Moral hazard problem in vietnamese commercial banks and solutions,graduation thesis

THE STATE BANK OF VIETNAM BANKING ACADEMY FOREIGN LANGUAGES FACULTY GRADUATION THESIS Moral Hazard Problem in Vietnamese Commercial Banks and Solutions Student: Pham Huyen My Class: K15 – ATCB Student number: 15A7510155 Supervisor: Ms Nguyen Thi Hong Mai Ha Noi, May 20, 2016 THE STATE BANK OF VIETNAM BANKING ACADEMY FOREIGN LANGUAGES FACULTY GRADUATION THESIS Moral Hazard Problem in Vietnamese Commercial Banks and Solutions Student: Pham Huyen My Class: K15 – ATCB Student number: 15A7510155 Supervisor: Ms Nguyen Thi Hong Mai Ha Noi, May 20, 2016 Graduation Thesis Banking Academy DECLARATION I hereby declare that the thesis is my original work and effort Where other sources of information have been used, they have been acknowledged Signature Pham Huyen My Pham Huyen My i K15 – ATCB Graduation Thesis Banking Academy ACKNOWLEDGEMENT This graduation thesis would not have been existed without the guidance and the inspiration of several individuals who in one or another way contributed and extended their valuable assistance in the preparation and completion of this study On the completion of this thesis, I would like to express my special thanks to my supervisor Ms Nguyen Thi Hong Mai – Dean of Foreign Languages Faculty of Banking Academy – for her useful materials, invaluable advice, kind guidance, suggestions, and comments on my paper work In spite of her busy schedules, she always spared the time to guide me through this thesis My sincere words of thanks also go to the lecturers in Foreign Languages Faculty of Banking Academy who have help build up my knowledge and necessary skills over the past four years Without their guidance, I could not perform this far Last but not least, I would love to extend my gratefulness to my family and my friends who have supported, advised, and taken care of me during the thesis completion Because of time pressures and limited capability of the writer, this work will certainly not be free from defects Therefore, hopefully lecturers and readers will sympathize Pham Huyen My ii K15 – ATCB Graduation Thesis Banking Academy ABSTRACT Moral hazard, together with adverse selection, is a type of asymmetric information which is a situation that one party in a trade has more information than the other In banking business, moral hard usually creates harmful effects on commercial banks, especially in credit provision to customers Contradict to the easier access to information in the modern world; moral hazard still becomes a serious threat to banks as it arises from the bad motivation of not only customers but also banks staff For a developing economy like Vietnam economy, with the uncomplete banking system where bank operation still has deficiencies, moral hazard can cause severe damage To know the reality of moral hazard problem conquering Vietnamese banking system recently, many crimes convicted have been studied The majority of them happened to one of the biggest banks in the system and usually made losses of billions of VND The most common way of conducting tricks was forging loan applications, and then after disbursement they would disappear with the money appropriated In some cases, the loss money could be recovered partly, but sometimes nothing was returned Noticeably, the result of the research shows that customers often jointed hands with banks’ employees to implement their sinful schemes After researching and studying, some solutions have been suggested to prevent and cope with moral hazard problem These contents would be humbly described in this thesis with the theme: Moral Hazard Problem in Vietnamese Commercial Banks and Solutions Pham Huyen My iii K15 – ATCB Graduation Thesis Banking Academy TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENT ii ABSTRACT iii LIST OF ABBREVIATIONS AND ACRONYMS vi LIST OF FIGURES AND TABLES vii CHAPTER I: INTRODUCTION 1 Rationale of the study Research objectives Scope of the study Research methodology .2 Thesis structure Chapter II: Literature review – Theoretical Knowledge of Moral Hazard in Commercial Bank Commercial banks .4 1.1 Definition of commercial bank .4 1.2 Role of commercial bank Asymmetric information in commercial bank system 2.1 Concept of asymmetric information .7 2.2 The consequences of asymmetric information .8 Moral hazard problem in commercial bank system 3.1 Concept of moral hazard problem in commercial banks 3.2 Causes of moral hazard .11 Pham Huyen My iv K15 – ATCB Graduation Thesis Banking Academy 3.3 Consequences of moral hazard 14 Chapter III: Research methodology and data analysis – Reality of Moral Hazard Problem in Vietnamese commercial bank system .17 The trend of Moral hazard problem in Vietnam recently 17 1.1 Overview .17 1.2 Recognizing common moral hazard behaviors 19 Severe cases of moral hazard in Vietnamese commercial bank system 22 2.1 Cases from the viewpoint of causes by customers .22 2.2 Cases from the viewpoint of causes by banks 28 2.2 Penalties sentenced .35 Addressing the existing problem of moral hazard .37 3.1 Prevailing policies and measurements in Vietnam .37 3.2 Unsolved