2011

www.thanhnien.news.online Retrieved June 18, 2011