Big equity began but do nothing for banking system

Ms Nguyen Thi Thuy Dung Faculty of Banking-Insurance Academy of Finance Aug 2020 The role of equity capital and mobilized capital in bank’s business - Equity capital is used to invest in fixed assets, capital contribution and share purchase, etc - Banks business by using mobilized capital (customers’ deposits) Types of equity capital - Accounting approach: ordinary / preference shares, share premium, reserves, retained earnings - Regulation’s approach Tier (core capital): ordinary shares; retained earnings; non- cumulative preferred stock; share premiums and other surpluses; and minority interests Tier (supplemental capital): allowance for loan and lease loss, subordinated debt capital instrument, mandatory convertible debt, equity notes Types of equity capital Regulation’s approach (Vietnamese case) Tier 1: chartered capital, retained earnings, reserves (for the purpose of charter capital supplement; financial provisioning, investment and development) Tier 2: surplus value in assets’ re-valuation (fixed assets and investment securities); convertible bonds, preferred stocks and subordinated debt instruments; general provisionings “Deposit taking means receiving money from an organization or individual as demand or term deposit, savings deposit, issuing deposit certificates, bills or treasury bills, and other forms of receiving deposits on the principles of full payment of principals and interests to depositors under agreement” (Law of credit institutions)  Deposits - Demand (sight deposits); - Time (term deposits); - Saving deposits  Valuable papers - Certificate of deposits (CD), treasury bills, promissory notes   Central bank funding (re-financing, special loan) Inter- bank lending  -  - Why people come to banks to open account and make deposits? Banks have reputation for public trust Banks’ business is closely regulated by laws Banks have to satisfy government requirements before starting its business Deposits insurance scheme is set up Procedure to open bank’s account Written application forms with specimen Required documents Features of demand deposits - Money are added to or withdrawn at any time by client - Without notice sent to banks in advance - Instrument: current account  Current account - Is designed to meet payment needs of customers - Issue cheque payment to third party - Withdraw money - Receive or transfer money from one to another account - Get non-term interest rate - Interest is paid monthly and automatically credited to the accounts  Features - Not flexible for customers to withdraw money before maturity - Term: Short term / Medium term/ Long term - Types: deposits in VND, (foreign currency, (gold))  Withdraw money prior to maturity disbursement - Switch deposit term -> get lower interest rate or non-term rate - Transfer ownership right - Roll-overs the time- deposits?  Benefits - Approval of overdraft limit - Collaterals for loans - Guarantee for third party’s borrowing at banks - Verification of personal finance  Refinancing: the state bank provide secured credit to meet short-term capital’s demand from banks  Types of refinancing - Discounting/ rediscounting valuable papers - Lending secured by valuable papers - Special loan in case of insolvency or under special control  Features - Short-term source of capital - Valuable papers must be mortgaged to SBV - Subject to the regulation of SBV and the monetary policy   When a bank is entitled to get a special loan from the SBV?  Why SBV have to support commercial banks in this case? “Bank business for nothing” The consequences of bank panics -  - - - Features Formed on the basis of mutual relation of borrowing among commercial banks Support liquidity need in the payment process of banks (ensure the continuously smooth capital flows) Support the reserve requirement from the SBV Cost Rate = Interbank rate + margin Interbank rate= VNIBOR, LIBOR, SIBOR (VNIBOR: Vietnam Interbank Offered Rate LIBOR: London Interbank Offered Rate)  Bidv issues 2009 certificates of deposit in dong – fourth phase Bank for Investment and Development of Vietnam (Bidv) has recently issued the certificates of deposit in dong for the fourth phase in 2009 with the minimum par value of million dong for individual customers and 50 million dong for corporate ones The deposit terms for those newly issued certificates are four months, seven months and 13 months with the coupon rate of 9.3-9.99 percent per year The bank has applied accumulative deposit rates for the customers In addition, with the purpose of bringing more benefits for the bank’s depositors, at the first time of changing the deposit term, the customers will receive their principal and interest at the higher coupon rates than of the normal post-paid savings products offered by the bank (from 24 Nov 2009 Intellasia)  Topic 3: “Compare and contrast different sources of banks’ mobilizing capital” What ‘s the compare and contrast paragraph? In a compare and