Research rationale
Between 2008 and 2012, the world faced severe consequences from the global financial crisis, which originated from the U.S subprime mortgage turmoil in the summer of 2007 This crisis is considered the most significant financial downturn since the Great Depression of the 1930s, leading to the potential collapse of major financial institutions, government bailouts of banks, and plummeting stock markets globally It significantly contributed to the failure of key businesses, resulted in a decline in consumer wealth estimated in trillions of dollars, and sparked a downturn in economic activity that eventually led to a recession and exacerbated the European sovereign debt crisis.
The global financial crisis has impacted economies worldwide, and Vietnam, as a small, open, FDI-reliant, and export-dependent nation, felt its effects, particularly in late 2008 Although the Vietnamese banking system was not severely impacted, the crisis exposed vulnerabilities in credit operations, raising concerns about enhancing the resilience of credit activities against future shocks This prompted my research on the "Impacts of the Global Financial Crisis on Credit Operations of the Banking Sector in Vietnam" as my graduation thesis.
Purpose and research questions
Purpose
Provide an insight into the global financial crisis, specifically its causes, timeline and effects on global banking system
Critically analyze the impacts of financial catastrophe on credit operations of commercial banks in Vietnam
Propose some practical recommendations for the recovery and improving the efficiency of credit operations.
Research questions
How to define a financial crisis? What are possible effects of financial crises on banking system in theory?
What is the global financial crisis? Why did it happen? And how was global banking industry influenced?
What are the impacts of the global financial meltdown on credit operations of banking sector in Vietnam?
How to enhance the efficiency of domestic credit operations to confront future shocks and crises?
Scope and limitations
The scope of this thesis covers the following main areas:
The global financial crisis of 2008
The credit operations of domestic banking sector under the crisis
However, the research project focuses only on the effects of the crisis on banking system without mentioning to societal or other economic consequences.
Research methodology
Quantitative research method
Quantitative method is a research method focusing on the collection and analysis of numerical data and statistics
This thesis analyzes the fluctuations in interest rates, credit growth rates, and outstanding deposits and loans within Vietnam's banking sector during 2007, 2008, and the first half of 2009, ultimately drawing conclusions about the subsequent impacts on the economy.
Data collection: Secondary data
In this paper, the secondary data are extracted from the SBV Annual Reports 2007-
2009, SBV Monthly Report on Banking Operations and the public annual reports of some commercial banks, to name but a few, ACB, Vietcombank, BIDV, VPBank.
Structure of the thesis
Apart from Introduction and Conclusion, the thesis consists of three chapters: Chapter I: Theoretical Framework of Financial Crisis
Chapter II: Global Financial Crisis and Its Impacts on Credit Operations of Banking Sector in Vietnam
Chapter III: Solutions to Improving Credit Operations of Domestic Banking
THEORETICAL FRAMEWORK OF FINANCIAL CRISIS
Definition and characteristics of a financial crisis
A financial crisis is a complex event that lacks a universally accepted definition, making it essential to clarify its meaning before analyzing its impacts Despite extensive research focused on identifying and dating financial crises, ambiguities continue to exist within the field.
Initially, financial crises were attributed to budget deficits, prompting the need for increased money supply to address imbalances This led governments to abandon fixed exchange rate systems, causing national foreign currency reserves to drop below acceptable levels According to Obstfeld (1994), the root cause of financial crises often lies in the tension between fixed exchange rate regimes and governments' desires for expansionary monetary policies.
Hyman Minsky (1919-1996) posited that financial crises arise from the failure of various economic factors to meet their financial responsibilities This can manifest in situations where banks are unable to repay their depositors or borrowers default on their loans to banks.
Unfulfilled payment obligations often stem from liquidity and solvency issues or intentional capital occupation Insolvency can arise from bankruptcies, business losses, or government spending challenges This situation can spread through the economy like an infectious disease, affecting overall economic stability.
Mishkin (2000) posited that financial instability can trigger a financial crisis due to asymmetric information, which may cause moral hazard and adverse selection Consequently, the banking system may struggle to fulfill its essential role as a distribution channel for financial resources.
Many economists believe there is a connection between efforts to liberalize financial markets and the occurrence of financial crises The debate over whether fiscal liberalization directly leads to financial instability remains a contentious issue.
Thus, what exactly is a financial crisis?
To choose the most proper definition among those, first it is advisory to have fundamental knowledge about some relevant notions below:
Finance: Branch of economics, a science that studies the management of funds
Financial market: Any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives
Financial markets play a crucial role in capital allocation, with capital markets primarily focused on raising funds and money markets enabling liquidity transfer These markets effectively connect capital providers with those in need of financial resources.
Crisis: A condition of instability or danger, as in social, economic, political, or international affairs, leading to a decisive change
A financial crisis is characterized by disruptions in financial markets, often leading to declining asset prices and insolvency among debtors and intermediaries This turmoil spreads throughout the financial system, impairing the market's ability to effectively allocate capital.
1.1.2 Typical characteristics of a financial crisis
Financial crises can vary significantly, even if their indicators appear similar Therefore, it is essential to study the different types of financial crises to identify their unique characteristics and effectively distinguish between them.
Financial crises can be categorized into two main types: those defined by strict quantitative measures and those assessed through qualitative analysis and judgment.
& Rogoff, 2009) The first group mainly includes currency and sudden stop crises and the second group contains debt and banking crises Each type has its own key features and indicators
A currency crisis, or balance-of-payments crisis, occurs when a currency experiences a sudden devaluation, often leading to a speculative attack in the foreign exchange market This crisis typically arises from persistent balance-of-payments deficits or market speculation regarding a government's ability to support its currency Currency crises predominantly impact fixed exchange rate systems rather than floating ones, as demonstrated by the 1997 Asian Financial Crisis, which showcased all the defining traits of such an event.
A sudden stop, also known as a capital account crisis, refers to a significant and often unforeseen decline in international capital inflows or a rapid reversal of total capital flows to a country This phenomenon typically coincides with a notable increase in credit spreads.
Since currency crisis and sudden stop are measurable variables, they lend themselves to the use of quantitative methodologies
A banking crisis occurs when customers rapidly withdraw their funds, leading to potential bankruptcy for the institution and creating a credit crunch due to reduced available funds A notable example is the 2008 failure of Bear Stearns, which highlights the indicators of a systemic banking crisis: bank failures, where some banks go bankrupt, merge, or are nationalized; bank runs, where many customers simultaneously withdraw deposits fearing insolvency; and significant government intervention to provide liquidity and capital assistance.
A debt crisis occurs whenever an economic entity cannot service or repay its debts
A foreign debt crisis occurs when a country is unable or unwilling to meet its foreign debt obligations, which can involve sovereign or private debt Conversely, a domestic public debt crisis arises when a nation fails to fulfill its domestic financial commitments, either through explicit default, currency inflation, or other forms of financial repression.
Since banking turmoil and debt crisis are not so easily measurable variables, they lend themselves more to the use of qualitative methodologies
In brief, several common characteristics of financial crises can be summarized as follows:
Declines in asset prices Currencies are devalued, foreign currency reserves decline, and the fixed exchange rate regimes collapse
High inflation rate due to devaluation (or depreciation) of domestic currency
Massive capital withdrawals when investors notice the devaluation of domestic currency
Bank runs that lead to closure, merger or takeover by the public sector of one or more financial institutions
Financial institutions have to seek the governments‟ capital assistance on a large scale
Deterioration of the balance sheet statement of financial institutions and non- financial ones
Imbalance in national budgets, BOP and trade
Foreign debts proliferate, and the economy slides into recession
Financial crises are contagious, spreading from country to country with the help of the globalization
Financial crises are intrinsically linked to significant disruptions and risks within the money and finance markets Consequently, the most profound effects of such financial turmoil are often felt in banking operations.
Possible effects of a financial crisis on banking operations
Numerous studies on financial crises have demonstrated their significant effects on both local and global economies, particularly highlighting the pronounced impact on banking system credit operations.
First and foremost, what are banking operations?