problems to deal with 40 Chapter IV: Recommendations and conclusions .42 Solutions carried out by banks 42 1.1 Solution to customers regarding bank operation 42 1.2 Solution to banks’ human resources 45 Extra solutions needed from the government 46 CONCLUSION 48 REFERENCES 49 Pham Huyen My v K15 – ATCB Graduation Thesis Banking Academy LIST OF ABBREVIATIONS AND ACRONYMS ABBank :An Binh Commercial Joint Stock Bank ACB :Asia Commercial Joint Stock Bank BIDV :Joint Stock Commercial Bank for Investment and Development of Vietnam DongA Bank :DongA Joint Stock Commercial Bank GIC :Global Insurance Corporation HCM :Ho Chi Minh Jsc :Joint-stock Company LienVietPostBank :Vietnam Postal Union Commercial Joint Stock Bank Ltd :Limited Company MSB :Vietnam Maritime Commercial Joint Stock Bank Navibank :Nam Viet Commercial Joint Stock Bank OCB :Orient Commercial Joint Stock Bank Sacombank :Saigon Thuong Tin Commercial Joint Stock Bank SBBS :SaigonBank-Berjaya Securities SBV :State Bank of Vietnam SeABank :Southeast Asia Commercial Joint Stock Bank Techcombank :Technology Commercial Joint Stock Bank The USA :The United State of America USD :US Dollar VAT :Value Added Tax VDB :The Vietnam Development Bank VIB :Vietnam International Commercial Joint Stock Bank Vietcombank :Bank for Foreign Trade of Vietnam VND :Vietnam Dong VPBank :Vietnam Prosperity Joint-Stock Commercial Bank Pham Huyen My vi K15 – ATCB Graduation Thesis Banking Academy LIST OF FIGURES AND TABLES Figure 1: Banking Moral Hazard Cases in Vietnam from 2006 to 2015 17 Figure 2: The Number of Moral Hazard Banking Criminals in Vietnam from 2006 to 2015 18 Figure 3: Banks’ losses announced in 2012 19 Figure 4: Banks’ losses to Phuong Nam Company 25 Figure 5: Losses caused by Huynh Thi Huyen Nhu 34 Table 1: Possible chances of asymmetric information 10 Table 2: Penalties for VDB Dak Lak – Dak Nong case 35 Table 3: Penalties for Phuong Nam Company case 35 Table 4: Penalties for Dong Phuong Company case 36 Table 5: Penalties for Lifepro case 36 Table 6: Penalties for Huyen Nhu case 37 Pham Huyen My vii K15 – ATCB Graduation Thesis Banking Academy CHAPTER I: INTRODUCTION Rationale of the study Since the Renovation in 1986, Vietnamese economy has changed astoundingly The business environment has been opened up to encourage economic entities to joint One of the most remarkable changes is the amazing development of the banking system For nearly 30 years (1986 – 2016), Vietnamese banking system has been expanded largely both in quantity and quality There are 46 banks in active1 among which closely 87% are commercial banks Banks nowadays not only just the source of funds but also carry out many other services supporting the establishment, operation, and the development of other economic entities The very important roles of banks require them to have an appropriate source of funds, facilities, and most essential, human resources Every banking activity is operated and supervised by staff Hence, it could be risky for banks if the employee is not well-qualified On the other hand, banks’ development drives them to more risks as more businesses are done, more risks from customers Among those customers exists people who intentionally or unintentionally want to take benefit for them will something harmful to banks The risk mentioned above is called moral hazard As the economy and also the banking system are evolving day by day, moral hazard is also becoming a serious threat to banks It results in serious consequences and severe damage to individuals, organizations, banks, and further the entire economy Because it is a human matter which is complicated, hardly anyone can shape it Being aware of how vital this problem is, this graduation thesis would like to portrait as much as possible an appropriate part of moral hazard problem in Vietnamese commercial banking system The author hopes that this work could help indicate the situation and suggest probable recommendation toward moral Statistic from SBV Pham Huyen My K15 – ATCB Graduation Thesis Banking Academy  Dong Phuong Company versus Agribank Internee Count Violating lending regulations in Bank Staff credit institutions’ activities Imprisonment 72 years in total Fraudulent appropriation Duong Thanh Cuong Life Abuse of trust appropriation Abuse of position and power while Le Thanh Cong performing official duties to 25 years appropriate properties Table 4: Penalties for Dong Phuong Company case  Lifepro Vietnam versus Agribank Internee Count Imprisonment Abuse of position and power while performing official duties Pham Thanh Tan Irresponsibility causing severe 22 years consequences Irresponsibility causing severe bank manager consequences Pham Thi Bich Luong Chu Thi Kim Hien Bank Staff 19 years in total Abuse of position and power while performing official duties Violating lending regulations in 60 years in total credit institutions’ activities Violating lending regulations in credit institutions’ activities Le Minh Hieu Abuse of position and power while (Lifepro) performing official duties 49 years in total 15 years Table 5: Penalties for Lifepro case Pham Huyen My 36 K15 – ATCB Graduation Thesis