Banking system consists of banks and the bank of banks

CHAPTER 2: BANKING SYSTEM CONSISTS OF BANKS AND THE BANK OF BANKS Ms Nguyen Thi Thuy Dung Faculty of Banking- Insurance Academy of Finance Aug 2020 I BANKING SYSTEM IN VIETNAM II SBV- a ministerial level agency and the central bank  A central bank can generally be defined as a financial institution responsible for overseeing the monetary system for a nation, or a group of nations, with the goal of fostering economic growth without inflation - - Central banks around the world? In the US: Federal Reserves In Europe: European Central Bank -ECB Central bank in Vietnam The State Bank of Vietnam (SBV) II SBV- a ministerial level agency and the central bank The State Bank of Vietnam the ministerial level agency of the government => The autonomy/ independence of SBV? - SBV’s Roles and functions are equivalent to other governmental department - Not have freedom to conduct the monetary policy, interest rate/ currency exchange policy - Be influenced by government spending and political factors https://www.youtube.com/watch?v=ju1gnMSciFU II SBV- a ministerial level agency and the central bank The State Bank of Vietnam is a central bank Note issuance - Central bank is the monopoly to issue note - Central banks’ notes and coins are legal tender Banks of commercial banks - Receipt of deposits for payment and required reserves - Lending to commercial banks (The last resort): refinancing in forms of: + discounting/ re-discounting valuable papers + lending secured by the mortgage of valuable papers - Clearing agent in payment system Banks of the State/ Government II SBV- a ministerial level agency and the central bank - - - SBV is a central bank- monetary policy Stabilize the value of currency + control (curb) inflation + control foreign currency exchange Implement monetary policy + Control money supply +Tools: interest rate, required reserves, the Open Market Operation (OMO) Control commercial bank system + Inspection + Supervision Monetary policy vs Fiscal Policy Monetary policy:  + is managed the SBV (central) + aim to manage the money supply + aims to control inflation, maintain price stability and public trust on the national currency + use some tools such as interest rate, the Open Market Operation Fiscal policy:  + is managed by the Ministry of Finance + regulates the government spending and funding, tax rate policy , to promote economic growth Translation: Monetary policy  Monetary policy is an economic policy that manages the size and growth rate of the money supply in an economy It is a powerful tool to regulate macroeconomic variables such as inflation and unemployment The central bank or a similar regulatory organization is responsible for formulating these policies The primary objectives of monetary policies are the management of inflation or unemployment, and maintenance of currency exchange rates Depending on its objectives, monetary policies can be expansionary or contractionary  This is a monetary policy that aims to increase the money supply in the economy by decreasing interest rates, purchasing government securities by central banks, and lowering the reserve requirements for banks An expansionary policy lowers unemployment and stimulates business activities and consumer spending The overall goal of the expansionary monetary policy is to fuel economic growth However, it can also possibly lead to higher inflation  The goal of a contractionary monetary policy is to decrease the money supply in the economy It can be achieved by raising interest rates, selling government bonds, and increasing the reserve requirements for banks The contractionary policy is utilized when the government wants to control inflation levels Translation: Tools of monetary policy Ngân hàng Trung ương sử dụng nhiều cơng cụ khác để thực thi sách tiền tệ NHNN Việt Nam sử dụng công cụ sau:  - Tái cấp vốn: Tái cấp vốn hình thức cấp tín dụng NHNN nhằm cung ứng vốn ngắn hạn phương tiện toán cho TCTD NHNN quy định thực việc tái cấp vốn cho TCTD theo hình thức cho vay có bảo đảm cầm cố giấy tờ có giá; chiết khấu giấy tờ có giá; hình thức tái cấp vốn khác  - Lãi suất: NHNN công bố lãi suất tái cấp vốn, lãi suất loại lãi suất khác để điều hành CSTT  - Tỷ giá hối đoái: Tỷ giá hối đoái đồng Việt Nam hình thành sở cung cầu ngoại tệ thị trường va có điều tiết Nhà nước NHNN công bố tỷ giá hối đoái, định chế độ tỷ giá, chế điều hành tỷ giá Translation: Tools of monetary policy  - Dự trữ bắt buộc: Dự trữ bắt buộc số tiền mà TCTD phải gửi NHNN để thực CSTT quốc gia NHNN quy định tỷ lệ dự trữ bắt buộc loại hình TCTD loại tiền gửi TCTD nhằm thực CSTT quốc gia  - Nghiệp vụ thị trường mở: NHNN thực nghiệp vụ thị trường mở thông qua việc mua, bán giấy tờ có giá TCTD; quy định loại giấy tờ có giá phép giao dịch thơng qua nghiệp vụ thị trường mở Further reading: The central banks’ monetary policy    Direct tools: Credit line management of commercial banks The concept is that