Article 4, section 12 of the Law on Credit Institutions 2010 defines banking operations as the trading in and regular provision of services, which include deposit taking, credit extension, and via-account payment.
Deposit taking and credit extension are crucial to banking activities, as they represent over 50% of a commercial bank's total assets and contribute significantly to its income, often accounting for half or two-thirds of total earnings Consequently, these credit operations are vulnerable during financial crises, impacting the overall stability of the banking sector.
Financial turmoil can significantly impact key factors such as interest-rate policies, market money supply and demand, credit management practices, and debt recovery processes, all of which directly influence credit operations Consequently, a financial crisis poses a risk to banks' deposit-taking and credit extension activities.
Changes in government interest rate policies can significantly impact deposit-taking and credit extension activities When interest rates decrease due to expansionary monetary policy, the demand for money rises, prompting banks to increase loan sizes to remain competitive and expand their credit operations However, lower interest rates can also create challenges for banks in mobilizing funds Conversely, higher interest rates resulting from contractionary monetary policy make borrowing more expensive, reducing the money supply in circulation and within banks, leading to what is known as "credit scarcity."
A financial crisis induces banks to tighten their credit management To minimize the credit risk, banks can be stricter on loan conditions, consequently reducing their credit and debit balance
A financial crisis significantly hampers business performance, leading to challenges for organizations and individuals in repaying loans Consequently, intermediaries struggle to collect debts, while customer defaults diminish the attractiveness of banks' balance sheets and exacerbate liquidity issues As banks face funding problems, customers may withdraw their deposits en masse, pushing banks toward insolvency This situation is further aggravated by large-scale insolvencies that can threaten to destabilize the entire banking system.
In conclusion, the credit activities within the banking industry are significantly influenced by various factors in the financial market, including interest-rate policies, money supply and demand, and credit policies, as well as banks' debt collection capabilities Any alterations in these elements can trigger a financial crisis, leading to substantial repercussions for the credit operations of commercial banks during such events.
GLOBAL FINANCIAL CRISIS AND ITS IMPACTS ON CREDIT
The global financial crisis of 2007-2008
2.1.1 Global financial crisis: Five key stages
The global financial crisis, also known as the late-2000s financial crisis or the
The "Great Recession" is widely regarded by economists as the most severe financial crisis since the Great Depression of the 1930s, originating from financial turmoil in the US in 2007 and rapidly affecting global markets This crisis should be viewed as a multi-staged process that developed over time, with five key stages marking its progression, notably on significant dates such as August 9, 2007, and September 15, 2008.
On August 9, 2007, the financial crisis began as BNP Paribas announced the cessation of activity in three hedge funds focused on US mortgage debt, triggering a seizure in the banking system This revelation exposed the existence of tens of trillions of dollars in questionable derivatives, significantly undervalued compared to prior estimates by bankers.
Nobody knew how big the losses were or how great the exposure of individual banks actually was, so trust evaporated overnight and banks stopped doing business with each other
The financial crisis reached its peak on September 15, 2008, when the US government decided not to bail out Lehman Brothers, marking a significant turning point In contrast, earlier actions included the US facilitating a buyer for Bear Stearns on March 14, 2008, and the UK nationalizing Northern Rock on February 17, 2008, highlighting differing approaches to financial instability.
The collapse of Lehman Brothers shattered the belief that banks were "too big to fail," leading to a widespread perception of risk among all financial institutions Within a month, the imminent threat of a global financial meltdown prompted Western governments to inject substantial capital into banks to avert their failure While these interventions occurred just in time, they could not stop the global economy from spiraling into crisis Credit availability for the private sector plummeted, coinciding with a significant decline in consumer and business confidence This turmoil followed a period of high oil prices, which had led central banks to prioritize high interest rates to combat inflation instead of lowering them in anticipation of an impending financial crisis.
During the winter of 2008-09, the newly established G20 group, comprising both developed and developing nations, took coordinated measures to avert a recession from escalating into a severe economic slump Key actions included drastic cuts to interest rates, the announcement of diverse fiscal stimulus packages, and the implementation of quantitative easing to create electronic money This strategic response was highlighted at the London G20 summit.
