Financial security for vietnam financial market in international economic integration context

Research scope and subjective Research in general the financial market, financial market’s security, focusing onresearching the monetary and banking market and securities, insurance mar

INTRODUCTION

1 Significant of the research

Vietnam, a developing and integrating country, from a low income country and hasnow become first level country of the middle income group Vietnam has the small financialand economic system, therefore, it is easily vulnerable with international financial,economic crisis and the hard of domestic economy

To ensure the financial security, especially to ensure the financial security for thefinancial market is the top issue of Vietnam in the development and integration into theinternational economy For this reason, the Ph.D student has chosen to research the topic:

“Financial security for Vietnam financial market in the international economic integrationcontext” as his Ph.D dissertation

2 Overview of the research

+ The first study: “Solutions to enhance the anti money laundering activities inVietnam in the international economic integration context”

+ The second study: “Solutions to enhance the micro supervision activities for creditinstitutions in Vietnam in the international economic integration context”

+ The third study: “Some main solutions to ensure the financial security for theoperations of Vietnam’s monetary market in the international economic integration context”These 3 studies of the Ph.D student has been approved by the Board of Approval ofthe on 25 November 2011

On 22 March 2013, the Ph.D student has defended the dissertation at the basic levelwith the Board of dissertation at the basic level After announced with the result of the Ph.Ddissertation at the basic level and received the comments from the Board’s members, theresponse of the Chair of the Board, the Ph.D dissertation has been further supplemented tobecome perfect

3 The research objective

+ To deepening the scientific aspect of the financial security for the financial market;+ To assess the actual circumstance of financial security of the Vietnam financial market,focusing on analyzing the financial security of the monetary and banking market, securitiesmarket, insurance market

+ Recommend the best solutions to assure the financial security for the Vietnam financial market

4 Research methodology

On the basis of materialistic dialectics method, historical materialistic method, statisticsmethod, generalizing and factual researching at State Bank of Vietnam and some creditinstitutions, securities companies, study the documents of international organizations toconduct the analyzing, induction to find the best solutions for the research purpose

5 Research scope and subjective

Research in general the financial market, financial market’s security, focusing onresearching the monetary and banking market and securities, insurance markets that arethe major actors that affecting the financial market since Vietnam has become WTOmember For the monetary and banking market, the Ph.D student focuses on researchingthe operating market between credit institutions and economic organizations, residentsand other organizations

- The subjective of the research is the issue of financial security for the Vietnam’sfinancial market, taking the monetary, banking market, securities, insurance market toassess and evaluate

6 Structure of the dissertation

In addition to the introduction and conclusion, the dissertation covers 3 chapters: Chapter 1: The theory basis for financial security of the financial market in theinternational economic integration context;

Chapter 2: The factual of financial security of financial market, assessing, identifying,causing and lesson learnt;

Chapter 3: The solutions for the financial security of Vietnam’s financial market in theinternational economic integration context

CHAPTER 1 THE THEORY BASIS FOR FINANCIAL SECURITY OF THE

FINANCIAL MARKET IN THE PROCESS OF INTERNATIONAL

ECONOMIC INTERGRATION

1.1 Overview of financial security of the financial market in the international economic integration context

1.1.1 The definition of financial security

According to the Governor of the Central Bank of Turkey, financial security can bestrengthening through the smooth operations of the existing system This is the generaloverview and covers the payment system, information techonology infrustrcture as well asmanagement and supervision framework The financial safety and financial security arestrictly linked

Accroding the document titled the national financial security, theory, alert, policiesissued by the finance publisher in Juy 2004 of the Professor, Ph.D Tao Huu Phung (chiefeditor) and the research documents of group researchers of State Bank of Vietnam andMinistry of Finance, the financial security can be defined as follows:

Financial security is a basic concept to indicate a stable, secure, strong and no crisisfinancial situation

