financial institutions and markets

Evaluate the performEvaluate the performEvaluate the performance of Vietnam''''s commercial banance of Vietnam''''s commercial banance of Vietnam''''s commercial bankkkk system k system In the te

VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITY

INTERNATIONAL UNIVERSITY

FINANCIAL INSTITUTIONS AND MARKETS

Nguyßn Th Trúc Linh ß

Đặng Hoài Xuân Nhi

Nguyßn Th Thu Hi ß ßn

BAFNIU20319 BAFNIU20327 BAFNIU20373 BAFNIU20176

Table of Contents

Table of Contents

I COMMERCIAL BANK OVERVIEW 2

1 Definition of a commercial bank 2

2 Evaluate the performance of Vietnam's commercial bank system 2

3 Main regulators of Vietnam commercial banks 2

II FINANCIAL STATEMENT AND ANALYSIS 3

1 Commercial bank’s balance sheet 3

2 Major categories on a commercial bank’s statement 6

3 Applying ratios 6

III REGULATION OF COMMERCIAL BANKS 6

1 Reasons for regulating the commercial banks 6

2 Types of regulations 7

a Safety and soundness regulation 7

b Monetary policy regulation 8

c Credit allocation regulation 8

d Consumer protection regulation 9

e Investor protection regulation 9

f Entry and chartering regulation 9

IV EXTENSION 9

1 The relationship between the financial market and commercial banks 9

2 The role commercial banks play in funding real estate transactions 11

3 How do FLCs market domination cases and Tan Hoang Minh fraudulent appropriation of assets directly affect commercial banks? 11

V REFERENCES 12

2

I COMMERCIAL BANK OVERVIEW

1 Definition of a commercial bank Definition of a commercial bank

Commercial banks represent the largest group of depository institutions measured by asset size and their major assets are loans As we examine the structure of commercial banks, their financial statements, and the regulations that govern the operations, we notice a distinguishing feature between commercial banks and saving institutions or non-financial firms Commercial banks are regulated to protect against disruptions within services and control insured deposits

In general, commercial banks perform functions similar to those of saving institutions and credit unions, they accept deposits (liabilities) and make loans (assets) Commercial bank liabilities include several types of non-deposit sources of funds (subordinated notes and debentures) Moreover, their loan portfolio is more diverse including consumer, commercial, international, and real estate loans

→ The structure and composition of assets and liabilities of commercial banks and saving institutions are significantly varied Revenue from commercial banks is generated from loans, investment securities, cash, and other assets

2 Evaluate the perform Evaluate the perform Evaluate the performance of Vietnam's commercial ban ance of Vietnam's commercial ban ance of Vietnam's commercial bankk kk system k system

In the territory of Vietnam, there is a list of 33 commercial banks (public bank, private bank, foreign bank, and regional rural bank) that ranked at the top is the Vietnam Commercial Bank for Investment and Development JSC (BIDV) with a total charter capital of approximately 40.000 billion VND

Under the 4.0 industry and Basel impacts, Vietnam banks in general and commercial banks in particular pay attention more to risk management in governance as the covid-19 pandemic continued to develop complicatedly The reform of financial services quality management policies has been excellent, the bank's efficiency is measured by the usage of inputs to generate maximum outputs, and in contrast In fact, the majority of Vietnam's commercial banks can generate the most significant output revenues by using the same amount of input as other countries but at a lower cost Demir and Danisman9s (2021) study indicated that the Covid-19 pandemic positively affects banks with large capitalization, higher customer deposits, higher-income diversification, and lower non-performing loans Vietnam is defined as a country with expansionary monetary policy through liquidity support policies for banks, interest rate support policies for borrowers, and the share price of the banking industry after the pandemic generally tends to increase

3 Main regulators of Vietnam Main regulators of Vietnam Main regulators of Vietnam commercial ba commercial ba commercial banks nks

- Federal Deposit Insurance Corporation (FDIC)

- Office of the Comptroller of the Currency (OCC)

- Federal Reserve System (FRS)

- State Authorities

Banking, organizations are under the management of the State Bank of Vietnam (SBV)

As listed in Article 52 of the Law on the State Bank of Vietnam, including the Policy Bank and credit institutions9 subsidiaries:

- State-owned enterprises established by the SBV governor

- Other agencies, organizations, and individuals that are subject to observance of the laws and regulations in the fields under the management of the SBV

II FINANCIAL STATEMENT AND A FINANCIAL STATEMENT AND A FINANCIAL STATEMENT AND ANALYSIS NALYSIS

1 Commercial bank’s balance sheet Commercial bank’s balance sheet Commercial bank’s balance sheet

To gain a better understanding of commercial banks, it is crucial to acknowledge and understand the financial statement and analysis of such institutions

A balance sheet provides its readers with a clear view of an organization9s financial health at the time it was made This type of report consists of two sides, assets and financing, which has two parts: liabilities and equity First, let us study an important part of the balance sheet itself – assets As for the bank, four major categories are identified for deeper learning, and such are

<cash and due from depository institutions=, <investment securities=, <loans and leases=, and