On April 2, 2009, global leaders pledged a $5 trillion fiscal expansion, including an additional $1.1 trillion for the International Monetary Fund and other institutions to stimulate job growth and reform banks However, as the global economy began to recover, international cooperation weakened as countries prioritized their individual interests.
On May 9, 2010, the focus of financial concern shifted from the private sector to the public sector, as the IMF and European Union stepped in to assist Greece, highlighting the solvency issues of governments rather than banks The recession had led to soaring budget deficits due to decreased tax revenues and increased welfare spending, compounded by fiscal measures introduced in late 2008 and early 2009 Greece faced unique challenges, including a lack of transparency regarding its public finances and tax collection issues, which raised alarms in other nations about their own budget deficits This shift towards austerity influenced policy decisions across the UK, Eurozone, and the United States, which had maintained expansionary fiscal policies longer than others.
On 5 August 2011, the morphing of a private debt crisis into a sovereign debt crisis was complete when the rating agency, S&P, waited for Wall Street to shut up shop for the weekend before announcing that America's debt would no longer be classed as top-notch triple A This could hardly have come at a worse time, and not just because that week saw the biggest sell-off in stock markets since late 2008, as fearful investors reacted to the United States losing its coveted AAA credit rating
Figure 1: The Dow Jones industrial average on August 6, 2011
2.1.2 Genesis of the global financial crisis
The global financial crisis, triggered by the bankruptcy of Lehman Brothers in September 2008, has created significant challenges for the world economy, the global financial system, and central banks This crisis may lead to transformative changes in central banking and financial regulation Identifying the root causes of the crisis is crucial for developing effective solutions to mitigate its impacts.
The causes of global financial crisis should be examined on both global and national (the US) scales
Global imbalances, resulting from prolonged loose monetary policies in major advanced economies, have significantly impacted the financial landscape The United States experienced large current account deficits, peaking at nearly 6% of GDP in 2006, while countries like China and oil-exporting nations in the Middle East and Russia recorded substantial surpluses These macroeconomic imbalances were identified as a primary cause of the financial crisis, as they led to significant saving-investment discrepancies and extensive cross-border financial flows, ultimately straining the financial intermediation process and interacting with inherent flaws in financial markets and instruments.
Sources: Datastream, BEA, Census Bureau, Natixis
The ongoing financial turbulence can be primarily linked to local factors, particularly the sub-prime mortgage crisis and reckless speculation in the United States.
Easy credit conditions in the United States, driven by decreasing interest rates and an influx of foreign funds, led to a housing bubble financed by numerous subprime mortgages These loans, accessible to consumers with poor credit ratings, posed higher risks of default and were offered at elevated interest rates and unfavorable terms Financial institutions repackaged these mortgages into investment products like collateralized debt obligations (CDOs) and mortgage-backed securities (MBS) through securitization Government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac played a crucial role by purchasing and repackaging these mortgages for investors, which allowed lenders to reinvest and expand their lending activities The intense competition among mortgage lenders for market share further relaxed lending standards due to a limited supply of credit-worthy borrowers, enabling less credit-worthy individuals to secure loans Many of these borrowers opted for adjustable-rate mortgages (ARMs), which initially offered low payments that later escalated significantly, with around 80 percent of subprime loans in 2005 being ARMs.
The surplus of investment capital, often referred to as a liquidity glut, led to an excess of funds chasing limited investment opportunities This situation contributed to the housing bubble's peak, where substantial capital was funneled into poor-quality projects Prior to the global financial crisis, a significant portion of this available capital was allocated to mortgage-backed securities and collateralized debt obligations.
The strong demand for bundled mortgages from investment banks and government-sponsored enterprises (GSEs) led to a decline in lending standards, creating an unsustainable speculative bubble In 2007, the top five US investment banks reported over $4.1 trillion in debt, representing 30 percent of the US economy While GSEs like Fannie Mae and Freddie Mac traditionally maintained conservative lending practices and high underwriting standards, they began to lose market share as loan originators gained power The most problematic loans were issued between 2004 and 2007, a period marked by intense competition, prompting GSEs to relax their standards to compete with private banks.
