Lessons from the global financial crisis and recommendations to vietnamese banking sector

VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS n - I I S t l B- VU MINH HUONG LESSONS FROM THE GLOBAL FINANCIAL CRISIS AND RECOMMENDATIONS TO VIETNAMESE BANKING SECTOR Major : Business Administration Code : 60 34 05 MASTER OF BUSINESS ADMINISTRATION THESIS Supervisor : Dr Tran Phuong Lan đai học q uo c O 'a HP IV V TRUNG TẦM THONG Tin ĨHỰ yi£N ầ r L o / Hanoi - 2010 TABLE OF CONTENTS Acknowledue i Abstract ii Tóm tat vi able o f contents xi List of Abbreviations XV List of Tables xvii List cf B o x e s xviii List if Figures xix Introduction CHAPTER 1: GLOBAL FINANCIAL CRISIS AND ITS CAUSES AND EFFECTS TO THE WORLD BANKING SECTOR 1.1 Financial crises and its impacts to the econom y 1.1.1 Definition o f a financial crisis 1.1.2 Types of financial crises 1.1.3 Causes of financial crises 1.1.4 Impacts o f financial crises to the economy in history 10 1.2 Global financial crisis in 2008 - 2009 19 1.2.1 The causes o f the c ris is 19 1.2.2 The development o f the crisis 33 1.3 Impacts of global financial crisis to the world banking sector 34 1.3.1 IvOsses and default increase due to owning or financing mortgage derivaiives 34 1.3.2 Limited liquidity in the system - impact from difficult inter-bank market 36 1.3.3 Losses in market value as stock price plummeted 39 1.3.4 Banking activities stagnancy and Credit drain 41 xi 1.3.5 Collapses and Merger & Acquisition, nationalization 42 1.3.6 Confidence in banking system deterioration 45 1.3.7 The end of investment banks era 46 1.3.8 Large-scale lay-off, dismissal and unemployment in banks 47 CHAPTER 2: ANALYSIS THE VIETNAMESE BANKING SECTOR BEFORE AND AFTER THE FINANCIAL CRISIS 52 2.1 \ietnamese socio-economic context during global financial crisis 52 2.1.1 Excessive capital inflow 52 2.1.2 Inflation challenge and credit growth 53 2.1.3 Stock market sliding and real estate bubble swelling 54 2.1.4.Twin deficit 55 2.2 Tie Vietnamese banking sector before global financial crisis 56 2.2.1 Early stage o f development 56 2.2.2 Fast growth 58 2.2.3 Banking sector structure 59 2.2.4 Participation o f economic groups into banking sector 64 2.2.5 Undiversified banking services 65 2.2.6 \Veak risk management 66 2.2.7 )ver heated loan growth in 2007 66 2.2.8 Cooling loan growth rate in 2008 68 2.2.9 \ mapping of Vietnamese banks before the global crisis 69 2.3 Vietnamese banking sector after Global Financial C risis 73 2.3.1 Analyzing Vietnamese banks by CAMELS model 73 2.3.2 Bank mapping in the crisis (in 2008) 83 2.3.3 Bank mapping after the crisis (in 2009) 88 2.3.4 Little change in market share 90 2.3.5 Mergers & Acquisition (M&A) 89 2.3 Inpacts on foreign banks in Vietnam 92 xii 2.3.7 Little change in banking personnel 93 2.4 Analysis of the similarities and differences between the Vietnamese and US banking sector context before and during the financial crisis 94 2.4.1 Similarities of the Vietnamese and u s banking sector context before and during the financial crisis 94 2.4.2 Differences of Vietnamese banking sector context to u s context leading to the global financial crisis 97 Summary of Chapter 100 c HAPTER 3: LESSONS AND RECOMMENDATIONS 101 3.1 Lessons from the global financial crisis 102 3.1.1 Improving capitalization and leverage management lessons 102 3.1.2 Risk Management practices lessons 104 3.1.3 Separating commercial banks from investment banks 111 3.1.4 Transparency improvement lessons from u s and Euro zone’s banks 112 3.2 Recommendations to the Vietnamese Banking sector 115 3.2.1 Recommendations to Policy making level 115 3.2.1.1 More oversight and supervision from the authorities 115 3.2.1.2 Building SBV into a Central Bank in its exact meaning 117 3.2.1.3 Upgrading the legal system 124 3.2.1.4 Transparency improvement in authorities level 124 3.2.1.5 Improving deposit insurance activities 125 3.2.1.6 Improving banking personnel