(TIỂU LUẬN) written assignment course international banking

MINISTER OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY SCHOOL OF BANKING  WRITTEN ASSIGNMENT COURSE: INTERNATIONAL BANKING Lecturer : Student Name Class : : Class Code : Major Student ID : : Batch : Ho Chi Minh City, June 2021 Part Question 1: What are the three core functions of investment banking? How does investment banking differ from commercial banking? (chapter 5) What are the three core functions of investment banking? The three core functions of investment banking are to underwrite and sell stocks and bonds to investors, create a stock market for investors who want to buy and sell them, and provide services investment banking consulting-selling all forms of consulting to large companies and governments When most people think of underwriting, they envision a process in which an individual or organization accepts financial risk (usually insurance-related) in exchange for a fee Underwriting is also referred to as primary market making This is because the primary market is the first market in which a security can trade, as opposed to the secondary market, which only allows for the trading of aged or seasoned securities How does investment banking differ from commercial banking? The points of investment banking that differ from commercial banking are that investment banking is a higher-risk business because it depends on the ups and downs of the stock market, interest rates, and other intangible factors, reflecting the high degree of speculation involved Investment banking doesn’t accept deposits from customers, but commercial banking does Investment banking funds come primarily from the issuance of stocks or bonds For commercial banking, their fund mainly comes from accepting deposits from customers and making loans to people and small businesses In the area of international corporate commercial banking, we have looked at: • Elements of the international trade finance and information mechanism through which banks all over the world collaborate to reduce information asymmetry and create benefits for service companies internationalization between companies of all disciplines; • The origin, development and operation of the international lending market account is an important source of financing for both the private sector and governmental institutions globally; • The elemental foundations of international finance, a structural system for financing private sector activities, capital for large purposes, are becoming increasingly relevant to the multisectoral sources of finance of the United States expected basis.; • The quality and performance of the globally regulated cash and securities services offered by most international banks; • The case of Citicorp's Global Transaction Services division is an example of a highly successful approach to trade facilitation, cash management and trading securities services globally • In the area of leading international investment budgeting, we looked at: • The lead bank's primary role is as an agent and intermediary of structured financing designed to meet the objectives and constraints of issuers and investors; • The full scope of investment banking's revenue-generating activities and the quality of conflict of interest content arising from these activities; • The basic elements and segments of underwriting and the nature of the competition for a position on broad equity and fixed income issues; • Trading derivatives and budget games as stance makers for clients and traders for their own accounts; Question 2: What are the risks associated with project finance? How can a lender mitigate these risks? What are the risks associated with project finance? The risks associated with project finance include: • Resource risk: the cash flow of the project is not enough to pay the debts or there are not enough raw materials (oil, gas and minerals) to carry out the project • Input risk: not available energy and raw materials or too high input prices of raw materials • Completion risk The project in progress is delayed for an unforeseeable period of time As a result, the project's costs exceed the allowable level significantly • Market risk: the demand for the project in the future is significantly reduced and maybe no longer needed when the project is completed • Operational risks: when the project goes into operation, there are some problems in the operation stage Such malfunctions cause the cost to change or change important factors such as labor and transportation to be interrupted • Force majeure: these are the risks that cause the project to be interrupted and that the project implementer can not anything to be able to continue the project (war, natural disasters and epidemics) • Political risk but conflicts and conflicts surrounding the project may cause disadvantages to the implementation or operation of the project • Regulatory risk: this risk occurs at project completion due to changes in government regulations and laws related to a certain industry Actions such as raising taxes, banning certain activities, and opening markets to more competition can negatively affect project outcomes and jeopardize a project's ability to repay loans How can a lender mitigate these risks? Lenders can mitigate risk by carefully assessing creditworthiness based on a project's future cash flow sensitivity analysis in various situations where credit support may be required Additional specific tools from project sponsors to mitigate