Banking Academy  Huynh Thi Huyen Nhu 4,000 billion “great crime” Internee Count Imprisonment Fraudulent appropriation Huynh Thi Huyen Nhu Life Counterfeiting seals and documents of agencies and organizations Abuse of position and power while performing official duties Fraudulent appropriation 17 bank staff 181 years in total Violating lending regulations in credit institutions’ activities Irresponsibility causing severe consequences businessmen Usury years months 10 days in total Table 6: Penalties for Huyen Nhu case Addressing the existing problem of moral hazard 3.1 Prevailing policies and measurements in Vietnam In general, economies in the world tend to use two most applicable types of methods One is the strengthening of law and regulation to moral hazard violators This method performs as a cautionary to prevent people from falling into immoral behaviors A further superior method is applying protocols, strategies, frameworks, or tools to help improve the information database, prevent and protect the banking system from risk caused by the sinful activities Enforcing law and regulations The law and regulation in Vietnam from a long time ago has focused on penetrating debauched activities in the economy and most of the regulations are also applied to banking system Not until 1997 was The Law on Credit Institutions Pham Huyen My 37 K15 – ATCB Graduation Thesis Banking Academy published and brought into life Since then, the majority of cases were prosecuted under the effect of this law Combining many laws and regulations together, it seems like Vietnam has the effective punishment for moral hazard crimes with many court sentences to life imprisonment or many years in prison along with heavy compensation However, it still seemed to be not hard enough for people to put themselves away from moral hazard Tightening deposit insurance policy Deposit Insurance policy was created to protect the benefit of depositors incase banks collapsed When banks participating in deposit insurance fall into bankruptcy, deposit insurance organization will then takes charge to pay to depositors under legal policy Deposit insurance contributes to the safe and healthy development of banking operation In fact, it helps banks deal with the consequences of risks including moral hazard Up to present, 40 commercial banks in VN have participated in deposit insurance However, because of it, depositors not care about the creditworthiness of the bank but the higher interest rate This leads to the problem that bank may be too confident in the deposit insurance and loosen the management, making it easier for bank staff to profiteer by fraudulence, collusion Dealing with this problem, Vietnam has followed the instructions on reducing moral hazard based on the principles of BCBS – IADI According to principle 2, by ensuring the compatibility of the deposit insurance, moral hazard can be controlled Because restricting the condition of deposits to be insured can make banks highly aware that they will risk their own assets if investing or lending without much consideration Therefore, banks will have to build their own management and supervision systems to make sure that the investments or the loans are well monitored Deposit Insurance of Vietnam has set the limit of insurance at just 50 million VND per deposit This humble amount warns banks that if bankruptcy occurs, the majority of payment loss is to the bank Still, if banks cannot keep a close eye on it daily operation, wicked staff can still find ways to profiteer deposits Pham Huyen My 38 K15 – ATCB Graduation Thesis Banking Academy Specializing banking operation model In banking system, there are common two main management models which are the focus and the dispersion models For Vietnamese environment, the majority of banks follows the focus model and faces the risk of unprofessional operation One staff can take care of multitask, resulting in the chances for them to carry out moral hazard behaviors In developed economies, the separation model is designed to minimize risk and utilizing professional skills of every single credit officer At the head quarter, two main departments will exist namely credit authorization and credit management to share the task equally for a better performance Meanwhile, at branches there are three main units for three functions: customer relation, credit analysis, credit approval By this way, customers and staff cannot joint hand together to execute embezzlement However, this method seems to be suitable for big banks as it requires a considerable amount of money, time, and effort In Vietnam, VCB, BIDV are the pioneers in applying this model For example, the rate of VCB bad debts in 2013 was controlled at 2.73% This figure surpassed the expectations of its own shareholders (3%) and it is worth recording that this ratio is lower the average level of the banking sector Nevertheless, if customers can bribe with head officers, moral hazard can still happen If staff can get an enormous amount of money when they agree to customers a favor, there is no reason for them to refuse this precious chance to earn such fortune Building corporation code