Stability can be defined as maintaining the normal operations, no sudden and

unpredictable changes However, it should be understood stability during the movement anddevelopment Stability does not mean trying to keep things unchanged but keeps stabilityduring the move on process, no limit of improvements and perfectionism

Security can be defined as the circumstance of no danger due to inner and outer

influence Keeping security means not causing damage to ourself as well as preventing andagainst the outside attacking to damage If stability is the basic foundation, security is the coreelements to regulate the movements of financial status

Strengthening is the basic ground for stability and security, a weak financial status can

not be kept stable and assure security

Crisis is the final boundaries of losing financial security therefore; avoiding crisis is

the top priority of any financial security solutions Together with being in financial crisis isfinance unbalancing, meaning the payment liabilities will be over the payment instruments

at a specific time

Ph.D student has agreed with the financial security of the above researchers, however,this theory has only been in general mentioned in terms of “financial status” Therefore,with the purpose of improving the scientific and factual application of financial security, it

is necessary to research in deep the financial market and finance sectors

1.1.2 Classifying the financial security

1.1.2.1 Classifying based on level and scope of management

a National financial security;

b Financial security of enterprise;

c Individual financial security (inhabitants - family);

1.1.2.2 Classifying based on sector

a Financial security of state sector;

b Financial security of financial intermediary;

c Financial security of enterprises and inhabitants

1.1.2.3 Classifying based on financial functions

a Financial security in mobilizing financial source

b Financial security in allocating financial resources

c Financial security in utilizing financial resources

1.1.2.4 Classifying based on geographical

a Local financial security;

b National financial security;

c Regional financial security;

d Global financial security;

1.1.2.5 Classifying based on nature

a Real financial security;

b “Illusive” or formalism financial security

1.1.2.6 Classifying based on extend

a High extend of financial security;

b Secured financial security;

c Unsecured financial security;

d Lost in financial security;

1.1.2.7 Classifying based on financial market

a Based on the market specialized, market security, debt instruments security; capitalinstrument security; derivative instrument security In general, the financial market operated

on the basis of trading the financial properties;

b Based on the market structures: primary market security and secondary marketsecurity;

c Based on the time line of financial instruments: financial security of the monetary andbanking market; financial security of capital market; financial security of secuirities market;

1.2 Overview of financial market

1.2.1 Theory of financial market

Financial market is the market of financial instruments in which financial source will

be transferred from the person with capital abundant to the lack one through purchasing,trading the financial instruments

It can be understood simply as follows: the financial market is the place where the financialinstruments are traded Financial market is the environment where the financial systems areoperating

The main functions of financial market are the process of transferring the capital fromthe abundant person to the lack one

In the movement of the financial market there has been the participation of marketsupervisors with the purpose of creating the transparency, effectively operating market,minimize the operational risks of the financial market, maintain the stability, security forthe market and promote the its development

1.2.2 Classifying the financial market.

The financial market is very complex and variety, each kind of financial market isformed and developed with its own main functions and purpose depend on the economic,social development of different countries, depend on the financial instruments and paymentmethods, different participants of the market

1.2.2.1 Based on the order of issuing, trading and structure of the market: financial markets are divided into primary market and secondary market.

1.2.2.2 Based on the market specialized: the financial markets are divided into capital instrument market and derivative instrument market.

1.2.2.3 Based on the time line of financial instruments: financial markets are divided into monetary and banking market and capital market.

1.2.2.4 Based on the subject of the market, the financial markets include:

+ Borrowing and lending market of the government;

+ Borrowing and lending market of financial intermediary;

+ Borrowing and lending market of enterprises;

+ Borrowing and lending market of individuals;

1.2.2.5 Based on the operating criteria of the market

Financial market is divided into monetary and banking market, security market,insurance market This method of dividing perfectly matches with the focus of the Ph.Dresearch

+ Monetary and banking market is the place for short, medium and long term capitaltrading Monetary and banking market includes:

- Market of mobilizing and lending capital of credit institutions to financialorganizations, inhabitants, other organizations, individuals (often referred as first):

- Market of borrowing and lending among credit institutions (often referred as second)

- Market of borrowing, buying, selling between central banks and credit institutions(often referred as third)

+ Securities market means the market where the buying and selling securitiesactivities occurred Taking into consideration the nature of the market, the securities market

is the place to relocate the capital from the abundant owner to the needed one in theconcentrated and no concentrated market economy,

+ Insurance market means the market that occurring the buying and selling insuranceproducts The insurance market includes the life insurance market and non life insurancemarket.