risks have been identified and quantified When lenders have an in-depth understanding of project-specific risks, they can appropriately allocate risks among different project participants In addition, lenders can establish obligations of service providers in the contract setting out specific duties, including penalties for non-compliance with the contract that service providers guarantee to lenders In addition, sponsors should choose a financial advisor (either in the leading banking team or in the project's investment bank branches) to consider the complexity of the structure project finance refers to the loan agreements of other lenders Part Case study 1: "Banco Espirito Santo" Question 1: What are the main factors that drive the failure of the bank? Please explain In your opinion, what lessons should be learned from the case of Banco Espirito Santo Factors leading to the failure of BES: Complex structural system In contrast to other Portuguese banks, after privatization, Ricardo Salgado directed BES to follow a strategy of “focusing on organic growth” This complicates the ownership structure of parent company Espirito Santo International (ESI) even more With a complex ownership structure that flows through each management level, there is little openness and lack of transparency in financial matters between different entities Therefore, we can consider factors related to the ownership structure of the organization when assessing the cost of BES failure There is an argument that banking in Europe should suffer the negative effects of the separation between commercial banking and investment banking, but more broadly between banking and commercial activities The case of BES Bank proves this to be true Over the years, ESI has sought to develop itself as a consortium of commercial companies operating in diverse business sectors (e.g real estate, agriculture, healthcare, energy, etc.) quantity and tourism etc) Of course, ESI's growth is financed by debt, cash flow from BES's banking operations, and they also use Espirito Santo's stake in BES as collateral Although ESIs grow rapidly across many business areas, they also have the potential to cause credit misallocation in the commercial and industrial sectors of the group For example, if ESI falls into a state of collapse in those areas, then BES will suffer an increase in bad debts and lead to large losses and losses for the bank Above all, ESI is not subject to any prudential supervision, so the BES bank under the leadership of Ricardo Salgado must accept the risk of an increase in the debts of other ESI group members Supervision and related causes: When a banking crisis occurs, doubts about the cause of the crisis often turn to the way the central bank supervises Although supervision is not meant to prevent bank failure, it does play an important role in monitoring bank failures Because it helps to reduce both the probability and impact of financial crises whether domestic or worldwide Based on the readings, the reader can clearly see that the Central Bank of Portugal , the national supervisory and regulatory body, has not carefully monitored macroeconomic changes Significant scale and micro has occurred at the level of the banking system that should have been closely monitored and managed In particular, the Central Bank of Portugal failed to recognize the risks associated with BES's activities, which helped BES bypass the Central Bank of Portugal through legal loopholes This gap appears in the environmental regulation of financial firms spanning many national jurisdictions - here it seems that little information is exchanged between regulators in different countries ( especially Portugal, Luxembourg and Switzerland) It thus helped to blur the risks associated with the company's activities and perhaps helped conceal serious regulatory violations Although the Central Bank of Portugal then tried to prevent the collapse of BES, it failed the Central Bank of Portugal ordered a book review to verify potential liabilities in subsidiaries and other shareholders that could seriously affect BES In the first half of 2014, the watchdog also took other measures, such as imposing the ESFG in reserve of 700 million euros in case the non-financial companies in the group were unable to redeem their debt securities booked with BES customer Competition for inheritance in the family The start of the race for the right was when Ricardo Salgado's cousin, Jose Maria Ricciardi, the head of the bank's investment branch, expressed concern and doubt about the family's debt situation He disagreed with his cousin on how to finance the corporation itself through the sale of bonds issued by various Espirito Santo institutions to individual and institutional clients by BES Ricciardi blamed Ricardo for the family's predicament and called for his cousin to step down, but Ricardo remained in office The cousin then continued to urge the Portuguese financial authorities to review the business and financial situation of ESI And the examination revealed that ESI appeared to have misrepresented the value of assets, misjudged risks, and that financial liabilities were not fully recognized on ESI's statements Through investigative reports at the end of 2013 began to suspect the financial relationships between Banco Espirito Santo and controlling shareholder Espirito Santo International (ESI) including huge debts to be paid and the use of using BES stock as collateral for the debt Espirito Santo After a