of conduct Several commercial banks in Vietnam have published their own business cultures to improve their images in customers’ mind Among those cultures exists employee’s moral standards Nonetheless, ethical standards of banks focus much on the attitude toward customers rather than the concern about devoting to banks’ business For example, many formerly state-owned banks like Vietinbank, BIDV, or Vietcombank have announced regulations on moral standard, code of conduct to customers, living style for staff; and the result was quite positive as they gain Pham Huyen My 39 K15 – ATCB Graduation Thesis Banking Academy the satisfactory from customers doing business with them It helps them abandon the image of slow, duplicated, complicated, and bureaucratic operation However, the regulations on how should employee focus on banks’ benefit, assets, credit, etc was not clearly embraced but only covers some minor details such as punctuation for work or savings equipment and facilities That is why moral hazard still happens 3.2 Unsolved problems to deal with After looking into the real cases related to moral hazard, and the prevalent actions to cope with them, the general problems could be drawn out: First, it is obviously that customers can always have incentive to trick the banks whenever they are in need of money The trick they used were very simple, faking documents, taking the advantages of their reputation, or their relationship with bank staff So the initial thing to cope with is how to defend for customers Secondly, it can be seen that most cases arise from the bank’s manager and staff misbehaviors The majority of cases occur in the credit department Bank staff, for their own sake, has conducted several illicit activities This happened even though they knew that the applicants cannot satisfy the requirements for loans or they have dark motivation behind Consequently, funds that were improperly used may even be seized and not returned Because of the benefits given by some customers, bankers may wriggle or even break the rules to provide credit to clients This is the second problem that banks need to solve Third, some banks apply very lax credit and investment policies to customers: ignore some of the most basic principles in lending process and binding conditions; lack of strict and logical control of funds use leading to insufficient loans and bad debts; grant too much credit to some particular customers Banks pursue the goals of improving profitability by focusing much on credit growth To prevent moral hazard, this should be cared Pham Huyen My 40 K15 – ATCB Graduation Thesis Banking Academy Forth, some bank expanded business that reached to some new complex services and products Nonetheless, the management and the technology were not updated compatibly so banks could not deal with So, bank staff quality is also a problem to consider Fifth, it is the banks’ officers and employees that appropriate money with very sophisticated trickeries, such as counterfeiting legal identified objects, using fake accounts to set up loan applications, withdrawing funds from customers’ accounts to usurp etc This happened partly because everyone has greed However, it was also for the reason that banks staff know very well the banking activities, banking process so that it was like making it even easier for them to commit a crime Therefore, staff ethic standard is also a heavy burden In summary, the reality of moral hazard problem in Vietnamese commercial banks is on a bad trend in terms of various aspects However, the existing regulation cannot perform effectively in solving and preventing the issue There are few barriers against the problems, and cases discovered and sentenced only charged the criminals but cannot revive the damages fully On the ground that moral hazard rooted from human factor regarding customers and banks human resources, further solutions should be developed to cope with the immoral activities of customers, the ill-functioned of bank and also bank staff’s unethical behaviors Pham Huyen My 41 K15 – ATCB Graduation Thesis Banking Academy Chapter IV: Recommendations and conclusions As moral hazard problem are very complicated and difficult to solve, the responsibility is not to be taken by any party respectively but by all participants in the banking business: government, commercial banks, and customers However, this work focuses on the moral hazard problem happening to commercial banks, therefore, the solution will be guided to help those banks prevent the problem For banks in specific, the great idea is that banks need prevention from both the authority regulations and their own operating rules To deal with the customers, banking system need elucidations in the operation to defend themselves from various types of risk, and the government should also help banks to threaten the people To deal with the bank employee, many method to manage the human resources should be figured out Solutions carried out by banks Because most activities are carried out at commercial banks, it is necessary for banks to apply suitable policies to manage the work Moral hazard in banking mostly happens