1.2.3 The inter-relations between the elements establishing the financial market.

The markets that contribute to the establishment of the financial market have a strictlyinterrelations, specifically the 2 major markets that are the monetary and banking market,the insurance market

The monetary and banking market has become more consistent with the capital market

in the operation of the national financial market and has been globally The vulnerability ofthe economy will affect this market and then, in turn, will immediate affect the othermarkets

Nowadays, together with the development of the global economy, the operations ofthe financial market is becoming more and more complicated, sophisticated, the financialinstruments have been strictly interrelated, the markets are inter reacted and influenced, theborder line of the different markets are only relatively, the financial instruments are movedinter related among the markets, inter transferred

Financial market is the being influenced directly by the financial policies, monetarypolicies to obtain the target of the economy

1.2.4 The instruments of financial market.

+ The debt securities include bonds, bill of credit, commercial bills and otherreceivables

+ Capital securities are often called as shares, equivalent to the amount of sharesowned in the enterprise

1.3 Financial security within the operations of the financial market.

Financial security of the financial market means the financial security of the marketsthat contribute to the financial market includes monetary and banking market, securitiesmarket, insurance market

It is the stability, safety, developing manner and ability to against the crisis of themonetary and banking market, securities market, insurance market Besides, the elementsthat affect greatly the financial market include the public debts, meeting the standard of antimoney laundering of nations and financial institutions

1.3.1 Financial securities for the operation of monetary and banking market.

1.3.1.1.Therory of financial securities for the monetary and banking market.

+ To assure the financial security for the operations of monetary and banking marketmeans to assure the financial security for the 3 following markets:

* The market to mobilize capital and lending of credit institutions to individuals,financial institutions and other institutions (referred as the first market)

* The inter borrowing and lending market of credit institutions (referred as the secondmarket)

* The lending and buying, selling market among central banks and credit institutionsreferred as the third market)

Financial security for the operations of the monetary and banking market is the basicdefinition indicates the stability, safety, development and not being crisis during the

operation of the monetary and banking market.

1.3.1.2 Affecting factors and standard of financial security of the monetary and banking market operations

a Affecting factors

a1 Stabilize the operations of the monetary and banking market.

*) Stabilize the operations of the first market

+ Stabilize the capitals;

+ Stabilize utilizing capitals;

*) Stabilize the operations of the second market

*) Stabilize the operations of the third market

a2 Secure the operations of the monetary and banking market

*) Secure of the first market

+ There has been many factors in which the major ones required the credit institutions

to meet in order to secure the operations of the credit institutions include:

 Capital adequacy ratio;

 Credits margin;

 Debt service coverage ratio;

 The margin of capital contributions, buying shares;

 The rate of credit granted compared with capital called up

In addition, with the developing requirements of countries and over the different time,the requirements of the security for the operations of credit institutions should be added orchanged in increasing trends

*) Secure for the second market

To assure the operations of this market in the competition means identify theliquidity of the market, conditions to borrow and pay debt comply with the securitypolicies of the system to assure the banks, non financial banking institutions operating inaccordance with the market regime but also being controlled and monitored by the centralbanks

*) Secure for the third market

This is the buying and selling activities between central banks and credit institutions Asthe stability of this market, the security in a broad meaning is creating the safety for the policies

of stabilizing the value of money, safety for the operations of credit institutions, not simplymeans safety (receive all the money once selling valuable papers or receive all the amounts andinterest once giving loan…)

a3 Develop the operations of the monetary and banking market

*) Develop the first market

*) Develop the second market

*) Develop the third market

a4 Increase the ability to prevent the crisis of the monetary and banking market

Crisis is the final limit of lossing security for the monetary and banking market Themonetary and banking market is systematic and highly inter affected

Therefore, the first market is the highly important one for the safety, stability and

development of monetary and banking market.

