OVERVIEW

Part 2

Instructor: Dr. Bùi Thành Trung

MAIN CONTENTS
Function of financial markets

Structure of financial markets

Financial market instruments

Internationalization of financial markets

Function of financial intermediaries: indirect finance

Types of financial intermediaries

Regulation of the financial system

MAIN CONTENTS
Function of financial markets

Structure of financial markets

Financial market instruments

Internationalization of financial markets

Function of financial intermediaries: indirect finance

Types of financial intermediaries

Regulation of the financial system

Core Function: Channeling Funds

➢ Financial markets serve the essential economic function of transferring funds

from:
▪ Lender-savers (households, firms, governments with surplus funds)
▪ To borrower-spenders (businesses, governments, households needing
funds)
➢ This process enables:
▪ Investment in productive opportunities
▪ Economic growth and efficiency
▪ Better allocation of capital
Two Main Routes of Finance

➢ Direct Finance
▪ Borrowers issue securities (e.g., bonds, stocks) directly to lenders.
▪ Example: A company sells bonds to investors to raise capital.

➢ Indirect Finance
▪ Involves financial intermediaries (e.g., banks, insurance companies).
▪ Intermediaries collect funds from savers and lend to borrowers.
▪ This is the dominant form of finance in most economies.
Why Financial Markets Matter

➢ Efficiency: Funds flow to those with the best investment opportunities.

➢ Liquidity: Markets allow assets to be easily bought/sold.

➢ Risk Sharing: Investors can diversify and manage risk.

➢ Consumer Welfare: People can borrow to make timely purchases (e.g., homes,
education).

➢ Economic Stability: Well-functioning markets reduce financial frictions.

Consequences of Market Failure

➢ When financial markets break down (e.g., during crises), it leads to:

▪ Reduced investment

▪ Lower economic output

▪ Potential political and social instability

Real-World Examples

➢ Carl the Carpenter: Needs $1,000

for a tool that increases productivity.
Without financial markets, he and the
saver can’t connect.

➢ Young couple buying a house: Can

borrow now and repay over time,
improving life quality and economic
activity.
MAP

MAP
MAIN CONTENTS
Function of financial markets

Structure of financial markets

Financial market instruments

Internationalization of financial markets

Function of financial intermediaries: indirect finance

Types of financial intermediaries

Regulation of the financial system

Structure of financial markets

➢ Debt and equity Markets

➢ Primary and Secondary Markets

➢ Exchanges and Over-the-Counter Markets

➢ Money and Capital Markets

Debt and Equity Markets
Debt Markets

➢ Involve fixed payments over time

(interest + principal).
➢ Instruments include bonds,
mortgages, and loans.
➢ Debt holders are creditors, not
owners.
➢ Less risky but limited upside.
MAP

MAP
Debt and Equity Markets
Equity Markets

➢ Involve ownership claims in a firm

(e.g., stocks).
➢ Equity holders share in profits and
losses.
➢ No maturity date; returns come via
dividends and capital gains.
➢ Higher risk, but potential for higher
returns.
➢
➢ Key Insight: Debt markets are
typically larger in volume, but equity
markets are more visible and volatile.
MAP

MAP
Debt and Equity Markets
Key Insight:

➢ Debt markets are typically larger in

volume,

➢ But equity markets are more visible

and volatile.

MAP

MAP
Primary and Secondary Markets

➢ Primary Market
▪ Where new securities are issued.
▪ Firms/governments raise capital directly.
▪ Facilitated by investment banks through underwriting.

➢ Secondary Market
▪ Where existing securities are traded.
▪ Provides liquidity and price discovery.
▪ Examples: NYSE, NASDAQ, bond markets.
Primary and Secondary Markets
Key Insight:

➢ While primary markets raise capital,

secondary markets ensure that
securities remain attractive by
enabling resale.

MAP

MAP
Exchanges and Over-the-Counter (OTC) Markets

➢ Exchanges
▪ Centralized platforms with standardized rules.
▪ Transparent pricing and high liquidity.
▪ Examples: NYSE, Chicago Board of Trade.

➢ OTC Markets
▪ Decentralized; trades occur directly between dealers.
▪ More flexible but less transparent.
▪ Common for bonds, derivatives, and foreign exchange.
Exchanges and Over-the-Counter (OTC) Markets

Key Insight:

➢ Exchanges offer transparency and

regulation, while OTC markets offer
flexibility and customization.

