Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks. These functions are common to the financial systems of most developed economies. Yet the form of these financial systems varies widely. In the United States and the United Kingdom competitive markets dominate the financial landscape, whereas in France, Germany, and Japan banks have traditionally played the most important role. Consider the statement above. Select an element of the Australian financial system, e.g. banks, debt markets, equity markets, foreign exchange markets, superannuation, government regulation. Compare and contrast the selected element with the corresponding element of the financial system of the country you are allocated to and suggest lesson(s) for the development of the financial system in Vietnam.
Financial system supports the exchange of cash and other financial assets between private citizens and commercial entities by banks, debt markets, equity markets, foreign exchange markets, superannuation, government regulation (Langfield & Pagano, 2016b) The banking system is essential to the economy because it makes credit and money more easily available Every country has a diverse banking system based on its political and economic structure, particularly the USA, which is a developed nation under a democratic regime, and Vietnam, which is a socialist country in a developmental stage The banking systems of Vietnam and the USA have three most prominent similarities First, both the Vietnamese and US banking systems have two levels, with the central bank at the top and commercial banks at the bottom The US central banking system is the Federal Reserve Act, which was passed in 1913, established the Federal Reserve system (Rothbard, Murray, 2002) The State Bank of Vietnam is the central bank of Vietnam (World bank, 1995) Figure 1: USA Federal Reserve System and The State Bank of Vietnam logo Besides, both systems are regulated by government agencies to ensure the safety and soundness of the financial system Based on function of bank system, both systems offer a wide range of banking services and products for both individuals and companies, such as investment products, loans, credit cards, and checking and savings accounts Based on political and economic structure, Vietnam and US bank systems have following key differences Characteristic Vietnam USA Central bank independence No Yes State ownership Dominant Significant, but not dominant Foreign participation More significant Less significant Technology adoption Less advanced More advanced Table 1: The key differences between the Vietnamese and US banking systems First, about central bank independence, the US Federal Reserve is an independent central bank (Board of Governors of The Federal Reserve System), while the State Bank of Vietnam is under government oversight Secondly, the Vietnamese banking system is dominated by state-owned commercial banks, owns 41.18% of total assets of bank system (Tran Thuy, 2021), while the US banking system is more competitive, with a mix of public and private banks Thirdly, foreign banks play an important role in the Vietnamese banking system, accounting for about 10% of total banking system assets (Can Van Luc, 2022) The US banking system has lower foreign participation, with foreign banks accounting for only about 5% of total banking system assets (Kirikkaleli, 2016) Finally, about technology adoption, because of being developed country, the US banking system is more technologically advanced than the Vietnamese banking system, with a higher adoption of digital banking and mobile payments By contrasting the financial systems of the two nations, the Vietnamese banking system can get some insight into the benefits of the United States for its own advancement Firstly, from the Government and the State Bank, it is necessary to amend, supplement and perfect a legal corridor of publicity, transparency, and fairness at all levels of management to facilitate equal and safe commercial banks The State Bank conducts inspection, assessment, classification of commercial banks based on criteria for good and safe banking evaluation Secondly, Vietnamese Commercial Banks should be active in the main aspects, such as equity, asset quality, liquidity, profitability To improve the governance capacity, commercial banks should clearly define the rights and responsibilities of boards and head office centers, as well as strengthen the coordination between these boards and their branches, continue to innovate and modernize banking technology Vietnamese domestic commercial banks should strengthen international cooperation with foreign commercial banks and actively participate in programs and institutions to combine with regional and international economic association in supervising and exchanging information Overall, the banking systems of Vietnam and the USA are still similar in terms of banking system functions, however there are a few differences in state management, market share of foreign banks, and technology systems The measures taken by the government, State Bank, and commercial banks are aimed at strengthening the Vietnamese banking system and making it more resilient to shocks References Langfield, S., & Pagano, M (2016) Contribution to The Palgrave Handbook of European Banking Unpublished Work, 41(6), 1363–1373 Rothbard, M (2002) A History of Money and Banking in the United States: The Colonial Era to World War II (PDF) Auburn, Alabama: Ludwig von Mises Institute pp 36–37 ISBN 0-945466-33-1 World Bank (1995) Viet Nam Financial Sector https://documents1.worldbank.org/curated/en/338111468762900866/pdf/ multi0page.pdf Review Board of Governors of the Federal Reserve System (2020) Who owns the Federal Reserve? Board of Governors of the Federal Reserve System (n.d.-a) https://www.federalreserve.gov/faqs/about_14986.htm#:~:text=The%20Federal %20Reserve%20System%20is,directly%20accountable%20to%20the%20Congress Thuy, T (2021) High capital adequacy, Total Assets of the Private Banking Sector Continue to Increase Strongly Financial magazine https://tapchitaichinh.vn/antoan-von-cao-tong-tai-san-cua-khoi-ngan-hang-tu-nhan-tiep-tuc-gia-tang-manhme.html#:~:text=T%E1%BB%95ng%20t%C3%A0i%20s%E1%BA%A3n%20c %E1%BB%A7a%20kh%E1%BB%91i%20NHTM%20nh%C3%A0%20n %C6%B0%E1%BB%9Bc%20(g%E1%BB%93m%20AgriBank,t%C3%A0i%20s %E1%BA%A3n%20to%C3%A0n%20h%E1%BB%87%20th%E1%BB%91ng Van Luc, C (2022) It’s Time to Relax the Limit on Foreign Investors’ Ownership Economic life in Vietnam and the World https://vneconomy.vn/den-luc-noi-gioihan-ty-le-so-huu-cua-nha-dau-tu-nuoc-ngoai.htm Kirikkaleli, D (2016) Foreign Bank Penetration and the Domestic Banking System: Empirical Evidence from Turkey based on the var approach Acta Oeconomica, 66(1), 79–105 http://www.jstor.org/stable/24857771