Assignment của chương trình Topup của Học Viện Ngân Hàng hệ quốc tế liên kết với Sunderland University. Bài trình bày theo format chuẩn, theo sát với hướng dẫn của giáo viên. Câu hỏi của assignment gồm 2 phần chính: 1. What are the reasons that banks move abroad and the role of international banks in Vietnam 2. What are the income opportunities available to international banks and the potential impact of regulatory inform since the Financial crisis on such income?
ASSIGNMENT COVER SHEET UNIVERSITY OF SUNDERLAND BA (HONS) BANKING AND FINANCE Student ID: Student Name: 169154426/1 Mai Le Phuong Module Code UGB322 Module Name/Title: International Banking Centre / College: Banking Academy of Viet Nam Due date: January 2018 Hand in date: 12 January 2018 Assignment Title: Individual assignment Students Signature: (you must sign this declaring that it is all your own work and all sources of information have been referenced) Table of Contents PART A: REASONS BANKS MOVE ABROAD AND THE ROLE OF INTERNATIONAL BANKS IN VIETNAM Introduction: II BODY Reasons for banks going abroad Presence of international banks in Vietnam III CONCLUSION 13 PART B INCOME OPPORTUNITIES AVAILABLE TO INTERNATIONAL BANKS AND THE POTENTIAL IMPACT OF THE REGULATORY REFORMS SINCE THE FINANCIAL CRISIS ON SUCH INCOME 14 I INTRODUCTION: 15 II BODY 16 Income opportunities available to international banks 16 Potential impact of regulatory reforms since the financial crisis on such income 17 III CONCLUSION: 22 References 23 Module Title: INTERNATIONAL BANKING Module Code: UGB 322 BA (Hons) in Banking and Finance Submission date: 12 January 2018 Prepared by: Mai Le Phuong Student ID: 169154426/1 PART A: REASONS BANKS MOVE ABROAD AND THE ROLE OF INTERNATIONAL BANKS IN VIETNAM Introduction: This paper investigates the drivers of bank foreign expansion There are many reasons that motivate banks to going abroad Understanding these factors which have led the entry of foreign banks is crucial to the host countries Therefore, the role of these foreign owned banks can be evaluated In Vietnam, foreign banks have acted at both positive role and negative role II BODY Reasons for banks going abroad Over the past decades, there has been a significantly increase of international financial integration Larger financial integration therefore has been closely joined with the internationalization of banking (Brewer, 2000) The positions of banks gross cross-border have expanded sharply Bank ownership are diversified more, foreign subsidiaries as well as branches are becoming more popular (David, 2014) Following the trend of globalization, the opening of representative offices and branches abroad of the commercial banks is indispensable Approaching to new markets and financial deregulation has helped banks to accelerate the growth of operations (Goldstein, 1999) The candidates for today global banks of the new millennium namely Merrill Lynch, J.P Morgan, Goldman Sachs Citibank for instance, have been operating offices in more than 90 countries, HSBC has about 4000 offices in 70 countries (Citibank, n.d.) There are many markets for foreign banks to choose and to provide a range of financial services which question about the reasons impact the decision for global expansion of banks In this literature, several factors are determined Factor price differentials and trade barriers: Factor price differentials and trade barriers are two core theoretical and empirical motives behind a bank’s decision to operate abroad (Asiedu, 2002) Factor price differential refers vertical Foreign Direct Investment (FDI) implies that the foreign expansion occurs therefore firms can benefits from international price differences (Faeth, 2009) study worldwide location choice of US bank in 22 countries conclude that GDP and FDI are main determinants for the expansion of US banks Likewise, (Herrero and Simon, 2003) proved that the reasons of bank’s expansion in London is the size of the banking sector in the foreign country, bilateral trade with UK, the FDI make a positive impact on the foreign country’s bank expansion in London According to (Goldberg, L G and D Johnson, 1990), the headquarter services require mainly physical as well as human capital inputs Nevertheless, the production is substantial manual labor intensive If factor prices is differential among countries, then firms turn into multinational by setting up production in lower manual labor cost and lower skilled labor costs for headquarters (David, 2014) The home currency costs of going overseas usually to be more appealing than the costs of similar operation in the home market (Faeth, 2009) In Malaysia for instant, UK’s banks like Standard Charted established subsidiaries not only for the potential market but also because of their lower labor cost (Brewer, 2000) The bank has employed about 7,000 employees for Malaysia’s operation with about 40 branches (Faeth, 2009) Regulatory for many areas of banking are also play as substantial trade barriers (Gray, 2005) If banks want to sell its products in a market, it has to establish physical presence in that market Many jurisdictions demand a bank to have a physical establishment before entering market for retail banking service The regulations in both domestic and foreign markets acted as a crucial role in the