request from the Bank of Portugal that BES must drastically reduce the credit extended to its parent company In March 2014, KPMG informed the Bank of Portugal of the anomalies examined in the Espirito Santo audit, information that was made available to the public at a later time Business ethics of the leader Ricardo Salgado is a BES mentor and matchmaker He succeeded in maintaining relations with successive governments and exerted great influence in the main areas of Portuguese business Leadership has two sides to it: leaders can go from a brilliant and wise leader to a fool in one of his bad decisions It is a fact that using BES to lend money to its shareholders, the accounting department concealing the true financial position of the corporation, and other similar adverse events have pushed the bank to downfall, which occurred under the direction of Salgado Ricardo Salgado was forced to resign in June 2014 as President of Banco Espirito Santo, along with other family members who have held senior management roles at the Bank Ricardo was later arrested on suspicion of tax evasion, money laundering and conducting business ethics violations for his own profit Lessons can be learned from the case of Banco Espirito Santo: The central bank needs to coordinate with the state to come up with an appropriate set of legal zones to supervise the activities of commercial banks to limit mistakes and mistakes of commercial banks and at the same time can secure loans or borrowings properly to avoid bad debts that lead to liquidity crisis of banks, as they accept high-risk loans to generate more profits At the same time, limit the banks' contact and work with malicious financial institutions Next, bankers need to separate commercial banking from investment banking to avoid systemic collapse Private banks should not build a family-owned business model or system because it leads to competition for succession, making the bank's operations inefficient The bank's important positions are not properly evaluated, leading to ineffective banking development orientation when only bringing family members to work but not paying attention to their capacity or not The central bank should establish regulatory standards for commercial and private banks to limit and eliminate money laundering and tax evasion Question 2: In your opinion, how poorly or well the government react to the state-in-play of Banco Espirito Santo described in this case? Was the resolution plan effective when it was imposed on Banco Espirito Santo If so, please explain In your opinion, how poorly or well the government react to the state-in-play of Banco Espirito Santo described in this case? In my opinion, the Portuguese government reacted very poorly to the Banco Espirito Santo activities described in the above article BES was not subject to any oversight from the budget of the Central Bank of Portugal as it accepted the risk of refinancing the blossoming accounts of other ESI members They took advantage of the flawed change of regulatory and methodological gaps in the regulatory environment of financial firms spanning many national jurisdictions - here very little information is provided between regulatory authorities in different countries (especially Portugal, Luxembourg and Switzerland) BES work blurs the risks associated with a company's operations and hides liabilities about a company's debt or loan levels very easily As the debt grew, BES used its stock as collateral It was only when Ricardo's last name appeared that the Central Bank of Portugal began to question the financial relationship of the BES and ESI They asked KPMG to examine the position and books of ESI and they discovered commonalities, such as ESI misrecording of assets, incorrect risk assessment, liabilities The main document is not a complete report Especially after the growth of ESI are activities that have a negative impact on BES bank These activities expose BES to the risk of increased liabilities from member library companies of the ESI group But it was too early, and when Salgado linked the regulatory systems of the Portuguese government and the Governor of the Central Bank, Carlos Costa, asked for a 2.5 billion euro loan to back it up group But he was recommended by Prime Minister Pedro Passos Coelho Then the relationship between BES and ESI is published and BES inevitably hangs After BES fell into crisis and announced a loss of €3.5 billion for the second quarter of 2014 That loss plus a €2.1 billion loss was reported by consultants and the Portuguese Government Computer factory One failure of the BES bank is that the government is not interested in the bank taking risks to generate profits but working with companies with bad financial situations In addition, the governance system of BES also shows us the shortcomings of the Portuguese Government when they lack management communication so creating gaps in the management method is very important Finally, the biggest personnel from the departure of capable and influential leaders affected the image and the economy when BES bank was weak and in need of help Was the resolution plan effective when it was imposed on Banco Espirito Santo If so, please explain The government collapse plan worked well when it was applied to Banco Espirito Santo (BES) in Portugal, but in Angola it did not work After the BES announced a record loss of 3.5 billion euros in the second quarter of 2014, the Central Bank of Portugal faced the collapse of the BES and the risks