MAP

MAP
Money and Capital Markets

➢ Money Market
▪ Deals with short-term debt instruments (maturity < 1 year).
▪ Instruments: Treasury bills, commercial paper, repos.
▪ Low risk, high liquidity.

➢ Capital Market
▪ Deals with long-term securities (maturity > 1 year).
▪ Instruments: Stocks, corporate bonds, mortgages.
▪ Higher risk, potential for greater returns.
Money and Capital Markets
Key Insight:

➢ Money markets are used for short-

term funding and liquidity
management,

➢ WHILE capital markets support long-

term investment and growth.

MAP

MAP
MAIN CONTENTS
Function of financial markets

Structure of financial markets

Financial market instruments

Internationalization of financial markets

Function of financial intermediaries: indirect finance

Types of financial intermediaries

Regulation of the financial system

Financial market instruments

Money Market instruments Capital Market instruments

• Treasury Bills • Stocks

• Negotiable Bank Certificates of • Mortgages and Mortgage-Backed
Deposit Securities
• Commercial Paper • Corporate Bonds
• Repurchase Agreements • Government Securities
• Interbank lending • State and Local Government Bonds
• Consumer and Bank Commercial
Loans
MONEY MARKET INSTRUMENTS
Money Market Instruments

➢ They are short-term debt securities (maturity < 1 year)

▪ used by governments, financial institutions, and corporations

▪ to manage liquidity and short-term funding needs.

➢ They are generally low-risk, highly liquid, and widely traded.

Treasury Bills (T-Bills)

➢ Issuer: U.S. Government

➢ Maturity: 1, 3, or 6 months
➢ Interest: No periodic interest; sold at
a discount and redeemed at face
value.
➢ Example: Buy for $9,000, redeem
for $10,000 in 6 months.

MAP

MAP
Treasury Bills (T-Bills)
Features:

➢ Most liquid and safest money market

instrument.
➢ Used to finance federal government
operations.
➢ Held mainly by banks, but also by
households and corporations.

MAP

MAP
Negotiable Bank Certificates of Deposit (CDs)

➢ Issuer: Commercial Banks

➢ Maturity: Typically several months

to a year.

➢ Interest: Fixed annual interest;

principal repaid at maturity.

MAP

MAP
Negotiable Bank Certificates of Deposit (CDs)

Features

➢ Can be traded in secondary markets

(negotiable).

➢ Important funding source for banks.

➢ Held by corporations, mutual funds,

and government agencies.
MAP

MAP
Commercial Paper

➢ Issuer: Large corporations and banks

(e.g., Microsoft, GM)

➢ Maturity: Usually less than 270

days.

➢ Interest: Discounted or interest-

bearing.
MAP

MAP
Commercial Paper

Features

➢ Unsecured short-term debt.

➢ Used for working capital and short-

term obligations.

➢ Rapid growth in recent decades due

to corporate demand.
MAP

MAP
Repurchase Agreements (Repos)

➢ Issuer: Banks and financial

institutions

➢ Maturity: Typically overnight to a

few weeks.

MAP

MAP
Repurchase Agreements (Repos)

Mechanism:

➢ Seller agrees to repurchase securities

(usually T-Bills) at a higher price.

➢ Functions as a secured loan with

collateral.

MAP

MAP
Repurchase Agreements (Repos)

Features:

➢ Used by corporations to earn short-

term interest.

➢ Important source of short-term

funding for banks.

MAP

MAP
Interbank Lending (Federal Funds)

➢ Issuer: Banks lending to other banks

➢ Maturity: Overnight
➢ Purpose: To meet reserve
requirements at the Federal Reserve.
➢ Interest Rate: interbank rate
(Federal Funds Rate) — a key
indicator of monetary policy.

MAP

MAP
Interbank Lending (Federal Funds)

Features:

➢ Sensitive to liquidity conditions in

the banking system.

➢ Not issued by the government or Fed,

but facilitated through Fed accounts.

MAP

MAP
CAPITAL MARKET INSTRUMENTS
Capital Market Instruments

➢ They:
▪ are long-term financial securities (maturity > 1 year)
▪ used by corporations, governments, and households
▪ to raise funds for investment and development.

➢ These instruments typically carry higher risk and return than money market
instruments.
Stocks

➢ Type: Equity instrument

➢ Issuer: Corporations
➢ Features:
▪ Represent ownership in a company.
▪ Entitle holders to dividends and voting
rights.
▪ No maturity date; considered long-term.
▪ Value fluctuates with company
performance and market conditions.
➢ Market Value (2010): $17 trillion
➢ Held by: Individuals, pension funds, mutual
funds, insurance companies. MAP

MAP
Mortgages and Mortgage-Backed Securities

Mortgages:

➢ Loans to purchase real estate.