in Government level 127 3.2.2 Recommendations to banking governance and management 128 3.2.2.1 Improving capitalization in commercial banks 128 3.2.2.2 Improving liquidity management in commercial banks 129 3.2.2.3 More robust risk management in commercial banks 129 3.2.2.4 Mergers and Acquisitions (M&A) activities in banks 134 3.2.2.5 Improving transparency in Vietnamese commercial b a n k s 134 XI I I 3.2.2.6 Developing banking services by diversification and IT investment 135 3.2.2.7 Improving personnel from commercial bankslevel 137 Summary of Chapter 138 Conclusion 139 Bibliography 140 Annex 01 146 Annex 02 156 Annex 03 159 G lossary 160 xiv LIST OF ABBREVIA TIONS SOCB State-owned commercial bank J SB Joint-stock bank SBV State bank of Vietnam MOF Ministry of Finance IMF International Monetary Fund WB World Bank DIV Deposit Insurance o f Vietnam, SCIC State Capital Investment Corporation FED Federal Reserve CPI Consumer Pricing Index MBS Mortgage-backed security SEC Securities and Exchange Commission ARM Adjustable-rate mortgage CDO Collateralized debt obligation CLO Collateralized Loan Obligation CDS Credit Default Swap ABS Asset-backed security CRA Credit rating agencies BHC Bank holding company Ỉ D ie Federal Deposit Insurance Corporation SOE State-owned enterprise NPL Non-Performing-Loan ratio ROA Return On Asset ROAA Return On Average Asset ROE Return On Equity ROAE Return On Average Equity VAS Vietnamese Accounting Standards IHRS International Financial Reporting Standards NIM Net interest margins SSG Senior Supervisors Group NBFI Non-bank financial institution CAR Capital Ratio ECB European Central Bank TARP Troubled Asset Relief Program LIST OF TABLES Chapter 1: Table 1.1: Depreciation in GNP in some ASEAN Nations in 1997-1998 Table 1.2: Depreciation of some ASEAN Nation’s currency in 1997-1998 Table 1.3: Depreciation of some ASEAN Nation's Per capita income in 1997-2005 Table 1.4: Preliminary Capital Appreciation Contributions to the S&P500 Table 1.5: Number o f job cuts from banks, insurer and funds since August 2007 Chapter 2: Table 2.1: Financial Markets in Vietnam (Percentage of GDP) Table 2.2: Banking Sector in Vietnam (Percentage of market share) Table 2.3: Foreign strategic stakes in Vietnamese Banks Table 2.4: Investment of economic groups and SOEs Table 2.5: Profit comparison o f Vietnamese banks and banks in other countries Table 2.6: Profitability and of Efficiency of Vietnamese banks in 2008 Table 2.7: Sliding bank stock price in 2008, 2009 xvii LIST OF BOXES Chapter 1: Box 1.1: A short list o f some major financial crises since 20th century Box 1.2: How are MBSs (Mortgage backed securities) traded? Box 1.3: A bank run - Northern Rock xviii LIST OF FIGURES Chapter 1: Figure 1.1: Unemployment Rate o f us (1890 - 2008) Figure 1.2: USA annual real GDP from 1910-60 Figure 1.3: Wall Street Crash on the Dow Jones Industrial Average 1929 Figure 1.4: us Credit Market Debt as Percentage of GDP Figure 1.5: Growth in Figure 1.6: us us Household Mortgage Debt Sub-prime mortgage loans in total mortgage loans (Quantity and percentage) Figure 1.7: Breakdown o f Securities Backed by us Home Mortgage Collateral (January 2007) Figure 1.8: The Growth of the CDSs Market Figure 1.9: Moody's Profit per Employee vs Total ABSs Issuance Figure 1.10: Northern Rock share prices, day open (2005-2008) Figure 1.11: Market value in October 2008 compared with Quarter 2, 2007 Figure 1.12: Gold price fluctuation from September 2008 to 2009 Chapter 2: Figure 2.1: Investment growth and investment over GDP ratio in 1997-2007 Figure 2.2: Money and Credit indicators Figure 2.3: Inflation of Vietnam from 01/2007 to 04/2009 xix o February 17: Northern Rock was nationalized by the UK o M arch 10: Dow Jones Industrial Average at the lowest level since October 2006, falling more than 20% from its peak just five months prior o M arch 14: Bear Steams got Fed funding as shares plummet o M arch 16: Bear Steams was acquired for $2 a share by JPMorgan Chase in a fire sale avoiding bankruptcy The deal was backed by the Federal Reserve, providing up to $30B to cover possible Bear Steams losses o July 11: Indy Mac Bank, a subsidiary of Independent National Mortgage Corporation (Indy Mac), was placed into the receivership o f the Federal Deposit Insurance Corporation- FDIC by the Office of Thrift Supervision It was the fourth-largest bank failure in United States history, and the secondlargest failure of a regulated thrift after depositors had drawn more than 1.3 billion USD within 11 days o July 17: Major banks and financial institutions had borrowed and invested heavily in mortgage backed securities and reported losses of approximately $435 billion o Septem ber 7: Federal took over Fannie Mae and Freddie Mac, which at that point owned or guaranteed about half o f the US's $12 trillion mortgage market, effectively nationalizing them This caused panic because almost every home mortgage lender and Wall Street bank relied on them to facilitate the mortgage market and investors worldwide owned $5.2 trillion of debt securities backed by them 149 o September 14: Bank of America announced its plan to buy at 29 USD a share after rejecting to buy Lehman Brothers o September 15: This was the worst day in Wall Street since September 11 terrorist attack Lehman Brothers filed for bankruptcy protection, the biggest bankruptcy in u s history Merrill Lynch was sold to Bank of American American International Group (AỈG), the biggest insurance company, went insolvency due to losses from mortgage-backed securities The crisis officially spread globally o September 16: AỈG stock lost 50% value in the market Fed announced its plan to inject 85 billion USD into AIG to hold 80% o f its shares to avoid bankruptcy Barclays of the UK bought the North American assets of Lehman Brothers at $1.75 billion o September 17: Goldman Sachs and Morgan Stanley went down sharply Lloyds TBS of the UK acquired its competitor HBOS Securities and Exchange Commission (SEC), stopped short-selling o September 18: Treasury Secretary Henry Paulson and Fed Chairman Ben Bemanke met with key legislators to propose a $700 billion emergency bailout through the purchase of toxic assets Bemanke told them: "If we don't this, we may not have an economy on Monday." o Septem ber 19 - 21: Paulson financial rescue plan was unveiled after a volatile week in stock and debt markets Goldman Sachs and Morgan Stanley shifts into multi-function banks, signaling the end for investment banks in Wall Street 150 o Septem ber 25: Washington Mutual was seized by the Federal Deposit Insurance Corporation (FDIC), and its banking assets were sold to JP Morgan Chase for $1.9 billion With the total asset o f 307 billion USD, WaMu had become the largest bank going bankruptcy in u s history o Septem ber 29: 700 billion USD rescue plan - Emergency Economic Stabilization Act was defeated in the u s House of Representatives Reacting with that news, Dow Jones Industrial Index lost 780 points, the biggest loss in a day The stock market had a gloomy outlook Federal Deposit Insurance Corporation announced that Citigroup Inc would acquire banking operations of Wachovia o O ctober 1: The U.S Senate passed the $700 billion bailout bill after amendments o O ctober 3: President George w Bush signed the Emergency Economic Stabilization Act, creating a S700 billion Troubled Assets Relief Program (TARP) to purchase failing bank assets o O ctober 3: Using tax law change made September 30, Wells Fargo made a higher offer for Wachovia, scooping it from Citigroup o O ctober : France called on a summit with the largest countries in EƯ UK, Germany and Italy to cooperate in tackling the crisis which has spread heavily in these countries o O ctober 5: Germany financial minister announced that all deposit into Germany banks are insured unlimitedly 151 o O ctober 6-10: Worst week for the stock market in 75 years The Dow Jones lost 22.1%, down 40.3% since reaching a record high of 14,164.53 o O ctober 9: The Standard & Poor's 500 index lost 18.2%, its worst week since 1933 down 42.5% since its own high o O ctober 6: BNP Paribas informed to acquire Fortis at 14.5 billion Euro o O ctober 8: Central banks in USA (Fed), England, China, Canada, Sweden, Switzerland and the European Central Bank cut rates in a coordinated effort to aid world economy Fed also reduced its emergency lending rate to banks by half a percentage point, to 1.75% White House considered taking ownership stakes in private banks as a part of the bailout bill o O ctober 10: 98-year-olf insurer Yamato Life Insurance CO in Japan filed for bankruptcy as losses surmounted 11.5 billion yen (about 116 million USD) This signaled the spread o f the crisis to Asia o O ctober 11: The Dow Jones Industrial Average capped its worst week ever with its highest volatility day ever recorded in its 112 year history Over the last eight trading days, the DJIA has dropped 22% amid worries of worsening credit crisis and global recession Paper losses now on u s stocks now totalled $8.4 trillion from the market highs last year o October 11: A group o f central bankers and finance ministers from the Group o f Seven (G7) leading economies met in Washington and agreed to urgent and exceptional coordinated action to prevent the credit crisis from throwing the world into depression The G7 did not agree on the concrete plan that was hoped for 152 o O ctober 14: The u s tapped into the $700 billion available from the Emergency Economic Stabilization Act and announced the injection of $250 billion of public money into the u s banking system The form of the rescue would include the u s government taking an equity position in banks that choose to participate in the program in exchange for certain restrictions such as executive compensation Nine banks agreed to participate in the program and will receive half of the total funds: 1) Bank o f America, 2) JPMorgan Chase 3) Wells Fargo, 4) Citigroup, 5) Merrill Lynch, 6) Goldman Sachs, 7) Morgan Stanley, 8) Bank of New York Mellon and 9) State Street Other u s financial institutions eligible for the plan had until November 14 to agree to the terms o October 21: Fed announced that it would spend $540 billion to purchase short-term debt from money market mutual funds in a hope to help unfreeze the credit markets, making it easier for businesses and banks to obtain loans o November 12: u s Treasury Secretary Paulson abandoned plan to buy toxic assets under the $700 billion Troubled Asset Relief Program (TARP) Mr Paulson said the remaining $410 billion in the fund would be better spent on recapitalizing financial companies o November 15: The group o f 20 (G20) of the world's largest economies met in Washington DC and released a statement o f the meeting though no detailed plans were agreed upon o November 17: The Treasury gave out $33.6 billion to 21 banks in the second round of disbursements from the $700 billion bailout fund, bringing the total to $158.56 billion so far 153 o November 24: The u s government agreed to rescue Citigroup after an attack by investors caused the stock price to plummet 60% over the last week The plan included injecting another $20 billion of capital into Citigroup bringing the total infusion to $45 billion o November 25: Fed pledged $800 billion more to help revive the financial system $600 billion would be used to buy mortgage bonds issued or guaranteed by Fannie Mae, Freddie Mac, and Fannie Mae, and the Federal Home Loan Banks o November 28: The Bank for International Settlements (BIS), the global organization behind the Basel Accord, issued a consultative paper providing superv isory guidance on the valuation of assets at fair market value 2009 o Ja n u a ry 18: the Danish Parliament agreed to a financial package worth 100 billion Danish crones (17.6 billion USD) o The two month period from January 1-February 27 represented the worst start to a year in the history o f the s& p 500 with a drop in value of 18.62% By March 2, the DJIA had dropped more than 50% from its summer 2008 peak, only second to the decline of the 1929 Great Depression, which was 53% between September 1929 and March 1931 o March 6: the Bank o f England announced up to 150 billion pounds of quantitative easing, increasing the risk of inflation o In M arch: Blackstone Group CEO Stephen Schwartzman said that up to 45% o f global wealth had been destroyed by the global financial crisis 154 o M arch 9: the Dow had fallen to 6440, a percentage decline exceeding the pace of the market's fall during the Great Depression and a level which the index had last seen in 1996 o M arch 10: a countertrend Bear Market Rally began, taking the Dow up to 8500 by May 6, 2009 Financial stocks were up more than 150% during this rally o Ju n e 22: the World Bank projected that the global production for 2009 would fall by 2.9%, the first decline since the Second World War Source: http://en Wikipedia org/wiki/Subprime crisis impact timeline 155 Annex 02 Countries most affected by the financial crisis through financial channels Country Currency Depreciation (%) Bond Spreads(Bps) Ukraine -59.9 733 -66 Argentina -21.4 735 -58 Hungary -18.9 283 -58 Poland -35.2 127 -53 Jamaica -20.4 439 -51 Ghana -28.0 448 -35 Russia -22.0 144 -44 Kazakhstan -22.0 167 -34 Bulgaria -1.5 175 -51 10 Mexico -22.6 73 -35 11 Turkey -21.7 44 -40 12 Greece -1.2 95 -47 13 Sri Lanka -6.6 464 -27 14 Indonesia -8.8 85 -29 15 Austria -1.2 39 -49 ink** Equity Market 156 Rank** Country Currency Depreciation (%) Bond Spreads(Bps) Equity Market (‘ 15 Pakistan -6.3 132 -26 17 El Salvador -0.3 176 -35 18 Vietnam -7.1 53 -33 19 Italy -1.2 13 -50 20 Lebanon -0.3 57 -45 21 Netherlands -1.2 17 -42 22 Brazil -8.4 36 -28 23 Belgium -1.2 14 -36 23 Chile -5.5 80 -14 23 Tunisia -7.7 62 -14 26 Ecuador 0.0 2528 -13 26 Egypt -3.4 -137 -39 28 Spain -1.2 20 -31 29 France -1.2 11 -34 30 Colombia -3.4 63 -10 30 Germany -1.2 -34 32 Malaysia -0.9 81 -12 157 Rank** Country Currency Depreciation (%) Bond Spreads(Bps) Equity Market (%) 33 Philippines -0.1 53 -21 34 Peru -0.4 42 -15 35 South Africa 1.5 39 -20 36 United states 0.0 -24 37 Japan 9.2 -5 -17 38 China 0.3 -31 -11 **Rank from most to least affected The country with the greatest currency depreciation was given a (data from Wall Street Journal) Local currencies were compared to U.S dollar, U.S given percent in currency depreciation The country with the largest percentage drop in equity markets was given a (data from World Bank GEM, Japan data from MSCI Barra) The country with the largest growth in bond spreads was given a (data for EU countries from The Economist; data for remaining countries from World Bank GEM) EƯ bond spreads were compared to the German bund, while other bond spreads were compared to U.S Treasuries (U.S and German were given 0) http://www.camegieendowment.org/publications/index.cfm?fa=view&id=23284 158 Annex 03 Some key financial indicators of Vietnamese commercial banks to Dec 31, 2008 Unit: Percentage TTS (C M triêu đô n g ) N g in h in g R0€ ROA NM CP/TN TN ngí «/ Tổng TN NPLs z D P/ C PD P/TN trư c DP TSTK/ TTS Tổng d nọ/ HĐKH G ùi interbank/ V ay interbank (ề n) Vầy Interbank/ TTS CarTatal VCSH TTS 372,329.526 Agribanfc 26 86 60 18 29 34 45.65 N/A N/A 38 32 25 06 10019 96 02 N/A 9i 246,494,323 B I0 V 14 70 80 65 41 46 2547 02 63 55 52 07 31 63 98 52 38 56 N/A 5M 01 21 9,910,207 VictcontM nfc 20 13 22 3.07 27 68 26.67 48 108 30 4457 47 40 70.89 12 11 93 N/A 105,-306,130 ACS 28 46 10 3.07 37 53 35.65 90 72 93 32 591 54.24 2.64 40 12.44 S i comb* r* 12 31 40 06 51 75 53.27 62 115 99 26 41 02 7589 57 56 N/A 59,508,789 Techcom bonk 19 23 94 54 32 97 45.00 2.56 53 77 27 86 45.20 65 40 49 14 23 N/A 100 ; 48,750,581 E M w li 541 48 14 33 32 3316 N/A N/A 24 98 51.05 68 57 06 21 N/A 27 4: 68,430.569 3« 11 y 44.346.106 MB 14 09 57 36 33 91 13.27 N/A N/A 20 48 57 65 57 95 88 19 24 N/A 10 5í 38,596,053 set 16 51 20 3.11 42 69 6.90 57 134 80 15.02 234 101.35 60 20 15 91 7.2Í 34,719,057 VB 7.36 49 46 66 60 10.02 85 51 02 24 18 39.94 82 72 95 22 73 N/A 66C 34,4 90,700 O ongA 14 31 44 2.93 39 30 35.71 63 45 30 16 02 16 09 110.31 76 10 47 N/A 10 0- MSB 16 90 97 31 36 32 9.54 N/A N/A 14.53 62-61 7944 08 44 76 N/A S7* HttMỂMnk 11 77 49 32 30 48 1047 N/A N/A 18 67 520 94 89 04 35 26 N/A 12 6t 32.626,054 23,6*06,71 22,4 73,979 SaAbm k 769 43 17 29 46 5.33 N/A N /A 6.97 564 8834 12 36 23 N/A 18 5S 21.158,519 s outhorn Bank 08 45 33 65 90 4603 N/A N /A 19 41 37 67 98 58 0.25 31 49 N/A 11 1C 18.S87.010 W B t r tc 595 77 79 61 94 60 N/A N/A 25 34 2494 92 48 21 88 N/A 1288 15 7Ễ 14.381,310 SHB 859 35 28 39 88 66 34 02 022 23 393 65 76 32 15 54 N/A 14,091,336 O c o a n b tf * 20 32 50 58 02 5904 N/A N/A 57 49 67 92 62 46 42 71 N/A 6£ 13,731.691 ABB 28 37 19 72.74 20.31 16 28 70 23.55 37.00 9947 1.10 1502 N/A 28 7S 10.094,702 oca 409 64 78 63 96 19 69 N/A N/A 23 43 794 12650 18 14 19 N/A 15 7€ 9,557.062 HOB 361 63 21 61 69 4946 93 33 61 60 28.33 14239 94 21 69 28 66 17 51 8,582,199 Bắc A 81 38 02 37 72 3.03 N /A M /A 6.01 12.50 176 93 14 31 18 N/A 17 6S 7,4 52,949 L rtnV M t 12 87 595 66 25 17 27 69 00 N/A 79 56 96 84 80 98 12 79 N/A 46 24 6,184,199 P etro H m e i 639 06 48 48 65 3393 N/A N/A 14 90 53 53 107 56 0.72 43 41 N/A 16SS 5,891,034 N am A B a r* 0.75 16 2.04 81 88 2999 N/A N/A 509 24 26 109 86 058 17 99 5,031,892 V M N « n T in N0hM 289 34 74 47 25 14 94 N/A N/A 5305 152 8515 013 3,348,407 G to d M iB tf* 047 15 64 88 00 '58 49 20 20 61 1758 43 72 20911 84 3.1 33.749 DaiA 639 53 62 55 50 2947 47 88 10 48 33 98 102.22 2.53 2,939,018 ,.|l| v n erao n gJ|o w w 1.97 27 60 59 73 83 66 31 90 7.81 17.17 13290 2,661,681 W M t armB a n k 902 73 84 23 73 12 52 N/A N/A 308 39 01 158 78 2.418,643 T te rfh o n o b tr* 95 09 62 43 81 -3 99 00 N/A 05 81 60 23.50 1.4 79.142 FtcontfMitfc 857 91 01 515 96 97 73 N/A N/A 47 38 61 104 07 1.267.312 V tatbank 219 77 41 49 49 008 43 23.57 12 6314 33902 39 Bank N/A 21 29 28 N/A 119 49 13 N/A 31 31 48 70 239 263 65 N/A 356 40 23 28 N /A 41 3! 685 8.11 N/A 42.21 9.306 92 00 N /A 456 13 84 N /A 808 159 GLOSSARY (1) Mortgage debts (the same as mortgage loans): A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments Mortgages are used by individuals and businesses to make large purchases o f real estate without paying the entire value of the purchase up front In a residential mortgage, a home buyer pledges his or her house to the bank The bank has a claim on the house if the home buyer default on paying the mortgage In the case of a foreclosure, the bank may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt (2) Sub-prime lending: These clients typically have below average credit ratings because, being unable to prove regular and timely loan payments, their credit history is compromised (in the u s such clients are typically low income or elderly individuals, or new immigrants) (3) Mortgage-backed security (MBS): One of the most important types of Asset-backed securities (ABS, defined in (14) is MBS, a security with underlying mortgage loan collateral (mortgage-backed security) Changes in the prices of the ABS market are indicated by the ABX index, a synthetic, assetbacked credit derivative index (4) (US) Securities and Exchange Commission (commonly known as the SEC) is an independent agency of the United States government which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets to protect investors 160 (5) Securitize: To convert assets (typically outstanding loans or other receivables) to securities, usually by selling them with a discount to a financial intermediary, which pools them with other similar assets and sells further as securities to third-party investors Securitization: The fact or process of securitizing assets; the conversion of loans into securities, usually in order to sell them on to other investors (6) Alt-A category: With regard to risk the ALT-A category is located between the prime and sub-prime market on the u s mortgage market The candidates for ALT-A lending are considered relatively good borrowers, but either lack reliable proof of income or their debt-to-income ratio tends to be high (7) Adjustable-rate mortgages (ARM): A type o f mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin An adjustable rate mortgage is also known as a "variable-rate mortgage" or a "floating-rate mortgage" (8) Collateralized debt obligations (CDO): Special securities backed by bonds, loans or other assets as collateral Investors purchasing the CDO assume the risk of the loan or bond portfolio concerned The CDO is issued by an entity established solely for this purpose (special purpose vehicle, SPV), which acquires the securities used as collateral Based on the different risk levels and maturities the issuer o f the CDO chops the credit and/or bond portfolio into pieces (tranches) There are three risk categories reflected by three tranches: 161 senior tranches (AAA rating), mezzanine tranches (from AA to BB ratings), and equity tranches (unrated) If the securities are backed by loans or bonds only, they are called collateralized loan obligations or CLO, and collateralized bond obligations or CBO respectively (9) M ortgage contracts: contracts to get housing loans with mortgage (10) Collateralized Loan Obligation: the same as Collateralized debt obligations (CDO) (11) Credit Default Swap (CDS): A derivative instrument to transfer credit risk, where the buyer of the credit protection pays a swap spread to the seller of the protection, who, in turn, will guarantee the payment of the borrower's debt (12) Credit rating agencies (CRAs): are companies that assign credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves In some cases, the servicers of the underlying debt are also given ratings (13) Asset-backed securities (ABS): Securities backed by portfolios of homogeneous debt groups (mortgage or motor vehicle loans, credit cards, student loans, etc.) These securities are issued by institutions established exclusively for this purpose (SPV) (14) Federal Deposit Insurance Corporation (FDIC): is a u s government corporation created by the Glass-Steagall Act o f 1933 It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank The FDIC insures deposits at 8,195 institutions The FDIC also examines and supervises certain financial institutions 162 for safety and soundness, performs certain consumer-protection functions, and manages banks in receiverships (failed banks) (15) Stress test: The Supervisory Capital Assessment Program, publicly described as the bank stress tests (even though a number of the companies that were subject to them are not banks), was an assessment of capital conducted by the Federal Reserve System and thrift supervisors to determine if the largest U.S financial organizations had sufficient capital buffers to withstand the recession and the financial market turmoil The test used two macroeconomic scenarios, one based on baseline conditions and the other with more pessimistic expectations, to plot a 'What If?’ exploration into the banking situation in the rest of 2009 and into 2010 163 ... causes and effects o f the global financial crisis to the world and Vietnamese banking sector to draw lessons and recommendations to the local sector Besides, various recent reports on banks from. .. crisis to the Vietnamese banking sector and recommendations for it That is the reason for the author to carry out this research ? ?Lessons from the Global Financial Crisis and Recommendations to Vietnamese. .. the Vietnamese and u s banking sector context before and during the financial crisis 94 2.4.2 Differences of Vietnamese banking sector context to u s context leading to the global financial