Bài giảng

Nhập môn chuyên ngành TC-NH

Tổ Bộ môn Tài chính
Viện Tài chính – Kế toán, Trường Đại học Công nghiệp [Link]
CHAPTER 3:
BANKING

10-2
 Chapter outlines

• 3.1 Commercial banking

• 3.2 Central banking

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 Learning Objectives

• Understand the definition of commercial bank and its key

operations
• Describe top trends in banking industry today
• Chronicle the historical development of the Vietnamese
banking industry
• Practice measuring interest and repayment schedule

1-4
 3.1.1Definition of commercial bank
• Financial institutions that provide banking services
• Law on Credit Institutions No. 47/2010/QH12 of June 16, 2010,
Vietnam: “A type of bank which may conduct all banking operations
and other business activities under this Law for profit”
• Regulated by government authorities and the central bank is usually
their direct supervisor.

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 3.1.2 The role of commercial banks

• Channel resources

• Supply liquidity

• Manage customers’ finance

 Channel resources

Connect Provide Promote

consumption
surplus & financing
and
deficit unit effectively production

TOOL OF MONEYTARY POLICY

 Supply liquidity

access to a reliable, facilitate the

inexpensive exchange of goods
payments system and services
 Other roles
• Thirdly, banks reduce the problems of information asymmetries by
collecting and processing standardized information. Nevertheless,
commercial banks do takes advantage of economies of scale, in which the
average cost of producing a good or service falls as the quantity produced
increases. Therefore, they usually offer banking services with relatively
small fee. Banks nowadays also provide us with bookkeeping and
accounting services that help us manage our finances. Besides, there are
various bank products to diversify risk from low - cost investment to
derivative instruments such as forwards, swaps contracts.
• Learning Task: what is information asymmetries and econmies of scales ?
 Manage customers’ finance

BOOKKEEPING AND VARIOUS PRODUCTS TO

ACCOUNTING SERVICES DIVERSIFY RISKS
 Cost - effective

reduce the
takes advantage
problems of relatively small
of economies of
information fee
scale
asymmetries
Banks’ balance sheet
 3.1.3 Main operations

DEPOSIT TAKING CREDIT EXTENSION PAYMENT SERVICES

 a. Deposit taking

• Receiving money from the general public and businesses on the

principles of full payment of principals and interests to depositors
under agreement
• Main source of banks’ capital what is used to make a profit
 Demand deposits: payable on
Type of demand, easy accesible

deposit Fixed-term deposit: usually fixed

term, higher interest, less liquid
 Fixed-term deposits

Saving accounts Term deposits Certificates of deposit

(CDs)
 Liquidity risk
Bad management on banks’ balance sheet

The inability to meet payment obligations in a timely manner

The possibility of losses, insolvency/ bankruptcy

 Banks’ Reserves
• Reserve Requirement from the central bank
• Desired reserves held by commercial banks

Insurance against
liquidity risk and
costs associated
• Learning Task: Find out the current reserve requirement ratio
for commercial banks in Vietnam (cited your resource)
 Deposit Interest
(Circular No. 14/2017/TT-NHNN)
Components used to calculate interest:
• Interest Period: from and including the deposit placement date and not including maturity date.
• Actual Balance: principal amount maintained during the Interest Period
• Number of days with actual balance: number of days (months) with unchanged actual balance
• Deposit Interest rate: annual interest rate is calculated on the basis of one year having 365 days
(or 12 months) stipulated by the Bank from time to time and is fixed during deposit’s tenor.

Interest amount = Actual Balance x No. of days has actual balance x Interest Rate/365
Interest amount = Actual Balance x No. of monyhs has actual balance x Interest Rate/12
 b. Credit extension

• An agreement allowing an organization or individual to use a sum of

money or a commitment allowing the use of a sum of money on the
repayment principle
• The most significant function of commercial banks which makes
more than half of total assets, provide significant incomes of a bank
 Characteristics
Types: lending, discount, financial leasing, factoring, bank guarantee
and other credit extension operations