development of multinational banking (Jacobsen, 2008) Because without physical presence, banks may find it difficult to control their foreign expansion activities like marketing rules, differences in tax treatments, legislation of protecting consumer and so on (David, 2014) Even though in EU where so much efforts have been done to build a single market, retail services of finance are only provided by banks that placed in the respective countries (Jacobsen, 2008) Location advantages is another factor which happens from differences between countries resources, national regulatory frameworks or socio-economic element (Brewer, 2000) The advantageous condition gained from a new location in the host country make it profitable for foreign banks (Asiedu, 2002) Income diversification It is easy to see that the motivation for going overseas of banks is to hit the mark of management to diversify banks business activity By approaching into different markets, bank can expose their operations to the risk and return profile of exact business areas (Herrero and Simon, 2003) , Banks in some countries that have a great share of total credit which means they are more exposed to credit risk Hence these banks are in need to going oversea to diversifying portfolios as well as smoothing the non-synchronous fluctuation between loans and deposits (Goldstein, 1999) For example, if a United States bank believes the retail banking in Indonesia is more promising and more attractive than retail banking in US then it is worth to consider going abroad Therefore US bank will be less exposed to its home market and can diversify its income Otherwise, if banks only operate domestic, their customer base will only limit within country (Lipsey, 2002) But if banks also operate overseas, they can increase and attract customers from other countries as well (Jacobsen, 2008) pointed out that banks want to build subsidiaries in countries with profit are expected to be higher which is an obvious determinant explain why banks in developed countries are tend to open subsidiaries in developing countries Banks that obtain a large and geographically diversification customer base and banking networks will be capable of cutting transaction costs by gathering customers with offsetting needs (Asiedu, 2002) Moreover, spreading different product across different environments of economic can help banks to decrease expected costs of financial distress/bankruptcy (Boot and Schmeits, 2000) (Williams, 2005) reaches a conclusion that international banking with diversification of assets help banks to avoid systematic risks and stabilize the returns from their asset and improve level of efficiency Arbitrage and the cost of capital Arbitrage is another motive behind bank’s decision to invest overseas (Herrero and Simon, 2003)which basically means that bank raise finance in markets with strong currency that can be borrowed quite cheap After that, bank can invest that reward in weak currencies markets and gain profit from the difference in currency (Goldstein, 1999) Cost of capital refers to the situation that banks will earn credit when raising finance When debt or equity instruments in a strong currency are issued by bank, bank can also that at a rate of interest which is beneficial for them (Goldstein, 1999) For example, if the Euro is stronger than the dollar, funds can be raised through banks have subsidiary in Europe so that banks can acquire cheaper than their US firm which will benefit banks in someway and contribute to their expansion reason (David, 2014) Ownership advantage Ownership advantages are important because they allow banks to overcome the advantages enjoyed by indigenous banks When operating abroad, banks must own some of competitive advantages to compete with domestic banks equally (Williams, 2005) These advantages are valuable, easy to transfer and diffused smoothly within the bank such as technological expertise, superior marketing technique, and managerial expertise and so on (Goldberg, L G and D Johnson, 1990)observe that the impact of foreign ownership is beneficial to banks’ operations (Thomsen, 2002) reach a similar conclusion that the scope of the foreign ownership level impact positive on the return and risk of bank which explain why banks want to go abroad Follow customer Many studies show that the motive “follow customer” help banks to serve their domestic customers that have been internationalized (Brewer, 2000) The need for expanding abroad of bank to follow its customer oversea was also implied in the research of (Nigh et al, 1986) (Brewer, 2000)claimed that there is a positive relationship between the foreign activity of US banks and the extent of the US FDIs (Goldberg, L G and D Johnson, 1990) concluded form their studies that the foreign banks involved the US market to fulfill the international trade and direct investment demands of their home-country clients (Thomsen, 2002) also provide evidence that the higher the number of the clients from a home country in the foreign country, the higher the appearance of banking from the same home country in the foreign country Presence of international banks in Vietnam Keeping up with the trend of globalization of the banking industry, as a developing country, Vietnam has opened its market to foreign banks As a