➢ Secured by the property itself.

➢ Issued by banks, savings institutions,

insurance companies.

MAP

MAP
Mortgages and Mortgage-Backed Securities

Mortgage-Backed Securities (MBS):

➢ Bonds backed by pools of mortgages.

➢ Investors receive payments from

mortgage interest and principal.

➢ Played a major role in the 2007–2009

financial crisis.
MAP

MAP
Mortgages and Mortgage-Backed Securities

Government Role:

➢ Agencies like Fannie Mae, Freddie

Mac, and Ginnie Mae

▪ support the market by buying

mortgages and issuing MBS.

MAP

MAP
Corporate Bonds

➢ Issuer: Corporations
➢ Features:
▪ Long-term debt instruments.
▪ Fixed interest payments (typically
semiannual).
▪ Face value repaid at maturity.
▪ Some are convertible into stock.
➢ Market Size (2010): $2.98 trillion
➢ Held by: Insurance companies,
pension funds, households.
MAP

MAP
Government Securities

➢ Issuer: U.S. Treasury

➢ Type: Long-term bonds
➢ Purpose: Finance federal deficits
➢ Features:
▪ Highly liquid and widely traded.
▪ Considered risk-free due to
government backing.
➢ Market Size (2010): $2.8 trillion
➢ Held by: Federal Reserve, banks,
households, foreign investors.
MAP

MAP
State and Local Government Bonds (Municipal Bonds)

➢ Issuer: State and local governments

➢ Purpose: Fund infrastructure (schools,
roads, etc.)
➢ Features:
▪ Interest is tax-exempt (federal and
often state).
▪ Attractive to high-income investors
and banks.
➢ Market Size (2010): $1.8 trillion
➢ Held by: Banks, wealthy individuals,
insurance companies.
MAP

MAP
Consumer and Commercial Loans

➢ Issuer: Commercial banks and

finance companies

➢ Types:
▪ Consumer loans: Personal
borrowing for goods, services, or
education.
▪ Commercial loans: Business
borrowing for operations or
expansion. MAP

MAP
Consumer and Commercial Loans

➢ Features:
▪ Not traded in markets; held by
lenders.
▪ Important source of credit in the
economy.
➢ Market Size (2010):
▪ Consumer loans: $710 billion
▪ Bank commercial loans: $1.03
trillion
MAP

MAP
MAIN CONTENTS
Function of financial markets

Structure of financial markets

Financial market instruments

Internationalization of financial markets

Function of financial intermediaries: indirect finance

Types of financial intermediaries

Regulation of the financial system

Internationalization of financial markets

➢ International bond market: foreign bonds, eurobond, eurocurrencies, eurodollars

➢ World stock markets

➢ Global financial markets have become increasingly interconnected, with capital

flowing across borders more freely than ever.

➢ This trend has reshaped how corporations raise funds and how investors allocate
capital.
Global: Are U.S. capital markets losing their edge?

Trend:

➢ U.S. dominance in global financial

markets has declined.

MAP

MAP
Global: Are U.S. capital markets losing their edge?

Evidence:

➢ London and Hong Kong now handle

more IPOs than NYSE.
➢ Listings on U.S. exchanges are
shrinking; foreign listings are
growing.
➢ European debt markets surpass U.S.
markets in new corporate bond
issuance.
MAP

MAP
Global: Are U.S. capital markets losing their edge?

Causes:

➢ Faster tech adoption in foreign

markets.
➢ Post-9/11 immigration restrictions.
➢ Legal risks (e.g., lawsuits in U.S.
courts).
➢ Sarbanes-Oxley Act (2002):
Increased compliance costs,
especially for small firms.
MAP

MAP
Global: Are U.S. capital markets losing their edge?

Debate:

➢ Whether regulation is the main

reason for the decline remains
inconclusive.

MAP

MAP
Internationalization

Foreign Bonds

➢ Bonds sold in a foreign country,

denominated in that country’s
currency.
➢ Example:
▪ German automaker Porsche
issues U.S. dollar bonds in the
U.S.
▪ Financed U.S. railroads in the
19th century via British investors.
MAP

MAP
Internationalization

Eurobonds U.S. dollar bond

➢ Bonds denominated in a currency not

native to the country where they are
sold.
➢ Example: U.S. dollar bond sold in
London.
➢ Market Share: Over 80% of new
international bond issues.
➢ Size: Larger than the U.S. corporate
bond market.
MAP

MAP
Internationalization

Eurocurrencies Japanese yen

deposits

➢ Deposits of a currency in banks

outside the currency’s home country.