Lending - the borrower use the loan for a specific purpose in a

certain period as agreed upon on the principle of payment of both
principal and interest
A loan: an asset for a bank, typically less liquid and have a higher
probability of default than other assets, make highest return.
 Credit risk
• The risk arising from the possibility that the
borrower will default
• Causes: borrower’s characteristics, poor
lending practices of banks (Adverse selection,
Moral Hazard); the macro environment
 Credit risk management
• In order to militigate credit risk, commercial banks use a list of method for managing
credit risk such as: Screening and Monitoring; Long-Term Customer Relationships,
Loan Commitments; Collateral and Compensating Balances, Credit Rationing
(Mishkin, 2019, chapter 09). Commercial banks also need to do a better job managing
their balance sheets with a proper mix of assets and liabilities, to optimize the
risk/return profile of the institution going forward. For instance, banks alway give
strong consideration to capial aquadecy ratio (CAR) to help prevent bank failure while
not have severe effects on the returns of bank’s equity holder and to meet bank capital
requirements by regulatory authorities.
• Learning Task:
• What is CAR and how is it calculated according to Basel II & III?
• What is the minimum CAR according to Basel II & III?
• What is current minimum CAR for banks and foreign bank branches in Vietnam (cite
your resource)?
 Credit risk management
• Screening and Monitoring;
• Long-Term Customer Relationships,
• Loan Commitments;
• Collateral and Compensating Balances,
• Credit Rationing
• Good management on banks’ balance sheets
……v…..v……..
 Repayment schedule
Components used to calculate interest:
• Interest Period: from and including the loan placement date and not
including maturity date
• Original outstanding: the intitial size of a loan.
• Actual balance: remaining principal at the begining of repayment date
• Repayment period: number of months with unchanged actual balance
• Interest rate: annual interest rate is calculated on the basis of 1 year
having 12 months stipulated by the Bank from time to time and is
fixed during loan’s tenor.
 Repayment Calculation Formula
• Given Equal Principal Payment:
Loan amount
Principal =
Number of repayment period
• Interest on original outstanding loan:
Interest rate
Interest = Original outstanding x Repayment period x
12
• Interest on reducing balance:
Interest rate
Interest = Actual balance x Repayment period x
12
c. Payment services
 Technologies

Bank
Payment Rules
staffs

system BANKS, CREDIT UNIONS

Standards Procedures
Electronic payment
Banking industry today
 The evolution of electronic banking

• ATMs: allows customers to get cash, make deposits,

transfer funds from one account to another, and check
balances, available for use 24 hours a day, cheaper
transactions.
• Online banking: conduct many of their bank
transactions by using either a telephone, tablet or a
personal computer; low cost of transactions.
• Virtual Banks: accepting savings deposits, selling
certificates of deposit, issuing ATM cards, providing bill-
paying facilities, available for use 24 hours a day
 The Growth of International banks
The growth in the size of global trade and the corresponding increase in the volume of
international payments have encouraged domestic banks to open offices overseas where they are
so-called foreign bank subsidiaries/branches. It should be noted, however, that these institutions
target specific groups (normally foreign citizens or corporates those are important trading
partners of their home countries), achieving a higher representation within their target groups
than their national share would suggest. The internationalization of banking has meant that
financial markets throughout the world have become more integrated. As a result, there is a
growing trend toward international coordination of bank regulation, one example of which is the
1988 Basel agreement to standardize minimum capital requirements in industrialized countries.
This movement has also encouraged bank consolidation abroad, culminating in the creation of
the first trillion-dollar bank such as the merger of the Industrial Bank of Japan, Dai-Ichi Kangyo
Bank, and Fuji Bank (announced in August 1999 but took place in 2002). Another development
is that most of the largest banks in the world were foreign. Foreign banks have been extremely
successful in Canada when currently hold about 8% of total Canadian bank assets, with HSBC
Bank Canada (the former Hongkong and Shanghai Banking Corp.) enjoying a national market
share of over 3%. By contrast, some foreign banks sold a part of or total opearation to domestic
banks after a few years of their entries, as can be seen in the case of ANZ, Citibank and
CommenWealth Bank in Vietnam. The main reason is that banking industry is growing more
competitive with the increase of banks in the quantity and value. As a consequence, foreign
banks can not win over domestic ones who have long lasting history and strong customer base.
The success of foreign banks in other countries thus remains uncertained.
 Merger and Acquistions (M&A)

• Mergers is the combination of two companies to form one,

while Acquisitions is one company taken over by the other (for a part of or total
operation)
• M&A in banking sector grows rapidly on the backdrop of global financial
crisis, financial deregulation, and market competition in a fast – changing
world. FOR WHAT PURPOSES????