<other assets=

The first notable category of assets is cash and due from depository institutions which consist of vault cash, deposits at the Central bank and other commercial institutions, and cash in the process of being collected This type of asset has a relatively high liquidity and can be easily converted; therefore, it is mainly used as withdrawals for customers, satisfaction requirements from the central banks and as payment checks for various purposes

The second category of assets mentioned above is investment securities This type of asset consists of federal funds sold, repurchased agreements, national treasury, agency securities or securities issued by states, political subdivisions, mortgage-backed securities, and other debt and equity securities This type of asset has high liquidity, low default risk and is also able to generate few returns However, since its returns are too few in comparison with the next asset, investment securities are least likely to be used as an income source but more of a tool for managing liquidity risks due to its high liquidity and low risks

The third type of assets, loans and leases, consist of many varieties of loans such as commercial

or industrial loans, loans secured by real estate etc , and leases which are assets that a commercial bank would permit its customers to use in return for an amount of money during a

4

that this type of asset creates the most revenue among all assets for the institution However, loans and leases have a major drawback which lies in their lack of liquidity as this type of asset

is the least liquid asset compared to the others, and therefore becomes the main cause of credit and liquidity risk for the commercial bank

The fourth category consists of the remaining assets such as premises, fixed assets, other real estate, intangible assets, etc which account for a small portion of a bank9s assets These accounts take up a small amount of a bank asset, and though they are still recognized as part of the asset, they are least likely to create great changes in the balance sheet

In order to understand how Vietnam commercial banks9 balance sheet differ from that of US, a small observation is made to further compare the structure and function of two different assets side of a balance sheet Vietcombank9s report will be used as a demonstration for this comparison between commercial banks that of Vietnam and the USA

Vietcombank balance sheet9s asset side for six months period ended 30 June 2021 Observing the asset side above, a few notable differences compared to that of the USA worth mentioning are the difference between Cash and Due and Cash on hand, gold, etc , and the lack of leases in VCB balance sheet However, although most of these accounts are named differently and organized in a slightly different way, it is safe to say that the two reports share the same purpose and principle It is obvious that this is a standard required in every commercial bank globally, especially how Vietnam commercial banks are emerging globally and syncing is an important key in being global

6

2 Major categories on a Major categories on a Major categories on a commercial bank’s stat commercial bank’s stat commercial bank’s statem em ement ent ent

Apart from the balance sheet, it is essential to study important components of the financial statement The major categories on a commercial bank9s statement are made of interest income, interest expenses, net interest income, provision for loan losses, noninterest income, noninterest expenses, income before tax and extraordinary items, income tax, extraordinary items, and net income These categories are important for how they demonstrate the institution 8s financial health and give us a better understanding of the operation of this organization This also provides crucial information that works as indicators for owners and customers to identify and understand the bank business in order to further intervene Interest income shows how much the bank had gained through lending money while interest expenses represents the institution8 debt obligation which it has a responsibility to pay before due Net interest income is calculated by contracting expense on revenue which show how much value the institution had created Non-interest income is those that come from activities like trading

or investing; and noninterest expenses consists of operating expenses such as labor salaries, insurances, operating fees etc Provision for loan losses is the type of category used as adjustment to the financial statement due to debts that are likely to be unpaid Net income is the most important to the organization and its owner due to the fact that it demonstrates how much do the owners actually gain after an accounting period ended

3 Applying ratios Applying ratios

Applying those a knowledge above of balance sheet and financial statements, ratios could be used to serve the need for a more in depth and more detailed analysis which provides its users with the exact information they need to know about the bank operation There are many ratios which could be applied on Vietnam commercial banks which are return on Equity and its components (ROE), return for assets (ROA), Equity multiplier (EM), profit margin (PM), and Asset utilization (AU) ROE provides information on how efficiently a bank is using its9 equity to generate revenue as in how much revenue generated from one unit of equity, ROA tells the percentage of net income generated on every unit of asset, while AU show how much the bank

is utilizing its9 assets to create more revenue on a unit of asset Meanwhile, EM draws out the line whether a bank is desperately in need of funding even from more debts and PM shows how well the bank is operating while paying their own expenses with both interest and noninterest income Since these ratios provide a lot of informative data, it is encouraged to apply these ratios when analyzing a financial institution9s status and decide whether to take any action on the institution

III REGULATION REGULATION REGULATION OF COMMERCIAL BANKS OF COMMERCIAL BANKS

1 Reasons for regulating the co Reasons for regulating the co Reasons for regulating the commercial banks mmercial banks

- Financial stability: Banks have the ability to create credit or liquidity Any instability in the banking system causes a ripple effect in the entire economy An unstable banking system

cheap credit, all the sectors of the economy will gradually start slowing down and eventually will stop functioning Therefore, to prevent such a scenario, it is very important to regulate the banking system

- Reduce risk stability: Many commercial banks are required to offer deposit insurance to their customers Customers' savings in US banks are insured up to a certain extent by the Federal Deposit Insurance Fund It implies that if the bank is unable to satisfy its obligations, the State will reimburse the depositors for the amount protected by deposit insurance Deposit insurance protects depositors in the event of a bank default, however there is no deposit insurance available for bank stockholders