the central bank control the total outstanding balances of commercial banks Commercial banks can not exceed the limits regulated by the Central bank Pros: The central bank can adjust and control money supply when indirect tools are ineffective, during periods of overheating, high rate of inflation Cons: Eliminates the competitive dynamics among the commercial banks, reduces the efficiency of the allocation of capital in the economy Further reading The central banks’ monetary policy Direct tools: interest rate  The CENTRAL BANK set up an interest rate framework of commercial bank, thereby affecting the size of the credit and the economy => money supply  Pros: Suitable to countries when there are no conditions to promote the effect of indirect tools  Cons: + Lose the objectivity of interest rate, which is actually the "price" of capital so it must be formed from the supply and demand relationship of capital in the economy + Make commercial banks be passive and their business operations be more expensive Further reading The central banks’ monetary policy Indirect Tools: Reserve requirements Banks need to hold a quantity of reserve assets for prudential purposes If a bank falls to its minimum desired level of reserve assets it will have to requests for loans or seek to acquire additional reserve assets from which to expand its lending By changing the required reserve ratios, the central bank can control the money supply Further reading The central banks’ monetary policy Indirect Tools: Loans to banks and the discount window Allows eligible banking institutions to borrow money from the central bank, usually to meet short-term liquidity needs By changing the discount rate, that is, the interest rate that monetary authorities are prepared to lend to the banking system, the central bank can control the supply of money in the system Manipulation of the discount rate can therefore influence short-term rates in the market Further reading The central banks’ monetary policy Indirect tools:The Open Market Operation The central bank operates in the market and purchases or sells government debt to the non-bank private sector In general, if the central bank sells government debt the money supply falls (all other things being equal) because money is taken out of bank accounts and other sources to purchase government securities => an increase in shortterm interest rates OMOs are flexible and precise – they can be used for major or minor changes to the amount of liquidity in the system; they can easily be reversed; open market operations can be undertaken quickly Exercise: Translation  Có ba mơ hình NHTƯ giới: (1) NHTƯ độc lập với phủ; (2) NHTƯ quan thuộc phủ; (3) NHTƯ thuộc Bộ Tài  NHNN Việt Nam quan thuộc Chính phủ, đơn vị ngang Bộ Chính vậy, hoạt động NHNN chịu điều chỉnh lớn Chính phủ  Gần hoạt động NHNN phải cho phép Chính phủ (phát hành tiền, thực CSTT quốc gia, cho vay ngân sách trung ương… ) Exercise: Translation  Sự thiếu độc lập NHTU làm giảm tính linh hoạt việc thực CSTT quốc gia Bên cạnh đó, NHNN phải thực nhiệm vụ không phù hợp với mục tiêu CSTT, chẳng hạn tái cấp vốn cho NHTM để xoá nợ khoản vay doanh nghiệp nhà nước Topic for writing Topic 2: “Define the central bank’s autonomy What you think about the case of the State Bank of Vietnam” Step 1: Type of an essay: An opinion essay Step 2: Define the central bank’s autonomy Step 3: Explain the current status of SBV Step 4: State your opinion (agree/ disagree) and justify its (reason) Step 5: Conclusion Topic for writing Central bank’s autonomy refers to the extent to which the central bank is independent from the executive and legislative control to carry out its functions (refers to the independence of the central bank from the government) The State Bank of Vietnam (SBV) is a ministerial level agency of Government; there is some political intervention in construction and implementation of SBV’s monetary policy For example, SBV does not have freedom to conduct the monetary policy, interest rate/ currency exchange policy Additionally, SBV is influenced by the government spending and other political factors When SBV is dependent on the government, it is easier to align/ connect several macroeconomic policies under the same guidance of the government However, research shows that a dependent central bank could not effectively conduct its monetary policies to reach the target of currency stabilization and inflation management Topic for writing In shorts, because a central bank independent from the government will allow more active implementation of monetary policies, I think that SBV should be given more flexibility (freedom/ independence) Giving SBV more freedom in its legal status, policy tools and goals, organization, human resource management and financial control is necessary to make its economic intervention more effective and pave the way for lower inflation, increased stability and more sustainable economic development in Vietnam