➢ Example: Japanese yen deposited in

a London bank.

MAP

MAP
Internationalization

➢ Eurobonds ≠ bonds in euros. Eurodollars ≠ euros.

➢ The prefix “Euro” refers to location, not currency.

World Stock Markets

➢ Shift in Leadership: U.S. stock market no longer the largest globally.

➢ Growth of Foreign Markets: Tokyo (Nikkei), London (FTSE), Paris (CAC),

Hong Kong (Hang Seng), Singapore (Strait Times).
World Stock Markets

➢ Investor Behavior:
▪ U.S. investors increasingly diversify internationally.
▪ Rise of mutual funds specializing in foreign equities.

➢ Impact:
▪ Foreign capital helps finance U.S. government and corporate activities.
▪ Promotes global economic integration and technology transfer.
MAIN CONTENTS
Function of financial markets

Structure of financial markets

Financial market instruments

Internationalization of financial markets

Function of financial intermediaries: indirect finance

Types of financial intermediaries

Regulation of the financial system

Following the Financial News: Foreign Stock Market Indexes

➢ These indexes help investors track the performance of major companies in

global markets:
▪ FTSE 100 (UK): Top 100 capitalized companies on the London Stock
Exchange.
▪ DAX (Germany): 30 largest firms on the Frankfurt Stock Exchange.
▪ CAC 40 (France): 40 leading companies on Euronext Paris.
▪ Hang Seng (Hong Kong): Major firms in Hong Kong.
▪ Strait Times (Singapore): 30 largest firms on the Singapore Exchange.
➢ These indexes are published daily and are essential for global investment
decisions.
Transaction Costs

➢ Costs incurred in executing financial transactions (e.g., legal fees, time, effort).

➢ In most developed countries, financial intermediaries (banks, insurance firms)

are more important than securities markets for corporate financing.

➢ Germany and Japan rely heavily on intermediaries—up to 10x more than

securities markets.
Liquidity Services

➢ Intermediaries offer services like checking accounts, enabling easy access to

funds.

➢ These services enhance convenience and reduce the need for direct market
transactions.
LOWER TRANSACTION COSTS
Economies of Scale

➢ Larger institutions reduce per-unit

transaction costs.

➢ Example: A bank can reuse a legal

contract across thousands of loans,
reducing cost per loan.

MAP

MAP
Economies of Scale

➢ Larger financial institutions can

▪ spread fixed costs (like legal,
administrative, and technological
infrastructure)

▪ over a greater number of

transactions,

▪ => reducing the average cost per

transaction.
MAP

MAP
Economies of Scale

Example

“A bank can hire a topflight lawyer for

$5,000 to draw up an airtight loan
contract that can be used for 2,000 loans
at a cost of $2.50 per loan.”

MAP

MAP
Economies of Scale

Example

➢ Without scale:
▪ An individual might pay $500 for
a single contract
▪ → $500 per loan.

➢ With scale:
▪ A bank pays $5,000 for a
reusable contract
▪ → $2.50 per loan.
MAP

MAP
Economies of Scale

Example

➢ This dramatic reduction in cost

➢ → makes it profitable for banks to

serve small borrowers like Carl,

▪ who otherwise couldn’t afford the

transaction costs of borrowing.

MAP

MAP
Benefits of Economies of Scale

➢ Lower transaction costs for borrowers and savers.

➢ Increased access to financial services for small clients.

➢ Higher efficiency in financial intermediation.

➢ Greater profitability for financial institutions.

RISK SHARING
Risk and Risk Sharing

➢ Risk = uncertainty about returns.

➢ Financial intermediaries pool and

redistribute risk → making
investments safer for individuals.

MAP

MAP
Risk and Risk Sharing
Asset Transformation

➢ Intermediaries convert risky assets

into safer ones (e.g., bundling
mortgages into securities).

➢ They earn profits from the spread

between risky asset returns and safe
asset payouts.

MAP

MAP
Risk and Risk Sharing
Diversification and Portfolio

➢ Diversification = investing in
multiple assets to reduce overall risk.

➢ Portfolios are structured to minimize

exposure to any single asset’s
volatility.

