Topic analysis of factors affecting the issuance of value papers of commercial bank solutions to increase the above capital

Commercial banks can borrow money from state banks, credit institutions and borrow money in the capital market by issuing valuable papers.. In the banking field, valuable papers include

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Topic: Analysis of factors affecting the issuance of value papers of

commercial bank Solutions to increase the above capital

TP HO CHI MINH — NAM 2022

JOB ASSIGNMENT SHEET

NAME MSSV WORK PART

Phan Tran Anh Thu 050608200700 Part 4 (Leader)

Pham Diém Quynh 050608200602 Part 3.5, 3.6

Nguyễn Phạm Lưu Ly 050608200435 Part 3.1, 3.2

Phạm Thiên Phước Quý 050608200586 Part 2.3.4, 2.4

Lê Uyên Nhi 050608200518 Part 3.3, 3.4

Mạc Thị Quỳnh Trang 050608200719 Part |

Hà Mỹ Tâm 050608200610 Part 2.1, 2.2

Nguyễn Quỳnh 050608200598 Part 2.3.1, 2.3.2, 2.3.3

Nguyễn Đỗ Quỳnh Nhĩ 050608200521 Part 5

Table of Contents

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2 The concept and characteristic of valuable papers and the issuance of valuable

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3 Factor afecting the issuance of value papers of commereial banks - ác c2 10

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1 The concept of commercial bank

1.1 What is a commercial bank?

A commercial bank 1s an economic organization that conducts banking activities m the areas of monetary supply, financial services between customers and banks, or vice versa According to the Law on Credit Institutions: commercial banks are credit institutions which are entitled to carry out all banking activities and other related business activities for profit purposes in accordance with the Law on Credit Institutions Use and other provisions of the law (Decree No 59/2009 / ND-CP of the Government on the organization and operation of commercial banks)

* Characteristics of commercial banks

- As an intermediary financial institution

- Diversified and integrated many services and operations

- Attract capital first by mobilizing deposits, issuing promissory notes and bonds, then using this capital to make production and business loans and consumer loans In addition, there are other services: Payment, money transfer, guarantee,

entrustment,

Through lending and payment activities, the system of commercial banks can generate

a large amount of currency, which is an important part of the economy's money supply, and has a great influence on monetary policy of the central bank

1.2 Capital mobilization activities of commercial bank

Mobilization is the activity of commercial individuals to create capital for their business activities in many forms For example: Open to sell securities, domestic and foreign linkages, loan capital, issue of bonds, etc

The mobilized capital of commercial banks is a source of capital that plays the most important role in the bank It is a source of capital mobilized from organizations,

businesses and legal entities in society through trust and is used as capital for business activities

Methods of capital mobilization can be mentioned as deposit mobilization (payment deposit, savings deposits, deposits from other banks) Another way to raise capital is to borrow Commercial banks can borrow money from state banks, credit institutions and borrow money in the capital market by issuing valuable papers

2 The concept and characteristic of valuable papers and the issuance of valuable papers at commercial bank

2.1 What is valuable papers?

Valuable papers are certificates or book entries, which confirm the property nghts of a certain entity (organization or individual) legal relationship with otherother subject In the banking field, valuable papers include only notes issued by banks in the form of a certificate or journal entry, which confirm creditor rights of the holder and the bank’s obligation to pay money at a specified time

2.2, Characteristics of valuable papers

Valuable papers have three primary characteristics:

- Valuable papers certify the property rights of a specific subject Valuable papers are assets and evidence confirming the property nghts of a person

-Valuable papers have monetary value It is possible to covert valubale papers into money This feature is clearly shown in the legal relationship related to valuable papers For example, the loan level is determined based on the value of valuable papers, not exceeded

- The holder of valuable papers can transfer ownership to other subjects in civil transactions The civil law considers valuable paper to be a kind of property, so the owner has the right to transfer valuable papers to another entity In a manner consistent with the provisions of law In some cases, the law stipulates that certain types of

valuable papers not be transferred, restrict to transfer or due to the legal status of valubale papers at the time establishment transaction, they have not satisfied all the conditions to be transferred

2.3 Valuable papers of commercial bank

2.3.1 Bond

A bond is a security that confirms the debt obligation of a business or government to the bondholder (lender) for a specified amount of time The income of a bond is called interest - it is the interest paid on a regular basis to the holder and does not depend on the business situation of the issuer When a company is dissolved or goes bankrupt, bond holders have priority to pay before stock holders The bondholder (the holder of the bond) has no right to participate in the company's operations

2.3.2 Promissory note

A promissory note is an unconditional undertaking issued by the Drawer promising to pay a certain amount to the Beneficiary specified on the promissory note or on his order to pay another person

Abstract promissory note: promissory note does not specify the reason for the arising

of the debt, but only records the information that the borrower has to pay the maker how much money, at what time period

The promissory note is force majeure: the debtor cannot use any reason to refuse to pay the debt This applies even if the debtor has not received the goods or the goods do not conform to the terms of the signed promissory note

Circulating promissory notes: can be transferred from one holder to another by a very simple transfer signature A promissory note is usually an order for the borrower to pay

a sum of money to a third party or maker

A type of short-term financial asset issued by a bank or a savings institution, certified for a certam amount of money deposited with the certificate issuer Banks and thrifts issue certificates of deposit to raise capital to finance their businesses Certificates of deposit have a specified maturity date, interest rate, and can be issued in any denomination

