Present About VN's Bank System

8/12/2019 Present About VN's Bank System

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HISTORY OF VIETNAM BANKINGSYSTEM

The development process of Vietnam banking system can be divided into four periods :

Period from 1951 to 1954: National Bankof Vietnam was established in 6 May 1951and operated independently in the financialsystem. The National Bank manage theState Treasury, and unify the budget system.Moreover, it developed bank credit for

production and circulation of goods,enhances economic to fight with theinvader.


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History of Vietnam banking system

Period 1955-1975: This was the era of resistance against the American invader.

National Bank implemented the following basic tasks: Strengthening the currency markets, keeping the currencystable, stabilize pricing, creating favorable conditions for theeconomic recovery in war Improve credit activities to enhance food production, restore

and promote the development of agriculture, industry, trade.


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Period 1975-1985:

A period of economic recovery after the war and the reunification ofthe country. National Bank (South) was nationalized and merged into

the state bank of Vietnam (North), to unify the national currency.After that, SBV issued and implementing monetary policies, credit,foreign exchange management, payment to stabilize the economicsituation, and monetary circulation.

However, the prolonged war has caused our economy to fall intosevere recession, budget deficit at a high level for many years,inflation at 3-digit level. The manufacturing operations, goodsdistribution and life of people face many difficulties.


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The period 1986 to present: This period was a comprehensiveinnovation of Vietnam's banking system. Here is some notable events:

-26/03/1988: The Council of Ministers has issued a new decree with basic orientation is " transfer the banking system to commercial

operation" Accordingly, four specialized banks were established on the basis of transfer and separated from the State Bank, including: Vietnamcommercial Bank for Industry and Trade, Agricultural DevelopmentBank, the Bank for Investment and Construction, and Foreign TradeBank.

- 5/2002: Electronic Payment System Interbank officially put intooperation, the electronic banking services include E-Banking, InternetBanking, ...


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-2006: State Bank participated in the WTO negotiations and activelyimplementing the commitment to international integration in the

banking sector.

- 2008: the global financial crisis occurred. Since 2009, problems began to break out across the world but the effect on banking andfinance was not much because the level of integration was not high.

- More importantly at that time, banks started to enter to the growth

period. 2009 was the prosperity moment of them. This situationdiffers from the U.S. and the rest of the world.


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However, 5 years after the global crisis,Vietnam's banking system start to face manydifficulties. Actually, the expression ofdifficulties in the banking sector began in2010-2011 when the subprime mortgage

increases, but banks still can keep the baddebt ratio less than 3%.

Latest Report of the National Bank said, bythe end of the month 9/2013, total bad debts

of the banking system of Vietnam is 142trillion, 24 trillion higher than the same

period last year.


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Market-based and Bank-based financialSystem

Market-based system Bank-based system

Having very developed share and bond markets. Having less developed financial markets

Strong competition between banks and non-banking

financial intermediaries to raise funds and provideloans to the economy.

Bank is a main intermediary. Bank is a more

dominant providers of external finance to firms

Widely-held listed firms (dominant shareholders areuncommon)

Dominant shareholders are common

High level of customer/investor protection withsophisticated laws and regulations.

Less sophisticated laws and regulations tend tohave civil law legal systems

Customers prefers to raise funds via debt and equitymarkets

Households are less exposed to financial markets


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The effects of bank-based systems onfinancial marketsWith respect to the relationship between economic growth andthe degree to which countries are bank-based, the effects of bank-

based systems on financial markets are:

- Acquiring information about firms and managers and therebyimproving capital allocation and corporate governance

- Managing cross-sectional and liquidity risk and therebyenhancing investment efficiency and economic growth

- Mobilizing capital to exploit economies of scale


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Market-based and Bank-based financialSystem

Sources of inefficiencies in bank-based and market-based systems Feature In bank-based system In market based system

Asymmetricinformation

Borrows know more about therepayment prospects for a loan thanbanks

Management knows more about the firm'sperformance than analysts andshareholders

Adverseselection

Bad borrowers take out loans; goodborrowers will find them tooexpensive. Result: the overallriskiness of banks' credit portfolios istoo high compared to returns.

Badly performing firms face a higherdemand for their shares, higher liquidityand better financing conditions than

justified under full information. Betterperforming companied face worseconditions than expected and thus aredriven out of the market.

Moral hazard In a system with deposit insurance,or central banks willing to act aslender-of-last-resort, banks may bemore willing to take risks thanotherwise in search of higher returns.

Managers not wholly liable for theconsequences of their decisions may bemore willing to take risks than otherwise

Agency cost Under insufficient monitoring dealersmay become tempted to take morerisks than justified in search of profitsand romotion.

A principal-agent problem may arise in therelationship between shareholders orfirms owners and managers if ownerswant mana ers to run the firm maximizin


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Weakness of Vietnam Banking System

AsymmetricInformation Improper accounting practices and the dearth

of timely and accurateinformation in Vietnamhas led the lack oftransparency

security revaluationlosses, inventoryrevaluation losses arenot included

More vulnerableto financial crisis Moral Hazard


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Weakness of Vietnam Banking SystemAsymmetric Information:

Banks did not reveal information instantaneously in the public market and itcould leads firms facing lack of sources of information to undertake misguidedinvestment.

Improper accounting practices and the dearth of timely and accurateinformation in Vietnam has led the lack of transparency. Companies inVietnam are reluctant to declare their actual business and financial figures,this leads to inaccurate credit information for bankers.

Vietnams accounting system uses statements of income and expenditure butitems such as security revaluation losses, inventory revaluation losses are notincluded. A foreign company operating in Vietnam may need two accountingsystems so that the company is able to report to its parent company inaccordance with international practices.


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More vulnerable to financial crisis : Firms under bank-based system are

likely to more agonize over the global financial crisis than firms under market-

based system.

After the 2008 financial crisis a dramatic banking reform was taken by the

Government, a new minimum capitalization requirement approaches was

released. This leads to the merger or closure of smaller banks that are unable

to meet the new requirements. The approach stated that any commercial bankthat could not meet the requirement by December 31, 2010, would be forced

to merge, have its scope of operations reduced, or have its banking license

revoked.


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Moral Hazard: when the banking system is in trouble, state-owned

commercial banks (SOCBs) appear to be safe havens for deposits because

the public assumes that they are guaranteed by the government.. Because,

SOCBs have no clear incentive to maximise profit, due to the subsidy

mechanism and reward system, which are not performance-based. This moral

hazard or problem weakens the ability state-owned commercial banks to

provide an objective and appropriate assessment of corporate profitability

and to ensure that resources are distributed efficiently


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Recover from 2008 financial crisisVietnams economic is considered bank-based and also recover slower than other market-

based system. Bank-based economies will have problem in long time period and affect

saving activities as it affect psychosocial of society. Bonds and shares in financial market

should be developed and flown to make recoveries as they have long term maturity. But

bank on the other hand rely on short term deposit. This problem could be easily seen inVietnam as people go to banks and withdraw money that makes banks get shortage. Plus, in

bank-based economies, people are not very familiar to financial market; therefore, the capital

within the country is frozen. This make Vietnams economic slowly recover from financial

crisis 2008. In conclusion, even that it is various in recover speed within economies; bank-

based economy in Vietnam is still in slow recover group of economies as well as bank-basedeconomies in the world compare to market-based ones.

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Present About VN's Bank System