Money is a special good in finance market which is bank based or market based

PROFESSIONAL MODERN BANKING IN VIETNAM Lecturer: Ms Nguyen Thi Thuy Dung Faculty of Banking- Insurance Academy of Finance Aug 2020 CHAPTER 1: MONEY IS A SPECIAL GOOD IN FINANCE MARKET WHICH IS BANK-BASED OR MARKET BASED I MONEY- A SPECIAL GOOD  Definition - Money is anything that is widely used and accepted in transactions involving the tranferring of goods or services from one person to another (anything is accepted as payment for goods) ? Can you name some forms/ types of money? I MONEY- A SPECIAL GOOD  Types - - - of money Commodity money: Used in barter economy where products are exchanged for products The value of the product is considered as the value of money Fiat money: has low intrinsic value; but it is legal and valid (legal tender) due to government’s regulations Bank money: consists of transactions relating to the withdrawing and depositing which are held at banks or the use of bank money I MONEY- A SPECIAL GOOD Types of money - Electronic money (REGULATED by the central bank): i.e Electronic money (e-money) is broadly defined as an electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the e-money issuer (European Central Bank) i.e Chinese digital currency (e-RMB) - Cryptocurrency (UNREGULATED): a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank i.e bitcoin, ethereum ,etc  MONEY- A SPECIAL GOOD Functions - A medium of exchange: + Solve the limitations of a barter system + Money facilitate transactions - A measure of value + an unit of account and a common measure of value +commodities value is expressed in money - A standard of deferred payment + Borrowing- related activities - A store of value +Saving purpose ? Which assets can also be used as the store of value? => Why we need to know about these functions of money?  BANKNOTES  The central bank is solely responsible to issue banknotes  Banknote circulation rule: money being used over a period of time is equal to the total price of all goods produced in that time MV= PY M: money supply V: speed of money’s circulation Y: the output of the economy P: price index MONEY SUPPLY SAYINGS AND QUOTES “A Penny saved is a penny earned” “Money is a good servant, but a bad master” II THE FINANCIAL SYSTEM: BANK-BASED OR MARKET- BASED? ? Commercial banks Vs non-bank credit institutions “Non-bank credit institution“ means a credit institution permitted to engage in some banking activities as its regular business, but not permitted to receive deposits from individuals and to provide payment services via clients’ bank accounts” (i.e finance companies, finance leasing companies…) (Law of credit institutions) VIETNAM BANK FOR SOCIAL POLICIES (VBSP) “Anywhere there is the poor where social policy bank is” - Operate not for profit purpose - Perform socio-policy lending programs of the government; - Targeted customers: the poor and the poor beneficiaries => Distinction between VBSP and commercial banks? VIETNAM DEVELOPMENT BANK (VDB) - the previous form: the Development Assistance fund - Serve development goals of the government - Mobilize capital to implement investment credit in infrastructure, supporting industries, environment protection… and export credit => Distinction between VDB and Commercial banks? FUNCTIONS OF BANKS  Capital mobilization: take deposits in forms of demand deposits, term deposits, savings deposits  Credit extension/ making loans: lend money to individuals and business  Payment service provision: provide means of payment, provide domestic and international payment service…  Other services: safe-keeping box, consultation, treasury FUNCTIONS OF BANKS: CREATING MONEY EXERCISES: FILL IN THE MISSING GAP One of the most vital roles of banks is money creation Banks create money through “fractional (1) r… banking” This term refers to the fact that banks keep only a small portion of their (2) d…… on hand When a customer comes into the bank and deposits $100, perhaps $10 of that will be kept on hand in the form of cash or (3) l… assets The remaining $90 will be lent out to customers as (4) l……, or used to (6) b… the stock or bonds of other companies This phenomenon is known as the (5) m…-m… and can be expressed as the formula: m = / reserve requirement If the reserve requirement is 10% (or 0.1), every dollar deposited with a bank, can become $10 of new money TYPES OF COMMERCIAL BANKS  Classification based on ownership State-owned - Joint-stocks own by the State / the people; - Cooperative; - Foreign joint venture - 100% foreign –owned  Classification based on scope of activities - Wholesaling - Retailing - EXERCISES: ENGLISH- VIETNAMESE TRANSLATION Banks’ maturity transformation Many investors are willing to invest on a very short term basis, but many projects require long-term financial commitments What banks do, then, is borrow short-term, in the form of demand deposits and short-term certificates of deposit, but lend long-term; mortgages, for instance, are frequently repaid over 30 years EXERCISES: ENGLISH- VIETNAMESE TRANSLATION Banks’ maturity transformation (cont.) By doing this, banks transform debts with very short maturities (deposits) into credits with very long maturities (loans), and collect the difference in the rates as profit However, they are also exposed to the risk that short-term funding costs may rise much faster than they can recoup through lending WRITING SKILLS Types of piece of writing:  Paragraph: a distinct section of piece of writing, usually dealing with a single theme/ idea and indicated by a new line, indentation or numbering  Essay: a shorter pieces of writing that often require the student to practice a number of skills such as close reading, analysis, comparison and contrast, persuasion, conciseness…  Thesis: a statement or theory that is put forward to be maintained or proved/ a long essay or dissertation involving personal research, written by a candidate for a university degree  Report: written for a clear purpose, to a particular audience, clearly structured with headings, titles, sections… WRITING SKILLS (CONT.) Essay writing: Types of essay  Define/ Explain/ Evaluate  Classification  Compare- Contrast  Cause- Effect  Opinion  Others (Narrative, description)  Combination of different types TOPIC FOR WRITING TO PREPARE FOR FINAL EXAM Topic : Define a commercial bank Explain why commercial banks are one of the most important financial intermediaries in the society Step 1: Type of essay: Define/Explain Step 2: Define a commercial bank (Introduction) Step 3: Explain its functions as a financial intermediary Step 4: Explain reasons why commercial banks are one of the most important financial intermediaries in the society Step 5: Conclusion TOPIC FOR WRITING TO PREPARE FOR FINAL EXAM Mock answer: A commercial bank refers to a special business operating in finance and monetary field Its main functions are receiving deposits, lending and providing other banking services for profit Commercial banks are where people can safely deposit their savings, which banks then pay interest on If there were no banks, people would have to store and protect their savings themselves, which would involve major risks Commercial banks issue loans to both people and companies Without banks, it would be very hard for people to buy a home or start a business, or for companies to make investments, for example In another way, commercial banks bridge the gap between savers and borrowers in the society The first reason for the importance of commercial banks as financial intermediaries is that, our economy couldn’t function without banks By attracting savings and granting credits, banks are the oil for the wheels that keep the economy turning Without banks as a gobetween, savers and borrowers would have to find each other personally, and a single transaction between a saver and a borrower would be very costly  Moreover/ Secondly/ What is more, the saver would face a big risk—if the borrower can not repay, the saver would lose all their savings A bank lends money to a lot of people and companies If some are unable to repay their loans, the bank can absorb these losses and savers will not be affected  In conclusion/ In short/ In summary/ Last but not least, commercial banks act as a key component of the financial system, which allocate funds from savers to borrowers in an efficient manner The existence of commercial banks make it easier for the economy to operate smoothly  THE CASE OF VIETNAM: BANK-BASED VS MARKET- BASED? Questions: Is the finance market in Vietnam a bankbased or market-based?  Data collections: (i) Market capitalization of listed domestic companies (% of GDP) (ii) Domestic credit to private sector by banks (% of GDP)  => Source: World Bank – World Development indicator https://databank.worldbank.org/source/worlddevelopment-indicators#  Data analysis: See Excel spread-sheet  Data presentation