MAP

MAP
 ASYMMETRIC INFORMATION:
ADVERSE SELECTION AND MORAL
HAZARD
Asymmetric Information

Adverse Selection and Moral Hazard

➢ Adverse Selection ➢ Moral Hazard

▪ Occurs before a transaction. ▪ Occurs after a transaction.
▪ Risky borrowers are more likely ▪ Borrowers may engage in risky
to seek loans. behavior once they receive funds.
▪ Example: Aunt Sheila (a ▪ Example: Uncle Melvin uses loan
gambler) is more likely to ask for money to gamble instead of
a loan than Aunt Louise (a investing in his business.
conservative investor).

MAP

MAP
Asymmetric Information
Solution

➢ Financial intermediaries screen and monitor borrowers to reduce these risks.

ECONOMIES OF SCOPE AND
CONFLICTS OF INTEREST
Economies of Scope in Financial Intermediation

➢ Economies of scope refer to the cost savings that financial institutions achieve
by using shared resources or information across multiple services.

▪ Economies of scale: focus on volume.

▪ Economies of scope focus on diversity of services.

Economies of Scope in Financial Intermediation

How It Works

➢ Financial intermediaries—especially banks—often provide multiple services such as:

▪ Loan origination
▪ Bond underwriting
▪ Investment advisory
▪ Asset management

➢ By evaluating a firm’s creditworthiness for a loan,

▪ A bank can reuse that information
o to decide whether to underwrite its bonds or offer other financial services.
▪ This reduces the cost of information production for each service.
Economies of Scope in Financial Intermediation

Example

“A bank, for example, when making a loan to a

corporation, can evaluate how good a credit risk the firm
is, which then helps the bank decide whether it would be
easy to sell the bonds of this corporation to the public.”

➢ Single evaluation → supports multiple decisions.

➢ Saves time, reduces duplication, and improves efficiency

Economies of Scope in Financial Intermediation

Benefits

➢ Lower operational costs across services.

➢ Improved client service through integrated offerings.

➢ Higher profitability for financial institutions.

➢ Better resource utilization (e.g., data, analytics, personnel).

Economies of Scope in Financial Intermediation

Risks: Conflicts of Interest

➢ While economies of scope offer efficiency, they can also lead to conflicts of
interest:

➢ A bank might misrepresent a firm’s risk to sell its bonds more easily.

➢ Competing objectives across services may compromise integrity of

information.
MAIN CONTENTS
Function of financial markets

Structure of financial markets

Financial market instruments

Internationalization of financial markets

Function of financial intermediaries: indirect finance

Types of financial intermediaries

Regulation of the financial system

• Thrift institutions (thrifts) • Life Insurance Companies • Finance Companies
• Commercial Banks • Fire and Casualty • Mutual Funds
• Savings and Loan Insurance Companies • Money Market Mutual
Associations (S&Ls) and • Pension Funds and Funds
Mutual Savings Banks Government Retirement • Investment Banks
• Credit Unions Funds

Contractual
Depository Investment
Savings
institutions intermediaries
institutions
Depository Institutions

These institutions accept deposits

and make loans.

MAP

MAP
Depository Institutions
Commercial Banks

➢ Largest group of financial

intermediaries.

➢ Accept deposits (checking, savings,

time) and make loans (business,
consumer, mortgage).

➢ Hold diversified portfolios including

government and municipal securities.
MAP

MAP
Depository Institutions
Savings and Loan Associations (S&Ls) and Mutual Savings Banks

➢ Traditionally focused on mortgage

lending.

➢ Funded by savings and time deposits.

➢ Now operate similarly to commercial

banks due to deregulation.
MAP

MAP
Depository Institutions
Credit Unions

➢ Small, cooperative institutions

serving specific groups (e.g.,
employees, unions).

➢ Funded by member deposits

("shares").

➢ Primarily make consumer loans.

MAP

MAP
Contractual Savings Institutions

➢ These institutions receive funds on a contractual basis and invest them long-
term, as they can predict future liabilities.

▪ Life Insurance Companies

▪ Fire and Casualty Insurance Companies

▪ Pension Funds and Government Retirement Funds

Contractual Savings Institutions
Life Insurance Companies

➢ Collect premiums to provide death

benefits and annuities.

➢ Invest in corporate bonds, mortgages,

and limited stocks.

MAP

MAP
Contractual Savings Institutions
Fire and Casualty Insurance Companies

➢ Cover losses from accidents, theft,

and disasters.