• Learning Task: go to [Link]

[Link]) and search for reasons of banking
M&A.
• M&A is one of the most renowned strategies to make adoption with those
changing businesses. According to the efficiency theory, the bottom line of the
M&A is for the purpose of synergy. In several cases for example infant bank,
bank that is incapable to compete, facing financial distress and unable to
maintain requirement of common equity of risk weighted asset, M&A could
become necessity in the first place rather than to acquire synergy. Hence, it
becomes necessary for the banks to be merged or acquired by other matured
and stable financial institutions before reach the target of having synergy in the
deal. As far as the M&A is concerned, today’s business is not bound within the
domestic arena; it has crossed the national boarder. Efficient and well-built
financial institutions tend to broaden their market beyond national boarder
throughout foreign direct investment (FDI) in the form of cross border M&A.
This strategy creates direct or indirect external or spillover effect on the
performance of the banks as well.
Banking industry in Vietnam
The Vietnam National Bank (VNB):
comprised the National Bank, inter-regional banks,
The Indochina Bank functions as and provincial and municipal banks.
both the central bank and a promote production, commerce
commercial bank fund for state-owned enterprises,
finance for the resistance against the French colony

1947

1945 1951–1955

Production Credit Office:

provide funds for production in rural areas,
facilitate policies to reduce interest rates,
finance collective businesses
 1955-1965

• VNB was renamed as the State Bank of Vietnam (SBV) in 1961

• Vietnam Construction Bank, Vietnam Bank for Foreign Trade
were established
• The banking network expanded to serve districts and towns,
support economic recovery, make improvements in non-cash
payment

1955-1985 1965 – 1975

• Special units were established to support the SBV during

wartime (B29, D270, N2683, B68, C32)

1975 to 1985

• Take over banking system of the old regime in the South

• Evoke the old banknotes and issue ones
• The system did not implement the market – oriented monetary
but still served as a budget tool.
 1985-2005
Decree No. 53/HDBT (1988): transform the banking system to commercial operations.
Four specialized banks were separated from the SBV

In May 1990, the ordinance on the State Bank of Vietnam and ordinance on banking
were enacted. The banking system extended credit to all economic sectors .

In 1997, the Law of the State Bank of Vietnam and the Law on Credit Institutions was
approved, the system of credit institutions was reorganized and consolidated

Banking technology developed with the operation of inter-bank electronic payment

system (May 2002) and e-banking services
 2005 - present
After joining WTO, banking sector
obtained significant renovation in the
governance and management,
institutional framework and technology. Privatize the wholly state-owned
Foreign banks have been granted licenses commercial banks
to operate in VN The Law on Credit Institution, 2010

2006 2007-2008 2010 2011–present

Going through global financial crisis with The Scheme of restructuring credit
the aim of restoring growth and low rates institutions and the Scheme on non -
of inflation performing loan resolution
Banking industry in
Vietnam

4 state-owned commercial banks

31 joint stock commercial banks

2 joint venture banks

9 wholly foreign-owned banks

• Learning Task: Introduce several digital wallets that commercial
banks in Vietnam provide and their funtions?
• QUESTIONS & EXERCISES:
1. What is the difference between commercial bank and investment
bank? Find out the answer on the following link:
[Link]
2. What is the limitation of the share of foreign investment in the
joint venture banks in Vietnam and in Vietnamese joint-stock
banks?
3. Explain causes of the 2007-2008 financial crisis and its effects on
banking sector.
 3.2 Central banks

• The worst global financial recession since World War II spread in 2007
• A banking and sovereign debt crisis in several euro-area countries
started in 2010
=> The world’s leading central banks played a key role in bringing the
financial system and the economy back to safe harbor
 3.2 Central bank
• Low and stable inflation.
• High and stable real growth,
together with high
employment.
• Stable financial market and Objectives
institutions.
• Stable interest rates.
• A stable exchange rate.
 Functions