of a systemic crisis related to the banking system the total banking system created by BES So the Central Bank of Portugal decided to apply to BES a settlement called “bridge institution tool”, combined guarantee/relief, BES bank was split in half Specifically, the Central Bank of Portugal guaranteed Banco Esrito Santo with a 4.9 billion euro capital injection from sovereign bailout during the European debt crisis in 2011 The bailout package from the Central Bank The Portuguese central government imposed most of the damage on the private creditors of the BES As a result, taxpayers will not bear the financial burden when the Central Bank of Portugal resolves the collapse of the BES On the one hand, the part BES is the “bad bank,” with equity and liabilities to subordinate creditors, as well as other malicious assets, contingent liabilities, and claims usually related parties In the end a “bad” bank like BES is irreversible and has to wait for liquidation over time As for BES's "bad" bank investment in Banco Espírito Santo Angola (BESA), BES's subsidiary in Angola, it was handled loosely and irresponsibly The central bank of Angola revoked guarantees on these investments, and state-appointed administrators took over the management of BESA The central bank of Portugal provides an additional 3.3 billion euros to BESA in the hope of recovering some of its loans in the bank's resolution This time, however, the central bank of Portugal has not made the same mistake of the past when making provisions for the entire BESA debt On the other hand, an established “good bank” is Novo Banco (NB) NB Bank includes all BES employees, branches, deposit and credit customers, as well as assumes the rest of the balance sheet, including deposits, senior debt obligations and healthy assets strong Bank NB will be sold to another bank in a bidding process to secure the highest possible price in order to recover as much as possible of the €4.9 billion in tax relief available to taxpayers In addition, pending the liquidation of BES, the owner also launched investigations to determine whether illegal or fraudulent activities were related to the demise of Banco Espirito Santo In addition to the standards on governance and management, it is also necessary to carefully consider and apply measures to promote transparency in financial statements, fight money laundering and tax evasion For example, opening training courses for staff to improve and enhance awareness and experience in identifying customer characteristics in money laundering prevention and combat In addition, the government needs to develop and apply internal regulations effectively and reasonably on preventing and combating money laundering Internal regulations include the basic policies, regulations, processes and procedures for identifying money laundering As for banks, it is necessary to research, develop and apply a reporting system and handle suspicious transactions In the process of performing transactions with customers, if detecting transactions with signs of law violation, records and information provided by customers are of low accuracy or incomplete, must promptly prepare Report suspicious transactions and hand them over quickly to the Anti-Money Laundering Department In addition, banks can think of the option of hiring experts on prevention and combat of money laundering to minimize the above behavior Because of these security experts they have experience and expertise in identifying customers and they have software that monitors transactions in progress, thereby improving the effectiveness of anti-money laundering activities Case study 2: "Bitcoin: Future of digital payment" Question 1: One of the arguments given by the persons who are not favor of Bitcoins and the other similar “virtual currencies” is that it is this lack of supervision and of regulation that makes Bitcoin dangerous Do you agree with this point of view? If not, please explain In my view, I agree with the view that “the lack of oversight and regulation has made Bitcoin dangerous”, but disagree completely Because Bitcoin becomes dangerous because of many other objective factors, not just because of the lack of supervision and regulation by the government Not to mention after the collapse of Bitcoin service providers and Bitcoin exchanges, Bitcoin has attracted significant regulatory scrutiny by governments around the world on both sides and positive Essentially, Bitcoin is described as “a completely new peer-to-peer electronic cash system, without a trusted third party.” The absence of a trusted third party creates a risk for the safety of Bitcoin transactions when only the Bitcoin private key is used as proof of ownership In the absence of government oversight and regulation of Bitcoin, it is used by people for a variety of purposes To some, Bitcoin looks like a niche currency used largely by libertarians But it also includes those who value “anonymity” in Bitcoin transactions for a negative purpose: those who not want their transactions detected by central banks or those who buy goods illegal It is clear that the lack of oversight and regulation by the government is part of the reason that creates opportunities for illegal activities in Bitcoin transactions and makes Bitcoin dangerous The risk of fluctuations in the value of Bitcoin is an objective factor that cannot be ignored in making Bitcoin dangerous It greatly affects Bitcoin service providers, merchants and especially Bitcoin exchanges Specifically