result, international banks seized the chances for their expansion (GBS, 2010) The country therefore has allowed banks from abroad to access the market since 1990s Law on Foreign Direct Investment and Law on Credit Institution are issued in 1987 and 1997 respectively (SBV, n.d.) These deregulations has create favorable condition for foreign banks to enter the market and develop the basic infrastructure and international standards (SBV, 2016) Number of Vietnam Commmerical banks 60 50 52 50 48 40 30 34 31 26 20 10 5 4 5 1999 2012 State commercial banks Joint-stock commercial bank Joint-venture bank Wholly foreign bank 2017 Foreign Branch Bank Table: Number of Vietnam Commercial Bank from 1999 to 2017 (SBV, 2016) Over the last two decades, the influence of foreign banks ‘entrance in Vietnam banking systems has been growing that has performed state management over Vietnam banking activities, monetary and foreign exchange (SBV, 2016) By the end of August 2017, joint-venture and foreign banks had the highest capital expansion of 7.7 percent Meanwhile, joint-stock commercial banks and State-owned banks are lower, at 2.9 per cent and 0.8 per cent respectively (SBV, 2016) Over years, Vietnam has managed to attract a great inflow of foreign banks These developments are regarded as vital source of economic growth for the country (Nguyen, 2007) Roles of international banks in Vietnam The presence of foreign therefore has benefited Vietnam financial system in vary ways 2.1 Positive impact First, they bring state of the art technology and training for domestic bankers (Mathieson et al, 2001) When access to Vietnam, banks from abroad have brought many advantages to the financial system and over all economy As a host country, Vietnam has benefited the technology and financial product innovations associated with foreign banks Foreign banks introduce new product, new techniques for manage risk and modern corporate governance culture This expansion also assist in stimulating transparent intermediary operation, legislative framework, financial monitoring and decrease corruption (Domanski, 2005) By enabling a better application of advanced management skills and more choice of products, foreign bank has fostered the development of financial markets (Detragiache, 2004) Banking sector thereby can benefit from the spill over effects and boost up economic efficiency Domestic banks when are influenced by the spillover effects saw an increase in profit and in costs This is because overseas banks are considered more productive and less risky than domestic banks, create a big gap of banking and technique Therefore it force domestic banks to upgrade in technology, services and monitoring activities (Detragiache, 2004) Domestic banks as a consequence can learn from foreign banks advanced techniques and good management skills and benefited the rich capital (Goldberg et al, 2001) Moreover, as a host country, that financial banking market can gain another positive impact which is to intensify market competition (Detragiache, 2004) According to (Nguyen, 2007), banks of Malaysia, Indonesia like Hong Leong, IVB have the corresponding labor productivity 2-3 times higher than the productivity of Vietnamese banks, which contribute to reduce costs, improve business performance Moreover, in order to compete other banks, banks all over Vietnam continuously launch new products with advanced technology such as M-POS, Mobile Banking, chip card technology, ewallet (Le, 2017) Vietnam banks catch up with that Internet banking trend and make their own innovation to serve customers Viettin bank provides customers with Viettinpay, BIDV provides customers with Business Online payment service, Vietcombank updated new Mobile Banking service for customers (Phuong, 2017) In 2016 when Standard Charted released the Good Life mobile application, based on a global positioning system (GPS), enables customers to search for special deals for debit and credit cards at locations where they come, TP Bank then launched Live Bank allowing customers to make transactions such as opening accounts, opening savings accounts, cash deposits, ATMs, and authenticating transactions with fingerprint sensors (Phuong, 2017) It is easier for foreign banks to access capital market abroad and liquid funds since they know how to deal with complex financial instruments and techniques (Lipsey, 2002) Moreover, their funding and lending patterns are more stable than domestic banks During periods of stress in the host country, foreign banks may not be affected much because they own a diversification of geographic credit portfolio (Nigh et al, 1986) The presence of overseas banks also help to stabilize the banking systems especially in emerging economy A study of Vogel and Winkler (2011) which cover the data in 84 emerging market countries had found that international banks have the role of balancing the cross-border component of financial worldwide growth In such emerging markets, when foreign banks have a high share of assets, the bank flow will be likely less decline (Rosengren, 1997) (Goldberg, L G and D Johnson, 1990) indicates that the entry of overseas bank is negatively associated with the debility of banking sector Their evidence also implies that the higher the presence of foreign banks, the lower the