2007, 61 percent of the loans Freddie purchased were subprime, and Fannie‟s portfolio reflected a similar 58 percent (Sperry 2011)
Table 1: GSEs’ subprime loan and securities purchases Sources: Inside Mortgage Finance, FHFA, Fannie Mae, Freddie Mac, and Edward Pinto
As adjustable-rate mortgages (ARMs) led to higher interest rates, many borrowers began to default, resulting in significant losses across various loan types, which John Talbott (2010) described as an "epidemic" that spread from housing to the broader economy In mid-2007, rising interest rates caused housing prices to plummet, resulting in homes being worth less than their mortgage loans, further exacerbated by supply and demand dynamics Thomas Sowell (2010) noted that banks, not typically managing real estate, were incentivized to quickly sell repossessed homes at any price By September 7, 2008, under the burden of defaulting mortgages, Fannie Mae and Freddie Mac were placed into conservatorship, holding over $5 trillion in mortgage-backed securities and debt Shortly after, Lehman Brothers collapsed, and Merrill Lynch was acquired by Bank of America in a fire-sale The American Insurance Group (AIG), burdened with $400 billion in credit default swaps related to defaulting subprime mortgages, ultimately failed on September 16, 2008, leading the Federal Reserve to authorize an $85 billion bailout for a 79.9% stake in the company This followed JPMorgan Chase's acquisition of Bear Stearns in May 2008, facilitated by the government due to Bear Stearns' inability to secure short-term financing As the housing bubble burst, soaring commodity prices, particularly oil, which rose from $60 to $147 per barrel by July 2008, further destabilized the economy, with energy analyst Tom Theramus identifying this volatility as a potential "root of the crisis."
2.1.3 Impacts of the crisis on global banking industry
Credit operations of commercial banks in Vietnam under the influence of
As Vietnam's financial market becomes increasingly integrated into the global economy, it faces greater vulnerability to external shocks and crises Banks, serving as the lifeblood of the financial system, are particularly susceptible to disruptions, as evidenced during the Great Recession when the stability of financial markets was severely threatened.
2008 and early 2009, the Government‟s regulatory policies on interest rate and money supply considerably changed the situation of fund mobilization and credit extension of Vietnamese commercial banks
2.2.1 An assessment of fund mobilization
Despite the mid-2007 financial crisis in America, the Vietnamese financial market remained largely unaffected, with the banking sector experiencing robust growth in fund mobilization.
By 2007, total capital mobilization by credit institutions surged to 47.64%, up from 36.53% in 2006 and 32.08% in 2005 Notably, VND mobilization experienced a significant increase of 53.99%, compared to 41.15% the previous year, while foreign currency mobilization rose by 29.66% in 2007, exceeding the 25.31% growth observed in 2006 The highest growth rate of 101.85% was recorded in joint stock banks, foreign bank branches, and non-bank credit institutions, alongside a 24.45% increase in fund mobilization within the state-owned commercial banking sector, according to the SBV Annual Report.
In 2007, credit institutions implemented proactive strategies to enhance mobilization, such as diversifying mobilization methods, raising interest rates, simplifying payment account openings, improving card services, and launching appealing promotions Furthermore, the expansion of their networks, including branches and sub-branches, played a significant role in attracting substantial idle funds from both economic entities and the general population.
Figure 3: Capital mobilization from the economy Source: Annual Report 2007- State Bank of Vietnam
During the global financial crisis, the situation deteriorated significantly, impacting the State Bank of Vietnam's interest rate policies, altering money supply and demand in the market, and eroding public confidence.
Firstly, the continuous changes in interest rate policies of SBV in the face of the crisis made it difficult for commercial banks to mobilize fund
Figure 4: Interest rate in 2008 Source: State Bank of Vietnam
In early 2008, crude oil prices reached a record high of $140 per barrel, driven by a downturn in the global financial market and internal economic factors, resulting in a significant surge in inflation rates.