• Issuance of currency
• The government’s bank
• The bankers’ bank
 Issuance of currency
• Improve cost-effectiveness
• Increase the durability of bank
notes
• Reduce counterfeiting
• Control the quantity of base
money and credit
• First of all, the central bank occupies a privileged position: It has a monopoly on the issuance of
currency. The central bank creates money. Historically, early central banks kept sufficient
reserves to redeem their notes in gold. People must have faith in money if they are to use it, and
experience tells us that this type of institutional arrangement creates that faith. Today the Federal
Reserve works as a central bank of the US, has the sole legal authority to issue U.S. dollar bills.
Most of central banks also conducts ongoing research, working closely with private-sector
partnerships and note-issuing authorities in other countries, in order to improve cost-
effectiveness, increase the durability of bank notes, and reduce counterfeiting. The ability to
print currency means that the central bank can control the quantity of base money and credit in a
country’s economy. Base money (also called monetary base or high- powered money) is an
important part of the money supply, because changes in it lead to multiple changes in the money
supply. In the modern word, the central bank however exercises control over the monetary base
not by issuing bank notes but through its purchases or sale of government securities in the open
market ( called open market operations) and its extension of loans to banks. This basis is what
we usually refer to the conduction of monetary policy which will be discussed thoroughly in the
later part.
• Learning Task: What does base money consist of?
 The government’s bank

• Conduct the monetary policy

• Execute financial transactions for the government
• Manage the government’s gold and foreign
exchange reserves
Learning Task: Does the central bank
control securities market?
 The bankers’ bank
• Provide loans during times of financial stress
• Manage the payments system
• Oversee commercial banks and the financial
system
• Learning Task: Explain the
“lender of last resort” role of the
central bank.
Monetary policy
• A set of tools can be
used to achieve
authorities’ targets
 Types of Monetary policy

Helps speed up the

economy or boost
economic growth
EXPANSIONARY

Helps slow down the

economy or calm
economic growth
CONTRACTIONARY
 Open market operations
• The central bank’s purchases or sale of government securities
in the open market.
• The central bank buys back government’s securities
=> raise the money supply and lower short-term interest rates
• The central bank sells government’s securities
=> lower the money supply and raise short-term interest rates
 Policy rates
• Rates are settled by the central bank: discount rate, refinance
rate, repo/reverse repo rate, overnight rate,….
• Raising or lowering the discount rate alters the banks’
borrowing costs and hence the interest rates on loans
=> change the supply of money in the economy
 Reserve requirement
• The portions of deposits that banks must maintain either in their vaults
or on deposit at the central bank to prevent illiquidity
• Reserve requirement ratio declines, banks will have more capital
available for lending
=> Increase the money supply and lower interest rates
• Reserve requirement ratio increase, banks will have less capital
available for lending
=> Decrease the money supply and raise interest rates
 The State Bank of Viet Nam

• The Vietnam National Bank (VNB) was officially established on May 6th,
1951, renamed as the State Bank of Vietnam (the SBV) on October 26,
1961.
• Original mandates: managing bank notes issuance and circulation, and the
State Treasury; mobilizing funds and lending for production and commerce;
conducting financial management through administrative measures and
foreign exchange management and fighting in monetary front
 The SBV during 1955 – 1975

• Focused on currency management and circulation under the socialist economic

management principles;
• Formulated & promoted bank credit scheme for state - owned and collective
enterprises;
• Improved non-cash payment, established payment centers as commercial banks;
• Expanded international credit and payment relationship; implemented the state
exclusive scheme for foreign exchange management
 The SBV during 1976 – 1985

• Supported the revolutionary government to build the new banking system and
unify the currency nationwide.
• Issued and implemented many monetary, credit, payment and foreign exchange
policies
• Provided funds for production, defense, security, and socio-economic programs
• Extended international cooperation.
 The SBV from 1986 to present
• On March 26th, 1988, the organization of the SBV was consolidated
• 1990 – 1996: the SBV adopted a positive interest rate policy and tools to manage
monetary policy, establish money markets, modernize its technology, and enhance its
human resources to regulate the new banking system.
• The first Law of the State Bank of Vietnam was approved in 1997. The SBV continued
to improve its conduct of monetary policy, especially its management of interest rates.
• It also participated in WTO negotiations
• In 2008, the SBV adjusted its priorities to address the prevailing
conditions in the context of global crisis.
• From 2011 up to present, the SBV regulation of monetary policy has
changed in a fundamental manner with a proactive ability to lead the
market and obtained significant achievements
• The Law on the State Bank of Vietnam were passed in June, 2010.
Position and functions of the SBV

Law on the State Bank of Vietnam, 2010