likelihood of a banking crisis (Papaioannou, 2009) provides strong evidence that foreign banks alleviate the adverse consequences of (local) banking crises Examine the example of Malaysia during the crisis in 1997, foreign banks has done a better job than domestic banks due to their overcome of profitable, efficiency and larger pool of capital This has helped Malaysia successfully weathered the crisis (Detragiache, 2004) In addition, (Mathieson et al, 2001) found that the local establishment of foreign banks help the local credit to run better during the financial distress time It is also worth mentioning that compared to local banks, foreign banks performed strong loan growth with humble associated volatility which leads to the contribution to larger stability in credit (Asiedu, 2002) Even when in distress, foreign banks still have the financial backing from their parent banks (Asiedu, 2002) 2.2 Negative impacts of foreign banks on Vietnam However, the presence of foreign banks rises some concerns (David, 2014)indicated that the entry of foreign bank can cause the fall in domestic lending This drop can cause instability in financial system notably in economic downturns (Kose, 2009) Though it is mentioned above that subsidiaries of foreign banks can help a lot for the host country during the financial distress because they are part of worldwide diversified entities but they can also impact host country with contagion effect (Lipsey, 2002) Because this is when subsidiaries act as transmission mechanisms for the policies used by their stockholders to solve the shock in particular economy or region where they have invested Besides, this foreign expansion can lead the host country to the decline in financial resources (Gray, 2005) After collecting domestic savings, these foreign banks can take that resource to finance in other countries as well Economic growth can also be slow down if these banks decide to lessen the supply of credit during financial distress for small and medium businesses impacted by the problem of credit rationing (Gray, 2005) III CONCLUSION With many reasons like that, no doubt there are more and more banks tend to expand abroad The benefits from entering of foreign banks have overweigh the drawbacks Not only the host country benefits about technology, management skills, spill over effects and also a large capital funds This has prospered the economy of banking sector and Vietnam in general PART B INCOME OPPORTUNITIES AVAILABLE TO INTERNATIONAL BANKS AND THE POTENTIAL IMPACT OF THE REGULATORY REFORMS SINCE THE FINANCIAL CRISIS ON SUCH INCOME I INTRODUCTION: The rapid expansion of international banking has made a great impact on economies This paper will conduct the income opportunity that international banks gain when they decide the going abroad With four main types of income, international banks has increased their revenue more and more After the financial crisis in 2008, international banks income has been affected not only because the crisis but also because of some regulatory like Basel III and Dodd-Frank Act This paper will investigate how these regulatory has impacted on international bank profit II BODY Income opportunities available to international banks (Matthews and Thompson, 2005) define international banking as the business performed by banks across national borders along with the activity that engaged the use of different currencies When operating abroad, the market will be widen leads to the higher potential customers for banks (Nigh et al, 1999) They can provide a variety types of banking and financial services to earn income opportunities through their international operations Money is basically made from major sources of income namely Net Interest Income, Net fees and commission income, Net trading income and Investment income (Countries, 2009) Like domestic banks, international banks have the same operation is to earn money from the Net interest income (Sullivan, 2005) When entering into new potential markets, international banks find it is not too hard to satisfy customers with any trends of financial services because they own a lot of skillful and experienced staff as well as sound products (Nigh et al, 1999) Therefore, they can seize the opportunity to raise income by collecting from the interests banks gained from their financial products such as loans, overdrafts or credit cards (DeYoung and Roland, 2001) Otherwise, the incentive for international banks to expand overseas is that they can earn income through their syndicated lending services (Ivashina, 2010) Two or more banks will together provide this kind of loan because the project is too risky for a single lender to undertake Not only risks will be spread but also financial opportunities will be provided equally for the lenders Typically, the interest rates can be fixed or floating and will be based on LIBOR (Chui et al, 2010) Asides from Net Interest Income, multinational banks also have the chance to make money from Net fees and commission income (Matthews and Thompson, 2005) This income include a broad range of services from international banks like insurance, leasing, factoring, intermediary service, foreign exchange currency services, management of cash, retail banking customer fees; corporate banking credit-related fees (Ivashina, 2010) Take an example for this kind of income, international banks can also gain profit from trading activity which they carry out on behalf of customer asset managers (Ivashina, 2010) Moreover, international bank can also earn from Net trading income (Matthews and Thompson, 2005) This is when international banks act as market maker, broker, trading derivatives, commitments and offer guarantees like letters of credit and bills of exchange (Sullivan, 2005) The profit can also be generated from Investment income which comes from underwriting, mergers and acquisition activities and provide management for asset and wealth (Sullivan, 2005) Potential impact of regulatory reforms since the financial crisis on such income Although cross border operation can help international banks to earn profit but it is also contained risks for them International banks can be seriously affected by the financial crisis by the contagion effect (Adrian and Shin, 2008) The most well known example for this affection is the credit crunch in 2008 It has affected not only banking industry but also the whole economy system (Adrian and Shin, 2008) After that crisis, the financial industry is now under scrutiny by the reforming of many regulatory especially the Basel III, Frank Dodd Act (USA) to ensure safety and stability of the financial system (Slovik, 2011) 2.1.Basel III: International policy has response to the financial distress with regulatory reform in order to identify a way to harmonies some existing standards and build new ones where gaps were determined (Mendoza, 2015) The first regulatory has addressed the risk of financial intermediaries by enhancing prudential regulatory standards, led by the reforms of Basel III Basel I and Basel II, as international standards for banking regulation, are not strong enough to protect banking industry from the crisis Basel Committee therefore has established Basel III to address the lessons from the financial turmoil and to close the gaps with Basel II (InternationalMonetaryFund, 2011) In Capital base section, the framework now has only Tier and Tier capital and total capital must exceed 8% of risk-weighted assets It is used to be Tier capital under Basel II but it is then eliminated in Basel III (Mendoza, 2015) It also require minimum common equity to be raise from 2% to 4.5% According to (Hellwig, 2010) the risk calibration of capital demands make international banks decrease regulatory capital and participate in more levered activities which generate higher income and gain systemic interconnectedness Therefore, international banks when abide the framework can increase the quality, consistency and transparency for their capital base which lead to more careful decision before lending and investing (Bierbrauer and Hellwig, 2010) Unfortunately, when international banks raise the safety level through the framework, there is also a cost It will took an amount of money from their income because banks have to hold extra capital and to be more liquid (Kretzschmar et al, 2010) Besides the requirements for capital for counterparty default risk, banks have to include a charge of capital to set-off the threat of potential mark-to-market losses (as known as credit value adjustment-CVA- risk) which was not addressed in Basel II (Alexander, 2011) But it is considered to cause more losses than those occur from counterparty defaults The framework also give introduction to the concept of Capital Conservation Buffer (Ivashina, 2010) With this supplemental layer of capital which is determined higher than the minimum requirement, can be drawn down during stress to absorb losses and sustain lending to the real economy According to European Banking Authority (2015a) reports, 15 largest EU banks had increased their CET1 ratios from 9.6% to 12.3% in year period from 2009 to 2015 (Matthews and Thompson, 2005) Along with that is the release of Countercyclical Buffer, a macroprudential tool, by setting up capital buffer in good times that can be drawn down in bad times, banking industry can avoid during the time of excess aggregate grow of credit (Slovik, 2011) With this regulation, banks can ensure the risk coverage is under control Nevertheless, there will be some disadvantage when developing and implementing these buffer (Slovik, 2011) Because increase provisioning to balance excess grow of credit can exacerbate the cycle lead to opposite of the intended effect (Chui et al, 2010) Table: Summary of CET1 capital requirements under Basel III compared to Basel II Basel III also develops a simple, transparent based measure of risk called “Leverage Ratio” to prevent leverage in banking sector and deliver supplementary safeguards against model risk and measurement error Besides enlargement requirements for capital, banks is now regulated to meet a minimum Liquidity Coverage Ratio where banks have to hold sufficient liquid assets to fully cover 30 days of funding stress along with the development of Net Stable Funding to limit maturity transformation (Alexander, 2011) Also higher capital base means international banks’ profit will be lower, banks therefore may seek out more insecure activities which can expose systemic risk of banking industry (Hanson et al, 2010) This is a way to constraint leverage in banking sector with the