contrast paragraph, you write about the similarities and differences between two or more people, places, things, or ideas  Structures: ✓ The first structure: Block format ✓ The second structure: Point-by-Point format  When using the block format for a two supporting details comparison, discuss one subject in the first detail and the other, in the second  The first detail: Opening sentence names the two subjects and states that they are very similar, very different or have many important (or interesting) similarities and differences.The remainder of the paragraph describes features of the first subject without referring to the second subject  The second detail: Opening sentence must contain a transition showing you are comparing the second subject to the first (e.g "Unlike (or similar to) [subject #1], [ subject #2] ) Discuss all the features of subject #2 in relation to subject #1 using compare/contrast cue words words such as like, similar to, also, unlike, on the other hand for each comparison When using this format, discuss only the similarities in the first paragraph and only the differences in the next This format requires careful use of many compare/contrast cue words and is therefore more difficult to write well  The first detail: Opening sentence names the two subjects and states that they are very similar, very different or have many important (or interesting) similarities and differences Continue discussing similarities only using compare/contrast cue words such as like,similar to, and also for each comparison  Opening sentence MUST contain a transition showing you are switching to differences (e.g Despite all these similarities, [these two subjects] differ in significant ways.) Then describe all the differences, using compare/contrast cue words such as differs, unlike, and on the other hand for each comparison Block format: - Para 1: Discuss about the features of Demand deposits: interest payment, maturity, flexibility to withdraw money, permission to issue cheque book - Para 2: Discuss about the features of Time / Term deposits in comparison with Demand deposits:  Point to point format 1: - Para 1: Discuss about the similarities between Demand and Time Deposits - Para 2: Discuss about the differences between Demand and Time Deposits  Point to point format 2: - Para 1: [interest payment]: compare Demand and Time deposits - Para 2: [flexibility to withdraw money]: compare Demand and Time deposits - Para 3: [Maturity]: compare Demand and Time deposits - Para 4: [ Permission to write cheque book]: compare Demand and Time deposits  [Introduction]: Demand and time deposits are among the most important and popular types of mobilized capital There exists several similarities and differences between these two types of customer deposits The essay will discuss these similarities and differences in turn [Body- Para 1- Similarities]: Demand and time deposits share several common features For instance, since they are both belong to the customer deposits, banks usually have several incentives to attract these funds from customers especially from individuals and households Both demand and time deposits get interest payment Additionally, customers can deposit their money at anytime [Body- Para 2- Differences]: Despite all these above similarities, Demand and Time deposits differ in significant ways In terms of interest payment, demand deposits usually get low interest rate due to its balance fluctuation In contrast, time deposits get high interest rate since customers use time deposits for interest-earning purpose With regard to the maturity, demand deposit have no maturity while time deposits have fixed maturity date Moving to the flexibility to withdraw money, demand deposits allow customers to withdraw their money at anytime However, customers will get lower interest rate or even non-term rate if they withdraw their money prior to the maturity date The last point in which demand deposits and time deposits differ relates to the permission to issue cheque book Demand deposits allow customers to issue cheque book whereas time deposits does not Time deposits could be used as collateral for customers to borrow from banks or to guarantee a third party to borrow from the banks [Conclusion]: There are several similarities and differences between demand deposits and time deposits They both serve as the key sources of mobilized funds for banks However, they are also very different Accordingly, the bank should be aware of these differences to design suitable method to attract the deposits          is similar to Similarly, Likewise, the same the same as both also too as well SIMILARITIES         Is different/ varied from Is divergent from Differ from in contrast By contrast, On the other hand, even though although DIFFERENCES     Like X, Y In like manner, One way in which X is similar to Another way in which X is similar to Y is (that) SIMILARITIES       Unlike X, Y… While x, Y whereas however , but , yet DIFFERENCES