In 2008, the government implemented various measures to combat inflation and stabilize the macro economy In the first quarter, these measures included tightening monetary policy and raising the base interest rate from 8.25% to 8.75% As a result, many commercial banks increased their deposit interest rates to avoid a slowdown in deposit mobilization, with the highest rate reaching 13.8% per annum Additionally, banks introduced special savings deposit programs to further enhance mobilization efforts.
"super high deposit interest rates" reaching 13 – 14.4% per annum This reaction implied that banking sectors was in need of VND
In May 2008, the SBV Governor's Decision No 16/2008/QD - NHNN abolished the interest rate ceiling regime, adjusting the yearly base interest rate from 8.75% to 12%, with a refinancing interest rate of 13% and a discount rate of 11% This regulation mandated that commercial banks' mobilizing and lending interest rates could not exceed 150% of the base rate, capping them at 18% annually, which was deemed appropriate for the market conditions and aimed at alleviating short-term credit shortages According to SBV statistics, total deposit outstanding in credit institutions rose by 1.05% in May 2008 compared to the previous month, with VND deposits increasing by 1.06% and foreign currency deposits by 0.99% Overall, 2008 experienced a 4.1% growth in aggregate deposit outstanding compared to 2007, driven by higher mobilizing interest rates for VND (1.84-4.5% pa) and USD (0.05-0.75% pa).
In June 2008, the base interest rate increased from 12% to 14%, while the yearly financing interest rate rose to 15% The discount rate also saw a 2% increase, reaching 13%, prompting banks to enhance their business strategies and attract more funds To maintain their market shares and bolster capital, commercial banks offered competitive interest rates, with some deposit rates climbing to between 17.5% and 19% per annum, alongside various promotions As a result, fund mobilization in the first half of 2008 showed positive outcomes, with several commercial banks reporting successful fund acquisition.
50% of their annual target revenues and profits though many banks was supposed to adjust their profit goals
In the latter half of 2008, commercial banks experienced a reduction in liquidity stress as mobilizing interest rates gradually decreased from their June peak Most banks began offering VND deposit rates below 18% per annum and USD rates not exceeding 6%, resulting in a slowed fund acceleration rate of just 1.47% in July, which further dropped to a low of 0.94% the following month The SBV Annual Report 2008 indicated a general decline in interest rates, with USD rates decreasing more significantly Specifically, yearly VND and USD mobilizing interest rates fell by 0.05-0.9 and 0.1-0.5 percentage points, respectively Additionally, interbank money market interest rates decreased by 0.79-2.89% across nearly all terms, with the highest yield recorded at 18.97% per annum.
Since August 19, 2008, the government's regulatory policy has capped the inter-bank money market rate at 150% of the base interest rate, limiting profit-earning opportunities for commercial banks with excess capital Consequently, annual interest rates are now restricted to a maximum of 21%, given the current base interest rate of 14% per annum.
Statistics from the SBV illustrate that total fund mobilized by the entire banking system in 2008 slightly increased by 20.5%, tantamount to a half of the growth rate in
In 2007, many banks struggled to meet their year-end funding targets, with most falling short by 50% By December 31, 2008, VPBank reported total deposits of VND 15,853 billion, a modest increase of VND 498 billion (3%) from the end of 2007, achieving only 66% of its target Similarly, Asia Commercial Bank (ACB) saw its deposits rise by VND 16,230 billion, reaching VND 91,174 billion, but this was just 60% of its anticipated goal The annual financial report of Vietcombank (VCB) indicated that the total funds attracted in 2008 amounted to VND 160,415 billion, reflecting an increase of only VND 30,445 billion since the end of 2007.
In 2009, the VND base interest rate was set at 7.0% per annum for deposits, effective April 1, with a refinancing rate of 8.0% and an annual discount rate of 6% This reduction in the base rate aimed to stimulate economic growth and stabilize the domestic financial market, resulting in relatively stable interest rates throughout the year However, competition among banks to increase market shares led to rising mobilization yields for deposits The interest rates for VND and USD deposits in commercial banks reflected these dynamics.