at the loan segment, thus, banks ought to find out appropriate solution to reduce information asymmetry, adverse selection, and moral hazard Banks should give loans to the right people and keep a close eye on the debt to make sure nothing wrong will happen However, as the causes worked out that the most dangerous factor, the root of moral hazard problem is from human, banks should have the priority at managing their own staff and customers 1.1 Solution to customers regarding bank operation Normally, if banks want to reduce the risk of moral hazard, they should have prevention from inside out For the outside factors like customers or investment partners, because it is not easy for banks to investigate or to know exactly the characteristics and the ethic manner of customers or the nature of the investment, Pham Huyen My 42 K15 – ATCB Graduation Thesis Banking Academy the best way to secure their assets is to create a strict and effective running regulations First of all, the bank should obey the corporate governance policy austerely “Good corporate governance is not an end in itself It is a means to support economic efficiency, sustainable growth, and financial stability It facilitates companies’ access to capital for long-term investment and helps ensure that shareholders and other stakeholders who contribute to the success of the corporation are treated fairly”9 According to OECD, corporations should follow the main rules about: the bank corporation’s structure, the roles, and responsibilities of the management boards, the rights, and duties of shareholders, and the transparency and access to information Following these rules will guarantee the management of the bank to be effective as each member of the leader board has his own authority and has to be responsible for what he does The information of the bank’s operation will also be kept track on closely so that if there is anything wrong, the bank can react in time Managing normal companies is not easy; managing banks even requires more attention Banks deal with various economic entities, bear higher risk, operate under complicated regulations; therefore the collapse of a bank is very fragile, and it can affect the whole system, causing severe damage Hence, good corporate governance is an essential factor to maintain a bank’s reputation, value, and existence Secondly, commercial banks themselves need to establish an internal control and auditing system The internal control system includes policies, procedures, practices, and instructions to keep the bank stick to the original aims and goals The internal auditing system is meant to monitor the bank’s activities objectively and to consult the management board if any problem rises The third point is to develop their own rules and conditions for providing credits and doing investment As most moral hazard problem happens in the credit and investing segment, it is vital to control where to pour the money into by setting G20/OECD Principles of Corporate Governance (September 2015) Pham Huyen My 43 K15 – ATCB Graduation Thesis Banking Academy specific and strict conditions Above all conditions, every customer who want to borrow, every project that need invested have to be legally accepted by the laws, the authority, and other government departments Only when customers satisfy certain conditions that banks can agree to provide them with credit Only when the projects are proved to be effective, profitable, and fair risk that banks can decide to invest in These principles are made to make sure that all departments in a bank will have to work thoroughly and carefully before making any decision Moreover, stating precise clause in lending of investing contracts helps banks identify faults, errors, or breaches more easily and determine who to blame quickly Fourth, collateral asset is an essential requirement that ought to be presented in lending contract to customers Collateral is one of the most important factors in those conditions mentioned above However, collateral is now an indispensable part of the lending process in particular Assets chosen to be collateral are required to have certain value based on the value of the loan and also on different calculation of each bank, but normally they have to cover the amount of loan in case of insolvency The next thing to care about collateral is their stability Usually, stable assets such as real estate, vehicles, financial documents (bonds, shares, secondary securities), saving accounts, etc The more stable the value, the more secure the loan In addition, when giving high value assets to banks as a guarantee, borrowers somehow are reluctant to carry out moral hazard activities Having favorable collateral secures the banks from the risk that moral hazard will happen The last possible thing to care about is for the period after disbursement or after investing This is a solution in the operation but also a great prevention against human factor as customers Banks have to keep a wide eye on the borrower, control closely the use of the loan to make sure there will be no violation, or infringe The financial status and many other information of the