aim to lessen the risk of the destabilizing process which can harmful the financial system However, (Bierbrauer and Hellwig, 2010) imply that when combine risk-weighted capital and leverage ratio and liquidity standards can distort the original regulatory intentions Thereby make banks invest in assets with lower risk weights and switch to the shadow banking system through arbitrage of regulation (Bierbrauer and Hellwig, 2010) This can cause new bubble and more serious crisis in the banking sector When banks implement this regulatory, their credit activity will be narrowed, making it harder for them to gain profit due to the poor lending activity (Rochet, 2010) Besides, Basel III is very complex with hundreds pages, if international banks will have to create many new full time compliance jobs which make a huge impact to their income opportunity (Rochet, 2010) 2.2.Frank Dodd Act: On July 21st 2010, Dodd-Frank Wall Street Reform and Consumer Protection Act (the DoddFrank Act) is enacted into federal law by President Barack Obama (US) as a response to the financial turmoil in 2008 (NewYorkTimes, n.d.) The act gives guideline for big banks to be supervised on basis of what they instead of their corporate form It also provides these banks the concept of capital and liquidity buffers in order to restrict their relative size and their riskiest financial activities (Hester and James, 2013) This Act introduces stricter regulation for banks to prevent the re-occurrence the event in 2008 (Schultz, 2014) In order to achieve this, the Act developed the Financial Stability Oversight Council (FSOC) to solve the problem impacting the financial industry and to monitor systemic risk and research the state of the economy (Hester and James, 2013) To save consumers from large unregulated financial institutions, the Act is established of Consumer Financial Protection Bureau (CFPB) with the aim to eliminate risky business practices that can badly impact consumers with transparent and truthful information about mortgages (Schultz, 2014) The key provision of the Act is the Volcker rule This rule will prohibit banks from making high-risk speculative investment It will restrict banks from owning not more than 3% of the total ownership interests in a private equity fund or hedge fund as if they are judged risky (Beyer, 2015) New tool to regulate risky called Credit Default Swaps (CDS) is also introduced in which require greater expose to people on the swap trading to lessen the risks it exposed to the public (Neiman and Mark, 2010) According to (Beyer, 2015), since early 2012, the credit default swap fraction has decreased 22% from 50% to 28% with only Deutsche Bank and Barclays are in the top 15 It has shown a positive sign for banks since they were less being affected by the crisis It can be seen that the new law has contributed to balance the financial instability after the crisis, lead to a stricter regulatory scrutiny on capital level (Duffie, 2012) The law therefore has done significant progress in regulating all banks, including those that were considered as “too big to fail” The most valuable contribution is the higher prudential standards for capital which make banks especially international banks more resilient to financial distress or crisis Nevertheless, following the Act, international banks needs to have a higher percentage of assets in cash (Schultz, 2014) This will reduce the amount they can hold in marketable securities which can limit the bond market-making role that banks normally undertake When banks are not being able to join as market maker, potential customers will find it difficult to finding counteracting sellers (Hester and James, 2013) also give empirical evidence that the new law has become a burden for all banks because of high compliance costs (Brewer, 2016) It also act as a deterrent of competitiveness of the US Banks vis-à-vis foreign banks The low-interest rates after the crisis affected banks’ profitability make it hard to sustain operation (Campbell et al, 2009) According to a report by Federal Reserve Bank, only a small number of banks were established under the Law while many other have either closed or consolidated The Act has therefore limit banks in generating profit, makes it harder for banks to expand their activity (Robinson et al, 2014) III CONCLUSION: Together these reforms has addressed the regulatory weakness that allowed the unregulated enlargement of shadow banking and too big to fail companies They build a fundamental for economic recovery However, because of the safety and strictly like that has made international banks decrease their lending activity, build a complex capital base and cost a lot for the compliance costs which will directly affect to their income opportunities References Adrian and Shin, 2008 Liquidity and financial contagion Alexander, S K., 2011 Why banks hold capital in excess of regulatory requirements: The role of market discipline Asiedu, 2002 On the determinants of foreign direct investment to developing countries: is Africa different? 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Determinants of U.S Banking Activity abroad Goldstein, M., 1999 The case for an international banking standard Gray, M., 2005 The multinational bank: a financial MNC? Journal of Banking Hanson et