Table 3: Information on banking operations in quarter I/2009
Source: The State Bank of Vietnam
Secondly, the changes in money supply and demand due to the crisis and the government‟s regulatory policies resulted in many adversities in banks‟ acquisition of new deposit accounts
In 2008, a significant decline in the stock market and real estate, coupled with government regulatory policies—such as limiting credit growth to 30%, raising the reserve requirement ratio by 1%, and issuing T-bills valued at 20,300 billion—led to a reduction in VND supply in the money market This decrease in domestic currency supply, alongside an increase in demand for foreign currencies, resulted in a shift in the credit structures and balance of payments (BOP) of commercial banks.
In early 2009, domestic production exhibited signs of recovery, driven by an increased demand for bank loans, which encouraged banks to enhance money circulation The State Bank of Vietnam (SBV) noted that the growth rate of mobilizing capital remained relatively stable during the first four months of the year Specifically, January recorded a growth rate of 0.18%, with a decrease of 0.47% in VND volume attracted February saw an increase to 1.62%, followed by a growth of 3.4% in March, and a slight rise to 3.74% in April compared to the previous month.
SOLUTIONS TO IMPROVE CREDIT OPERATIONS OF
Trend forecast for the global financial crisis
The Global Financial Crisis of 2008 originated from an outbreak in America in mid-2007, rapidly escalating into a worldwide financial downturn The International Monetary Fund (IMF) predicted that the effects of the Great Recession would persist for an extended period.
In 2009, the global economy faced significant challenges, with the International Monetary Fund (IMF) revising its growth outlook to -1.3%, down from earlier estimates of -0.5% to -1% The recovery was anticipated for 2010, but rebuilding market confidence would take time due to ongoing instability in financial markets The economic downturn resulted in substantial contractions, with the US, Eurozone, and Japanese economies experiencing declines of 2.8%, 4.2%, and 6.2%, respectively By the end of 2010, total losses from the crisis were projected to reach $4.1 trillion, with American financial institutions alone accounting for $2.7 trillion in losses, surpassing previous forecasts of $2.2 trillion and $1.4 trillion made in January.
Nevertheless, thanks to various governments‟ policies to combat the downturn, the
In early 2009, the US economy began to show signs of recovery, signaling a resurgence in global economic growth Ben Bernanke, Chairman of the Federal Reserve, predicted that the severe recession affecting the US economy for decades could conclude in 2009, indicating a positive shift towards economic recovery.
Recent discussions at the World Economic Forum in Davos, Switzerland, suggest a growing belief that the financial crisis that began in 2008 and lasted until summer 2012 may be coming to an end Scott Minerd, managing partner and chief investment officer of Guggenheim Partners, noted, “There’s a crystallization of thought that the financial crisis is over,” reflecting a shift in sentiment among financial leaders.
After four years, the unprecedented financial crisis may have finally concluded; however, it has led to a global economic recession that we are currently experiencing.
Solutions
The global financial crisis affected many regions worldwide, but Vietnam's financial system remained relatively insulated due to its limited ties to global markets Despite this resilience, the indirect effects of the crisis hindered credit growth across nearly all commercial banks in Vietnam.
2008 and 2009 The imperious question is how to make the credit operations in Vietnam more robust to adverse shocks in the next period Below are some recommendations:
3.2.1 Imposing appropriate interest rate policies
Commercial banks must reassess the interest rates they offer in response to shifts in supply and demand within the money market When interest rate fluctuations stem from intangible factors like psychological influences or unfair competition, small banks with limited capital face significant challenges, as their credit operations may suffer For instance, if one bank raises its mobilizing interest rate, others may follow suit, creating a domino effect where banks increase their rates to retain customers, despite not experiencing a funding shortage Given that interest rates are highly sensitive to changes in capital supply and demand, irrational regulatory policies can quickly undermine the growth and velocity of credit within commercial banks.
In response to the fluctuations in the financial market, the State Bank of Vietnam (SBV) has frequently adjusted interest rate regulatory policies to stabilize the macro-economy during global crises To strengthen their operations, Vietnamese commercial banks must develop appropriate interest rate strategies.