borrower should also be updated carefully in case any unfavorable incident happens These actions are to make certain that the loan will be back at maturity It is the same for Pham Huyen My 44 K15 – ATCB Graduation Thesis Banking Academy investment that every change related to the funds need to be informed so that the bank will know they are spending money wisdom 1.2 Solution to banks’ human resources Banking is a type of business that demands clear transparency and high professionalism Unqualified human resource not only affects the result of the business but also hides a big thread of moral hazard That is why banks need to pay attention to the recruitment process and the training programs to develop the human resource with high quality and work ethic Banks need to raise the group awareness among staff, show them how influential their work can affect the bank Employees should be told to bear in mind that their work is for the benefit of the bank, instead of their personal benefits What had happened in many cases proves that many bank staff did not care and did not try to protect the bank's assets as they protect their property In some cases, credit staff decided to make loans to disqualified customers or for the wrong purposes Then, the customer’s financial status got bad, they could not pay the loan, and the staff immediately quit the job with the fear for responsibility Apart from raising the awareness of employees, building a strict and strong risk management system and improving the ability of the HR managers is also essential to prevent misbehaviors in bank staff There should be rules forbidding one staff to have the authorization to multiple tasks In parallel, the accounting and auditing department need to be updated to daily or periodically activities Any hint of fraudulence or risk must be informed to the management board right away One professional strategy of some well-known banks in the world is building the enterprise culture It encompasses values and behaviors that “contribute to the unique social and psychological environment of an organization” Ravasi and Schultz (2006) wrote that organizational culture is a set of shared assumptions that guide what happens in organizations by defining appropriate behavior for various situations This is regarded as a smooth and flexible way to force employee to obey regulation It seems to look more attractive to staff rather than rules and laws Pham Huyen My 45 K15 – ATCB Graduation Thesis Banking Academy as people will enjoy the thought of being at good manner, professional, and prettier Not only helps guide the activity of existing bank’s staff, it also draws the attention of future staff whose thoughts are familiar to the culture Therefore, it shares the burden with the recruitment department Another effective solution banks can take is combining rewards and punishments rationally It is nature to apply serious penalty to the violator according to their faults If the behavior causes damages related to both the bank and the customer, and leads to disputes, it should be taken to course In reverse, basing on the employee’s contribution, productivity, and attitude, banks would offer some valuable rewards or higher bonuses so that staff is more motivated to work better and forces themselves not to get into moral hazard Extra solutions needed from the government Moral hazard in banking activities not only affects the banking sector but also has severe impact on the entire economy It forces the government to afford considerable amount of bailouts to save the economy This brings about the demand from authority to have effective management and close supervision to avoid the most damage First of all, the government should harden the punishment for moral hazard behaviors When people are seriously and absolutely afraid of the penalties that they with get when committing such crimes, their incentives and motivations to involve in moral hazard can reduce Because of the incomplete law and regulation, criminals with serious guilt still get soft sentences, the greedy still can find the flaws in the system to get away with the sins Secondly, it is compulsory to propose a high enough reserve requirement and minimum operating capital for banks This requirement forces commercial banks to re-assess their investment portfolios Because they have to keep a specific amount of capital at central bank’s vault and Pham Huyen My 46 K15 – ATCB Graduation Thesis Banking Academy at their vault to ensure the liquidity, banks will have to use their own idle funds to invest in other opportunities As a consequence, the risk that banks will face is at their own money; the more risky the investment, the more chance that bank will be exposed to losses In detail, there are commonly three types of reserve requirement and minimum working capital: based on the total asset against model (mostly customers’ deposits), based on the Basel Accords against the total assets and the off balance sheet assets, and lastly based on the model in the USA in 1996 for big banks to develop private model calculating potential losses and set up a provision of to times higher In