in the reading we can see Mt Gox is a once dominant Bitcoin exchange that broke down in September 2014 as they reportedly lost around 750,000 bitcoins of their users and 100,000 bitcoins of their own, the equivalent of nearly half a billion USD Basically, Bitcoin itself has brought with it the property of “time deflation” or in other words the value of Bitcoin is inherently volatile over time Of course, Bitcoin's deflation, especially during the Great Recession, will encourage speculation and hoarding Because thinking: “Why should they spend Bitcoin today when it could be worth so much more tomorrow?” is inevitable According to the reading, as of May 2014, there are more than 94% of all bitcoins in circulation, with a total value of over $5.5 billion, held by only 0.33% of all Bitcoin addresses At the time, there were about 12.7 million bitcoins in existence, but researchers estimate that 64% of all bitcoins have never been used once, meaning the effective number of bitcoins in circulation is close to ,5 million Speculating and hoarding Bitcoin can be seen as wasteful and negative for economies around the world Besides fluctuating in value, Bitcoin is far more dangerous due to its high risk of fraud Specifically, hackers can break into the cloud storage of Bitcoin wallet service providers to steal other people's Bitcoin private keys A prime example of this is Flexcoin, a cloud-based Bitcoin wallet service, which fell into crisis and then went bankrupt when it was reported that they were hacked and had 896 bitcoins belonging to them stolen owned by their customers, that Bitcoin was worth more than $500,000 at the time Last but not least, there are acts of taking advantage of Bitcoin to violate the law After Mt Gox bankruptcy, a US senator has asked government regulators to ban Bitcoin The purpose of this is to prevent illegal activities that have been and are taking place such as drug trafficking and money laundering with Bitcoin While a complete ban on Bitcoin in the United States is unlikely in that time frame, there are still a number of executives at Bitcoin companies who have been arrested for money laundering charges The incident has exacerbated the perception that the legislation surrounding cryptocurrencies is “ambiguous” In the text, we can see an example of the commercial use of Bitcoin on the Silk Road marketplace, launched in February 2011 and called “eBay for illegal drugs.” Since Silk Road provides complete anonymity for both buyers and sellers, partly by relying entirely on Bitcoin for payments, it is unlikely that any illegal activity in the Silk Road marketplace will occur avoidable Following a US senator's Bitcoin bran request, the FBI shut down Silk Road in October 2013, while also arresting its alleged owner As a result of the events of Mt Gox, Silk Road, First Meta, Flexcoin etc have attracted significant regulatory scrutiny by governments around the world on Bitcion On the positive side, governments have realized that it is necessary to engage in oversight and regulation in order to promote a faster, safer and efficient payment system with digital currencies like Bitcoin than In addition, governments need to deal with other factors based on the balance between legal uses and the potential for illegal activities On the negative side, some governments have issued warnings and bans on trading Bitcoin and other similar “virtual currencies” Question 2: If you were running a business, would you accept Bitcoins for payments for your products/services? Why or Why not? What would you to protect your business against the risks due to the fluctuations of the value of Bitcoins compared with the traditional currencies and against the risk of fraud? If you were running a business, would you accept Bitcoins for payments for your products/services? Why or Why not? As a business operator, I will accept payments for small business value products in Bitcoin While accepting in Bitcoin exposes businesses to many challenges such as: implementing the Bitcoin protocol to facilitate the transfer of bitcoins from consumers to merchants; convert received bitcoins into fiat currency; integrate the Bitcoin buying process into an online shopping cart system or a store point of sale system; etc… But the benefits of accepting Bitcoin payments can be huge and long-lasting When businesses accept customers to transact with Bitcoin, businesses can attract a large number of customers to the business In fact, there are many Bitcoin wallets that charge no transaction fees or very little transaction fees, so there is a lot of potential to attract customers by allowing payments in Bitcoin By offering Bitcoin transactions, businesses can earn a significant amount of revenue from new and potential customers Specifically in the text, we can see that Overstock.com, a large Internet retailer known for deep discounts to attract customers, reported Bitcoin sales of $1 million for the month first accepted to offer Bitcoin transactions to customers (the company's annual revenue is about $1.3 billion) Not to mention when Foodler accepted Bitcoin as payment, 60% of new customers appeared among those who bought with Bitcoin Similarly, computer electronics retailer TigerDirect received a $500,000 Bitcoin order within three days of accepting the digital currency Besides, we can see that the biggest obstacle for customers of foreign enterprises is that customers are very annoyed in having to pay an average fee of about 8.5% of the total amount