The lessons learned from the sub-prime mortgage crisis in America five years ago remain significant, highlighting the complexities of assessing credit risk and potential losses It is essential for domestic commercial banks to establish tailored credit extension and risk management frameworks, utilizing various credit risk measurement models such as the Z-score model, 6C model, consumer credit scoring, and the credit ratings provided by Moody's and Standard & Poor's.
Banks must adopt a more stringent approach to credit appraisal by evaluating the feasibility and profitability of projects, as well as the real value and legality of collaterals Additionally, assessing customers' creditworthiness is essential in the lending process to ensure responsible lending practices.
Credit risk is an inherent aspect of commercial banking, making it essential for banks to implement effective strategies to manage bad debts and reduce losses The first step in this process is the timely identification of problematic loans, which allows banks to take appropriate action Following this recognition, banks should systematically proceed with the necessary steps to process a write-off efficiently.
When a loan is categorized as bad debt, it should be transferred to the bad debt processing unit This process requires the completion of all relevant documents, including evidence of the state of the loan and the reasons for its downgrade.
The bad debt processing unit should immediately check the new-arising bad debt and collect up-to-date information to revaluate the client
1) Maintenance strategy: Banks maintain relationship with their customers who can restructure their loans based on their ability to repay debts and business performance
2) Exit strategy: applied to write-offs which need liquidating In this case, banks are supposed to collect debts through legal procedure, selling off mortgages in the nick of time
Banks need to focus on aligning loan terms and extending maturities with the debtor's business cycle and project timelines Additionally, overdue loans should be reclassified if customers do not repay at maturity without valid reasons.
3.2.3 Enhancing the efficiency of inspecting and supervising commercial banks
Regarding the causes of the global financial crisis, loose regulation oversight is to blame Thus, indisputably, supervision regimes for credit institutions are of paramount importance
In the coming period, Vietnamese commercial banks must prioritize enhancing the efficiency of their supervision and inspection activities related to credit extension, ensuring compliance with banking security laws and regulations Additionally, it is essential to strengthen organizational structures and offer training programs for banking supervisors and inspectors.
To enhance and streamline activities, various tools such as Key Risk Indicators (KRI), Key Financial Indicators (KFI), and Risk Assessment Tables are essential Inspections and supervision must be performed at multiple levels in accordance with the existing centralized banking model.
Credit Officers are responsible for closely monitoring each account to ensure clients adhere to the original borrowing purposes, review contract terms and conditions, and conduct site visits as necessary.
Risk Management Officers are supposed to frequently check customers‟ credit limits, oversee their business risks and analyze any implication from concerned
Credit Officer Assistants are delegated to calculate and report the credit limits to complete internal reports, and conduct constant checks on customers‟ contract abidance
Board of Controllers is in charge of frequently and periodically examining the internal statutes as well as regulations of relevant agencies
Board of Directors is responsible for the overall management of credit operations with the help of managing tools and reports
Banking supervisors should receive professional training and operate independently to maintain an objective perspective on their institutions This approach enables them to effectively assist banks in responding promptly to potential risks.
3.2.4 Associating insurance in credit operations
Commercial banks and insurance companies are the primary risk-taking entities within the financial intermediary sector, with insurance companies demonstrating superior expertise in risk assessment and management To mitigate loan-related risks and share the financial burden of potential losses, it is advisable for commercial banks to collaborate with insurance companies This partnership exemplifies the concept of "risk-sharing," which can enhance financial stability and reduce overall risk exposure.
Through collaboration with insurance companies, banks can concentrate on direct sales of banking services while minimizing credit risk associated with receivables This partnership not only enhances the sustainability and reputation of banks but also supports the expansion and diversification of their product offerings Additionally, the traditionally complex risk management processes of banks can be streamlined, as insurance experts are better equipped to assess risks and develop effective management strategies.
Despite the increasing global popularity of bancassurance, the bank insurance model (BIM) has not been extensively adopted in Vietnam Vietnamese banks should view insurance companies as essential partners in risk management, facilitating the development of effective credit insurance policies To improve credit operations and risk management, it is crucial for commercial banks in Vietnam to implement various measures, including asset insurance, mortgage protection insurance, business cycle insurance, export credit insurance, shipping insurance, and life insurance for borrowers.