➢ Need more liquid assets due to

unpredictable payouts.

➢ Invest in municipal bonds, corporate

bonds, stocks, and government
securities.
MAP

MAP
Contractual Savings Institutions
Pension Funds and Government Retirement Funds

➢ Provide retirement income through

annuities.

➢ Funded by employer and employee

contributions.

➢ Invest heavily in corporate bonds and

stocks.

MAP

MAP
Investment Intermediaries

➢ These institutions help channel funds from savers to borrowers through

investment products.
▪ Finance Companies
▪ Mutual Funds
▪ Money Market Mutual Funds
▪ Investment Banks
Investment Intermediaries

➢ Finance Companies
▪ Raise funds by issuing commercial paper, stocks, and bonds.
▪ Lend to consumers and small businesses.
▪ Often affiliated with parent companies (e.g., Ford Motor Credit).

➢ Mutual Funds
▪ Pool funds from investors to buy diversified portfolios of stocks and bonds.
▪ Allow small investors to access diversified investments at lower cost.
▪ Shares can be redeemed at any time, but values fluctuate with market prices.
Investment Intermediaries

➢ Money Market Mutual Funds

▪ Similar to mutual funds but invest in short-term, low-risk instruments.
▪ Offer check-writing features, functioning like interest-bearing checking
accounts.
▪ Highly liquid and low-risk.

➢ Investment Banks
▪ Not traditional banks (don’t accept deposits).
▪ Help corporations issue securities (stocks, bonds).
▪ Underwrite securities and advise on mergers and acquisitions
MAIN CONTENTS
Function of financial markets

Structure of financial markets

Financial market instruments

Internationalization of financial markets

Function of financial intermediaries: indirect finance

Types of financial intermediaries

Regulation of the financial system

Increasing Information Available to Investors

➢ Purpose: To reduce asymmetric information, particularly adverse selection and

moral hazard.
➢ Mechanism:
▪ The U.S. Securities and Exchange Commission (SEC) requires firms to
disclose financial data, sales, assets, and earnings.
▪ Insider trading is restricted to prevent manipulation of security prices.
➢ Impact:
▪ Enhances investor confidence.
▪ Improves market efficiency by enabling better-informed investment
decisions.
Increasing Information Available to Investors

Vietnam

➢ require mandatory adoption of

International Financial Reporting
Standards (IFRS) starting in 2025.

➢ This aims to improve transparency,

comparability, and investor
confidence, especially for foreign
investors (IFRS, 2024).

MAP

MAP
Ensuring the Soundness of Financial Intermediaries

Financial Panic

➢ Occurs when depositors withdraw

funds en masse due to fears of
insolvency.

➢ Can lead to systemic collapse.

MAP

MAP
Ensuring the Soundness of Financial Intermediaries

Restrictions on Entry

➢ Only qualified individuals or

institutions can establish financial
intermediaries.

➢ Requires charters from state or

federal authorities.

MAP

MAP
Ensuring the Soundness of Financial Intermediaries

Vietnam

➢ The 2025 revision of the State

Budget Law (SRTC, 2025).

▪ detailed legal frameworks for

financial institutions,

▪ enhancing entry standards and

regulatory oversight

MAP

MAP
Disclosure

➢ Institutions must follow strict accounting standards.

➢ Subject to periodic inspections and public reporting.

➢ Vietnam: IFRS adoption

▪ standardize financial reporting, improving disclosure quality (IFRS, 2025).
Restrictions on Assets and Activities

➢ Limits on the types of assets institutions can hold (e.g., banks cannot hold
common stock).

➢ Prevents excessive risk-taking.

Restrictions on Assets and Activities
US

➢ U.S. banks are prohibited from holding

common stock to avoid exposure to volatile
equity markets.
➢ The Glass-Steagall Act (1933) originally
enforced strict separation between
commercial banking and securities activities.
Though repealed in 1999, many prudential
restrictions remain.
➢ Insurance companies may hold stock, but
only up to a regulated fraction of their total
assets.

MAP

MAP
Restrictions on Assets and Activities
Vietnam

➢ Vietnamese banks are restricted from

investing in high-risk assets, including
equities and real estate, unless approved.
➢ SBV sets prudential ratios (e.g., capital
adequacy, liquidity) that indirectly limit
risky asset accumulation.
➢ Circulars such as 07/2025/TT-NHNN
update rules on asset classification and
provisioning (SBV, 2025).

MAP

MAP