Certificates of deposit are divided into two types: Non-negotiable and Negotiable

In the case of a non-transferable certificate of deposit, the original depositor must wait until the certificate's maturity date to get the deposit back If depositors decide to withdraw their funds early, they are subject to an early withdrawal penalty or only a very low interest rate

In contrast, a transferable deposit only allows the original depositor ( or subsequent holder of the certificate) to sell a certificate of deposit on the money market before the maturity date

2.3.4 Treasury bill

Treasury bills (or T-bills) are bills issued by the State Treasury or the Government for short-term loans to the State budget, recording the Government's commitment to repay the principal and interest to the owner Treasury bills are short-term government debt instruments that are usually issued and have a maturity

Treasury bills are considered the least risky financial instrument in the money market The reason is because the issuer (the Government) has very little risk of default or insolvency like a business When the debt comes due, the Government can always find

a way to pay its debt However, the interest rate of this type of bill is usually lower than other investment channels circulating in the money market

The characteristics of Treasury bills:

¢ Term to Maturity: Short-term 3 weeks, 26 weeks and 52 weeks are the usual maturities of this type of bill In addition, the Minister of Finance may prescribe different terms However, the maturity of this type of bill cannot exceed 52 weeks

¢ Objects of ownership: Treasury bills are mainly held by commercial banks Additionally, small number of households, companies or other financial intermediaries can also hold this type of bill

e Functions: Commercial banks also hold Treasury bills as a secondary reserve Furthermore, Central Banks can use this type of T-bill for open market operations This activity helps the Central Bank regulate the amount of money in circulation and control the money market

2.4 Issuance of valuable papers by commercial banks

According to the provisions of the Law on Vietnam Credit Institutions 2010 amended and supplemented in 2017, commercial banks will also have the authority to issue valuable papers as permitted by law

Commercial banks issue valuable papers in the form of certificates, book entries and other forms in accordance with the provisions of the Securities Law and guiding documents of the Securities Law and relevant laws Par value of valuable papers (except for bonds) issued in the form of certificates is pre-printed or as agreed upon by the issuing credit institution with the buyer The interest rate of valuable papers shall

be decided by the issuing credit institutions in accordance with the current regulations

on interest rates of the State Bank in each period

3 Factor affecting the issuance of value papers of commercial banks

3.1 Interest rate risk

The interest rate risk occurs when there is a difference between the input deposit interest rate and the output interest rate due to market fluctuations and the difference in term between mobilized capital and capital use

Issuing valuable papers such as bonds and certificates of deposit is a solution to rapidly increase medium and long-term capital Medium and long-term capital mobilization usually has high interest rates If the term of capital 1s greater than the term of capital use and the capital is reinvested (loaned) at an interest rate lower than the deposit rate due to changes in market interest rates, 1t will affect the profit of the banks because the high input costs cause the bank's interest income margin to narrow 3.2 Liquidity risk

Liquidity risk is the risk caused by:

- Credit institutions, foreign bank branches are unable to fulfill their debt repayment

- Credit institutions, foreign bank branches are capable of performing debt repayment obligations when they are due, but must pay high costs to fulfill fulfill such obligations (According to Circular 08/2017/TT-NHNN stipulating the order and procedures for banking supervision)

The bank will face liquidity nsk when the bonds mature, because at this time, the bank will be at risk of a cash shortage due to having to pay a large amount of money to customers, putting pressure on the bank to raise capital to maintain operations 3.3 Credit risk

Credit risk is expected to be arises when a borrower cannot meet their obligation about future cash flows Banks generate their incomes by issuing a massive amount of credit

to borrowers When borrowers of the banking sector default cannot meet their debt obligation on time, it is called credit risk When there is a large amount of loan defaulter, then it adversely affects the profitability of the banking sector

In case the business does not have a loan limit and 1s not eligible for a large loan, the bank will offer to sell corporate bonds to its customers Instead of banks deducting money to lend to businesses, they use this form of guarantee to collect the difference between the bond buyer and the bond issuer, called the issuance fee The risk will occur if at maturity, investors buy corporate bonds and sell them back to the bank, but

the bankrupt enterprise is unable to repay the bank's debt, the bank must take out its own money to pay This will be like the appearance of bad debt, increasing the credit risk for the bank

3.4 Risk of the offering

The offering of valuable papers increases the charter capital of the commercial bank in order to improve the financial capacity, operational scale and competitiveness, ensuring the stable and sustainable development of the bank

The success of the offering depends not only on the attractiveness of the bond, but also

on many other factors such as investors' expectations about interest rates, market interest rates at the time of transaction, and operations of that bank

In case of unfavorable market conditions, together with the unsecured offering, it is possible that the shares may not be sold at all, in order to minimize this risk, the management team of the commercial bank will proactively looking for investors to distribute the odd number of shares and the number of shares that are not fully sold due to the refusal of existing shareholders to buy and ensure compliance with legal regulations on handling residual shares

3.5 Other risks

Communication and brand risks There's a lot of misinformation or a rumor spread over the internet that also can negatively affect the bank's reputation, degrade the trust

of customers, shareholders, partners, and the community, leading to losses in the issuance of valuable papers

Besides the above risk factors, there are also some risks of force majeure such as natural disasters, wars, epidemics, fires and explosions on a large scale If these risks occur, they will have really serious consequences, directly affecting business activities and development of the economy as well as commercial banks For example, the COVID-19 pandemic in 2020-2021 has also greatly affected the issuance of valuable papers by commercial banks