reality, calling for a minimum amount of capital can be easing providing that there is effective administration and an explicit accounting and auditing system On the contrary, if the administrative system functions fruitlessly, basing on only the reserve requirement and minimum working capital cannot perform the best result The third resolution is the supporting tool to help enhance the power of the two methods mentioned above Government would try to impose the ceiling and the floor interest rate, restrict the class for loan, round the available segment for investing, keep the close and accurate accounting and auditing records, etc Limiting the interest rate prevents the risk that banks would attempt to lower the rate as much as they want to attract funds, and then using them to put in risky investment Restricting the target to give loans and the investment range is also a method to prevent banks from making the lending process too easy for borrowers, confine the situation that banks will lend money to dishonest customers, and invest in risky projects In the USA, banks are not allowed to hold common shares in corporation In some other countries, banks cannot carry out huge investments without permission of the central bank The strict control may give banking system a big challenge to develop freely, but it helps protect the safety and sustain of the market and the economy Pham Huyen My 47 K15 – ATCB Graduation Thesis Banking Academy CONCLUSION Commercial banks, as obviously showed, play a significant part in the national economy as for a wide range of services they provide Indeed, the roles and functions of this intermediary are irreplaceable and indispensable for the performance and development of the whole economy Explicitly, a deficiency or a problem relating to a bank’s operation and performance would not only affect its own business, but also has impact on the whole banking system Even worse, it could bring down the entire economy of a country and spread the risk to others As moral hazard now is considered a serious risk threatening the health of banks together with the economy, it is necessary that immediate actions be taken in the alarming situation of moral hazard in commercial banks Regarding Vietnamese economy, handling moral hazard problem in the banking system cannot be completed by just only banks It undoubtedly requires the cooperation of both banks and government Only when favorable conditions are satisfied and appropriate measures are taken is the matter can be controlled By that, the banking system could benefit from a more secured environment, and then perform more excellent The final result is that the domestic economy would partly get rid of malfunction banking system, contributing to the goal of sustainable development Pham Huyen My 48 K15 – ATCB Graduation Thesis Banking Academy REFERENCES Mirrlees, J A (1999) The Theory of Moral Hazard and Unobservable Behaviour: Part I In J A Mirrlees, The Review of Economic Studies (Vol 66, pp 321) Cambridge: Trinity College Boundless (2015, July 21) Asymmetric Information: Adverse Selection and Moral Hazard Retrieved from Boundless Economics: https://www.boundless.com/economics/textbooks/boundless-economicstextbook/challenges-to-efficient Delhaise, P (1998) Asia in Crisis – The Implosion of the Banking and Finance Systems John Wiley & Sons (Asia) Pte Ltd Laiboni, M (2012, April 9) Asymmetric Information in the Banking Sector: How adverse selection & moral hazard affect our banking system Retrieved from Munene Laiboni Blog: https://laiboni.wordpress.com/2012/04/09/asymmetric-information-in-thebanking-sector-how-adverse-selection-moral-hazard-affect-our-bankingsystem/ MA Nguyen Thuy Trang (2012, December) Rui ro hoat dong ngan hang Nhin tu goc dao duc Tap chi Ngan hang(23), 30-33 MA Vu Thanh Ha (2012, May) Quan ly rui ro dao duc hoat dong ngan hang Tap chi Khoa hoc va Dao tao Ngan hang(120), 7-31 MA Vu Thi Thanh Ha (2012, June) Moi quan he giua rui ro dao duc hoat dong ngan hang va tu hoa tai chinh Tap chi Ngan hang(12), 33-41 Mishkin, F S (2010) The Economics of Money, Banking, and Financial Markets Pearson PhD Do Thi Kim Hao (2012, May) Rui ro dao duc hoat dong ngan hang Nhin tu cac cuoc khung hoang tai chinh tien te tren the gioi va bai hoc cho Viet Nam Tap chi Ngan hang(10), 16-25 Pham Huyen My 49 K15 – ATCB Graduation Thesis Banking Academy Rose, P S., & Hudgins, S C (2005) Bank Management and Financial Services, 7th Edition McGraw-Hill/Irwin Vu Thanh Ha, & Tran Thu Huong (n.d.) Ly luan co ban ve rui ro dao duc hoat dong ngan hang Retrieved from The State Bank of Vietnam Website: http://www.sbv.gov.vn/portal/faces/vi/pages/ddnhnn/nctd/nctd_chitiet;jsess ionid=3H61X53J2L327wjVR9KyV4vkQSFkH8yDNzvLMy8Sksy5QnGhs pDV!-213760874!1257172917?dID=69735&_afrWindowId=null&_afrLoop=325677985722 70835&dDocName=CNTHWEBAP01162511366&_afrWindowMode Cases information Retrieved from these Websites: An ninh Thu Online: http://anninhthudo.vn/ CafeF: http://cafef.vn/ Lao dong: http://laodong.com.vn/ PetroTimes: http://petrotimes.vn/ VNExpress: http://vnexpress.net/ The Supreme People’s Court: http://toaan.gov.vn/ Pham Huyen My 50 K15 – ATCB