being transferred As for businesses, it takes a few days after a customer's payment to receive money even if they have used the largest money transfer service of Western Union or MoneyGram But when paying with Bitcoin, transferring money becomes easier and faster Instead of requiring many complicated procedures to register an account and make international payments Bitcoin is not like that Even customers only need to use SMS and a feature phone to use and pay with Bitcoin around the world, including African countries In addition, making international transactions is easy, and Bitcoin's transaction fees are not high or free Not to mention that the world's leading companies in providing Bitcoin services are constantly competing for "transaction fees" and the conversion process between fiat currencies Imagine the fact that customers can pay with Bitcoin with their mobile number and low transaction costs 10 will of course stimulate people to increase consumption in the world market Therefore, accepting payments in Bitcoin will bring huge profits from the world market In addition to reducing transaction costs and facilitating payments at home and abroad, accepting Bitcoin offers a number of benefits to merchants over credit cards in terms of reduced chargebacks When there is no longer a situation where consumers dispute a fee (sometimes months after payment occurs) and force the seller to return the money to the consumer, businesses will reduce labor and compensation costs complete This further promises a better future when businesses accept payments in Bitcoin What would you to protect your business against the risks due to the fluctuations of the value of Bitcoins compared with the traditional currencies and against the risk of fraud? When accepting payments in Bitcoin, businesses face many risks, especially those caused by fluctuations in the value of Bitcoin compared to traditional currencies and against the risk of fraud On the one hand, to combat the risk of fluctuations in the value of Bitcoin, businesses will list prices of goods/services in fiat currency On the other hand, because businesses pay their employees in fiat currency, the listing of prices of goods/services is in fiat currency Businesses can take full advantage of the instant “cash out” service offered by Bitcoin wallet service providers For example, if a consumer chooses to pay for goods with Bitcoin, merchant service providers will quote a price in Bitcoin, based on the seller's listed price and the current exchange rate available from one place called Bitcoin exchange After receiving Bitcoins from customers, service providers immediately convert bitcoins into fiat currency by automatically finding the top exchanges for the most profitable exchange rates A typical solution to limit the risk of Bitcoin's value fluctuations is to use Coinbase wallet Since Coinbase is both a consumer wallet and a merchant service provider, it is able to offer Coinbase wallet users an optimized “two-click” payment process at all merchants on Coinbase As a result, businesses can convert Bitcoins into currency quickly on Coinbase wallets to avoid the risk of Bitcoin's value fluctuations when the exchange rate changes In addition, when making international payments, businesses can use BIPS' merchant services The service focuses on international Bitcoin transactions and supports conversion to over 150 fiat currencies With BIPS being able to diversify Bitcoin-to-cash conversions in other countries, it is a good way to limit the volatility of Bitcoin's value against the exchange rate when making international payments Besides addressing the risk of Bitcoin's value fluctuations compared to traditional currencies, it's equally important to combat the risk of fraud in accepting Bitcoin payments 11 When a business makes a "cash out" (transferring ownership of Bitcoin to a Bitcoin wallet address and receiving fiat currency), that company must prove ownership of a private key, which can only be unlocked publicly for Bitcoins when making a "cash out" Therefore, in my opinion, businesses will not store Bitcoin private keys in the cloud as it can be stolen by cyber hackers In addition, businesses need to buy theft insurance or prefer a wallet with theft insurance that stores Circle's Bitcoin private keys In addition, businesses should use the "cold storage" services, offline storage, of leading Bitcoin wallet service providers such as Coinbase, Circle, etc Not to mention encryption services on external drives spread throughout physical vaults guarded by armed guards are also essential for security and fraud protection fraud for businesses 12 Reference Case: Banco Espirito Santo INSEAD Case: Bitcoin: The Future of Digital Payments Harvard Business School I.F.-H.F.B.S (2015) International Banking for a New Century Cenveo H.J.E.M.D.S.B (2002) International Banking: Text and Cases Pearson Education 13 ... investment banking? How does investment banking differ from commercial banking? (chapter 5) What are the three core functions of investment banking? The three core functions of investment banking. .. securities How does investment banking differ from commercial banking? The points of investment banking that differ from commercial banking are that investment banking is a higher-risk business... Investment banking doesn’t accept deposits from customers, but commercial banking does Investment banking funds come primarily from the issuance of stocks or bonds For commercial banking, their