- Protection of consumer rights: Commercial banks, financial institutions, bank holding companies, and non-banking finance companies together provide a range of services to the customers To protect the rights of customers, the banking system needs to be regulated

- Restrict monopoly: Healthy competition is good for the banking system The US

government has adopted several laws and regulations to restrict and abolish monopolistic practices in the banking sector The commercial banks and the banking sector need to be regulated to prevent mergers or acquisitions that will adversely impact the competition in the banking industry

2 Types of regulations Types of regulations

6 types of regulations:

a Safety and soundness regulation Safety and soundness regulation

Layers of regulation have been imposed on commercial banks to protect depositors and

borrowers against the risk of failure Due to a lack of diversification in asset portfolios,

regulators have developed layers of protective mechanisms that balance a Commercial bank9s profitability against its solvency, liquidity, and other types of risk These are illustrated in this figure These mechanisms are intended to ensure the safety and soundness of the commercial bank and thus to maintain the credibility of the Commercial in the eyes of its borrowers and lenders

8

- First layer: these mechanisms are requirements encouraging commercial banks to diversify their assets These regulations may result in lower profitability, but they also lower credit and liquidity risk and ultimately lower the risk of insolvency

- Second layer: The second layer of protection concerns the minimum level of stockholder capital or equity funds that the owners of a Commercial bank need to contribute to the funding

of its operations The higher the proportion of capital contributed by owners, the greater the protection against insolvency risk for liability claimholders such as depositors

- Third layer: The third layer of protection is the provision of guarantee funds such as the Depositors Insurance Fund (DIF) for banks Deposit insurance mitigates rational incentive depositors otherwise have to withdraw their funds at the first hint of trouble

- Fourth layer: The fourth layer of regulation involves monitoring and surveillance Regulators subject all Commercial banks to varying degrees of monitoring and surveillance This involves on-site examination of the Commercial bank by regulators as well as the Commercial bank9s production of accounting statements and reports on a timely basis for off-site evaluation

The difference between the private costs of regulations and the private benefits for the producers of financial services is called net regulatory burden The higher the net regulatory burden on Commercial banks, the smaller are the benefits of being regulated compared to the costs of adhering to regulations from a private owner9s perspective

b Monetary policy regulation Monetary policy regulation

Regulators control and implement monetary policy by requiring minimum levels of cash reserves to be held against commercial bank deposits

Outside Money: That part of the money supply directly produced by the government or central bank, such as notes and coin

Inside Money: That part of the money supply produced by the private banking system Regulators commonly impose a minimum level of required cash reserves to be held against deposits, or inside Money

As a result, Commercial banks often view required reserves as similar to a tax and as a positive cost of undertaking financial intermediation

c Credit allocation regulation Credit allocation regulation

Regulations support the Commercial bank9s lending to socially important sectors such as housing and farming

These regulations may require a commercial bank to hold a minimum amount of assets in one sector of the economy or to set maximum interest rates, prices, or fees to subsidize certain sectors

d Consumer protection regulation Consumer protection regulation

Regulations are imposed to prevent the Commercial bank from discriminating unfairly in lending

Commercial banks must report to their chief federal regulator the reasons that they granted or denied credit Many analysts believed that community and consumer protection laws were imposing a considerable net regulatory burden on commercial banks without offsetting social benefits that enhance equal access to mortgage and lending markets

e Investor protection regulation Investor protection regulation

Laws protect investors who directly purchase securities and/or indirectly purchase securities by investing in mutual or pension funds managed directly or indirectly by Commercial banks (as well as other FIs)

Various laws protect investors against abuses such as insider trading, lack of disclosure, outright malfeasance, and breach of fiduciary responsibilities Important legislation affecting investment banks and mutual funds includes the Securities Acts of 1933 and 1934, the Investment Company Act of 1940, and the Wall Street Reform and Consumer Protection Act of 2010 Since Commercial banks are increasingly moving into offering investment banking and mutual fund services following the passage of the Financial Services Modernization Act in 1999, these restrictions will increasingly impact their profits As with consumer protection legislation, compliance with these acts can impose a net regulatory burden on commercial banks

f Entry and chartering regulation Entry and chartering regulation

Entry and activity regulations limit the number of Commercial banks in any given financial services sector, thus impacting the charter values of Commercial banks operating in that sector Increasing or decreasing the cost of entry into a financial sector affects the profitability of firms already competing in that industry Thus, the industries heavily protected against new entrants

by high direct costs and high indirect costs of entry produce larger profits for existing firms than those in which entry is relatively easy In addition, regulations define the scope of permitted activities under a given charter

IV EXTENSION

1 The relationship betw The relationship betw The relationship betwee ee een the financial mar n the financial market and commercial banks n the financial mar ket and commercial banks

- On primary market:

✓ Publisher role:

Commercial banks issue bonds with important meanings:

o Contributes to increasing goods for the stock market

o An important capital channel for commercial banks for the growth goal of the economy

✓ Direct investment role: