Banking system consists of banks and the bank of banks

SBV- a ministerial level agency and the central bank SBV is a central bank- monetary policy - Stabilize the value of currency + control curb inflation + control foreign currency exchange

CHAPTER 2: BANKING SYSTEM CONSISTS OF

BANKS AND THE BANK OF BANKS

Ms Nguyen Thi Thuy Dung Faculty of Banking- Insurance

Academy of Finance

Aug 2020

I BANKING SYSTEM IN VIETNAM

II SBV- a ministerial level agency and

the central bank

Central banks around the world?

- In the US: Federal Reserves

- In Europe: European Central Bank -ECB

Central bank in Vietnam

The State Bank of Vietnam (SBV)

 A central bank can generally be

defined as a financial institution

responsible for overseeing the

monetary system for a nation,

or a group of nations, with the

goal of fostering economic

growth without inflation

II SBV- a ministerial level agency and

the central bank

The State Bank of Vietnam the ministerial level

agency of the government

=> The autonomy/ independence of SBV?

- SBV’s Roles and functions are equivalent to other governmental department

- Not have freedom to conduct the monetary policy, interest rate/ currency exchange policy

- Be influenced by government spending and political factors

https://www.youtube.com/watch?v=ju1gnMSciFU

II SBV- a ministerial level agency and

the central bank

The State Bank of Vietnam is a central bank

1 Note issuance

- Central bank is the monopoly to issue note

- Central banks’ notes and coins are legal tender

2 Banks of commercial banks

- Receipt of deposits for payment and required reserves

- Lending to commercial banks (The last resort):

refinancing in forms of:

+ discounting/ re-discounting valuable papers

+ lending secured by the mortgage of valuable papers

- Clearing agent in payment system

3 Banks of the State/ Government

II SBV- a ministerial level agency and

the central bank

SBV is a central bank- monetary policy

- Stabilize the value of currency

+ control (curb) inflation

+ control foreign currency exchange

- Implement monetary policy

+ Control money supply

+Tools: interest rate, required reserves, the Open Market Operation (OMO)

- Control commercial bank system

+ Inspection

+ Supervision

Monetary policy vs Fiscal Policy

Monetary policy:

 + is managed the SBV (central)

+ aim to manage the money supply

+ aims to control inflation, maintain price stability and public trust

on the national currency.

+ use some tools such as interest rate, the Open Market Operation

Fiscal policy:

 + is managed by the Ministry of Finance

+ regulates the government spending and funding, tax rate policy , to promote economic growth

Translation: Monetary policy

 Monetary policy is an economic policy that manages the size and growth rate of the money supply in an economy It is a powerful tool to regulate macroeconomic variables such as inflation and unemployment The central bank or a similar regulatory organization is responsible for formulating these policies The primary objectives of monetary policies are the management of inflation or unemployment, and maintenance of currency exchange rates Depending on its objectives, monetary policies can be expansionary or contractionary.

 This is a monetary policy that aims to increase the money supply in the economy

by decreasing interest rates, purchasing government securities by central banks, and lowering the reserve requirements for banks An expansionary policy lowers unemployment and stimulates business activities and consumer spending The overall goal of the expansionary monetary policy is to fuel economic growth However, it can also possibly lead to higher inflation.

 The goal of a contractionary monetary policy is to decrease the money supply in the economy It can be achieved by raising interest rates, selling government bonds, and increasing the reserve requirements for banks The contractionary policy is utilized when the government wants to control inflation levels.

Translation: Tools of monetary policy

Ngân hàng Trung ương sử dụng nhiều công cụ khác nhau để thực thi chính sách tiền tệ NHNN Việt Nam sử dụng các công cụ như sau:

 - Tái cấp vốn: Tái cấp vốn là hình thức cấp tín dụng của NHNN

nhằm cung ứng vốn ngắn hạn và phương tiện thanh toán cho TCTD NHNN quy định và thực hiện việc tái cấp vốn cho TCTD theo các hình thức như cho vay có bảo đảm bằng cầm cố giấy tờ có giá; chiết khấu giấy tờ có giá; các hình thức tái cấp vốn khác.

 - Lãi suất: NHNN công bố lãi suất tái cấp vốn, lãi suất cơ bản và các

loại lãi suất khác để điều hành CSTT.

 - Tỷ giá hối đoái: Tỷ giá hối đoái của đồng Việt Nam được hình

thành trên cơ sở cung cầu ngoại tệ trên thị trường va có sự điều tiết của Nhà nước NHNN công bố tỷ giá hối đoái, quyết định chế độ tỷ giá, cơ chế điều hành tỷ giá.

Translation: Tools of monetary policy

 - Dự trữ bắt buộc: Dự trữ bắt buộc là số tiền mà TCTD phải gửi tại

NHNN để thực hiện CSTT quốc gia NHNN quy định tỷ lệ dự trữ bắt buộc đối với từng loại hình TCTD và từng loại tiền gửi tại TCTD nhằm thực hiện CSTT quốc gia.

 - Nghiệp vụ thị trường mở: NHNN thực hiện nghiệp vụ thị trường

mở thông qua việc mua, bán giấy tờ có giá đối với TCTD; quy định loại giấy tờ có giá được phép giao dịch thông qua nghiệp vụ thị trường mở.

Further reading: The central banks’

monetary policy

Direct tools: Credit line management of

commercial banks

 The concept is that the central bank control the total

outstanding balances of commercial banks Commercial banks can not exceed the limits regulated by the Central bank

 Pros: The central bank can adjust and control money

supply when indirect tools are ineffective, during periods

of overheating, high rate of inflation

 Cons: Eliminates the competitive dynamics among the

commercial banks, reduces the efficiency of the allocation

of capital in the economy

Further reading The central banks’

monetary policy

Direct tools: interest rate

 The CENTRAL BANK set up an interest rate framework

of commercial bank, thereby affecting the size of the credit and the economy => money supply

 Pros: Suitable to countries when there are no conditions

to promote the effect of indirect tools

 Cons:

+ Lose the objectivity of interest rate, which is actually the

"price" of capital so it must be formed from the supply and demand relationship of capital in the economy

+ Make commercial banks be passive and their business

operations be more expensive

Further reading The central banks’

monetary policy

Indirect Tools: Reserve requirements

Banks need to hold a quantity of reserve assets for prudential purposes If a bank falls to its minimum desired level of reserve assets it will have to requests for loans or seek to acquire additional reserve assets from which to expand its lending

By changing the required reserve ratios, the central bank can control the money supply

Further reading The central banks’

monetary policy

Indirect Tools: Loans to banks and the discount

window

Allows eligible banking institutions to borrow money from the central bank, usually to meet short-term liquidity needs

By changing the discount rate, that is, the interest rate that monetary authorities are prepared to lend to the banking system, the central bank can control the supply of money

in the system

Manipulation of the discount rate can therefore influence short-term rates in the market

Further reading The central banks’

monetary policy

Indirect tools: The Open Market Operation

The central bank operates in the market and purchases or sells government debt to the non-bank private sector

In general, if the central bank sells government debt the

money supply falls (all other things being equal) because

money is taken out of bank accounts and other sources to purchase government securities => an increase in

short-term interest rates

OMOs are flexible and precise – they can be used for major

or minor changes to the amount of liquidity in the system; they can easily be reversed; open market operations can be undertaken quickly

Exercise: Translation

 Có ba mô hình NHTƯ trên thế giới: (1) NHTƯ độc lập với

chính phủ; (2) NHTƯ là một cơ quan thuộc chính phủ; và (3) NHTƯ thuộc Bộ Tài chính.

 NHNN Việt Nam luôn là một cơ quan thuộc Chính phủ, là một đơn vị ngang Bộ Chính vì vậy, hoạt động của NHNN chịu sự điều chỉnh rất lớn của Chính phủ

 Gần như mọi hoạt động của NHNN đều phải được sự cho phép của Chính phủ (phát hành tiền, thực hiện CSTT quốc gia, cho vay ngân sách trung ương… )

Exercise: Translation

 Sự thiếu độc lập của NHTU làm giảm tính linh hoạt trong việc thực hiện CSTT quốc gia Bên cạnh đó, NHNN đôi khi phải thực hiện những nhiệm vụ không phù hợp với mục tiêu của CSTT, chẳng hạn như tái cấp vốn cho các NHTM để xoá nợ các khoản vay của các doanh nghiệp nhà nước

Topic for writing

Topic 2: “Define the central bank’s autonomy What do you

think about the case of the State Bank of Vietnam”

Step 1: Type of an essay: An opinion essay

Step 2: Define the central bank’s autonomy

Step 3: Explain the current status of SBV

Step 4: State your opinion (agree/ disagree) and justify its

(reason)

Step 5: Conclusion

Topic 2 for writing

Central bank’s autonomy refers to the extent to which the central bank is independent from the executive and legislative

control to carry out its functions (refers to the independence of the

central bank from the government).

The State Bank of Vietnam (SBV) is a ministerial level agency of Government; there is some political intervention in construction and implementation of SBV’s monetary policy For

example, SBV does not have freedom to conduct the monetary

policy, interest rate/ currency exchange policy Additionally, SBV is influenced by the government spending and other political factors.

When SBV is dependent on the government, it is easier to align/ connect several macroeconomic policies under the same guidance of the government However, research shows that a dependent central bank could not effectively conduct its monetary policies to reach the target of currency stabilization and inflation management.

Topic 2 for writing

In shorts, because a central bank independent from the government will allow more active implementation of monetary policies , I think that SBV should be given more flexibility (freedom/ independence ) Giving SBV more freedom in its legal status, policy tools and goals, organization, human resource management and financial control is necessary to make its economic intervention more effective and pave the way for lower inflation, increased stability and more sustainable economic development in Vietnam.