In conclusion: financial security for the operations of the financial market is a stablestatus, safety, development and avoid of crisis of the monetary and banking market

b The indicators to reflect the security of financial stability for the monetary and banking market

b1 Capital adequacy

For the credit institutions operate internationally, these procedures at least notlower than the requesting ratio of capital respectively stipulated by Basel (at presentnot less than 8%)

The capital separate ratio and combined risks means the rate of combined capitalshould always ≥8% (Basel regulations) To assure the financial security, most of thecountries request the minimize rate must be higher than 9% According to PH.D researchpoint of view, this rate should always higher than 10% for every credit institutions to assurethe safety of the credit institutions

b2 Credit limitation to assure the financial security

+ The total of outstanding debts of a credit institution for a customer should not beover 10% of capital owned of credit institutions (safety margin should not be over 15% -common in many countries)

+ The total of outstanding debts and the outstanding of grantee of credit institution for

a customer, in the point of view of Ph D student it should not exceed 20% of the ownedcapital of credit institutions (the safety margin is 25%- common in many countries)

+ The total of outstanding debts of credit institutions of a group of customer should notexceed 45% of the owned capital of credit institution (the safety margin is 50%- common inmany countries)

+ The total of outstanding debts and the outstanding of grantee of credit institutions

of a group of customer should not exceed 55% of the owned capital of credit institution (thesafety margin is 60%- common in many countries)

b3 The ratio of ability to payment to assure the financial security

+ The minimize ratio under the PH.D research point of view is 20% equal the total ofcurrent assets payable immediate divided the total payable liablilites (the safety margin is15%- common in many countries)

+ The minimum ratio equal to 1.5 times of the total amount of current assets payablewithin 7 days since the next day and the total liabilities payable within 7 days since the nextday (under the point of view of student), This ratio is adequacy, in many countries thecommon is 1

b4 Limited capital contribution and share purchase

+ The capital contribution of the credit institution in a enterprise, investment funds ,investment projects , other credit institution shall not exceed 8 % ( in view of the PhDstudent) The safety ratio shall not exceed 11 % as usual

+ The total capital contribution and share purchase of a credit institution and itssubsidiaries, joint ventures, associated companies of credit institutions in the sameenterprises, investment funds, investment projects, the other credit institutions shall notexceed 8 % of the charter capital of enterprises, investment funds, investment projects other

credit institutions ( in view of the PhD student) Adequacy ratio of 11% as usual

+ The total capital contribution and share purchase of credit institutions in all thesubsidiary companies shall not exceed 20 % of charter capital and reserve funds ( in view ofthe PhD student) As usual safety is 25 %

b5 Credit ratio of total capital mobilization

+ For the Bank only used the mobilized capital to finance credit and after credit isprovided should ensure the affordability and safety ratio should not exceed 80 % for eachbank and the average of the commercial banking system

+ For the non financial credit institution shall not exceed 85 % for each of the nonfinancial credit institutions and for the whole system 's average , the non financial creditinstitutions

b6 The ratio of overdue liability to total outstanding loans

This ratio is always less than 5% at any time for each credit institution and the system'saverage credit institutions

Ratio of financial security of overdue liability (NPL-Non-Performing Loans) is alwayslower than 3% for each credit institution and for the whole system

b7 Percentage of the profits earned by credit institutions and the whole system is always greater than 1% over the year Each credit institution must continuously be

profitable All systems have gained increasing interest maintained through the years Acredit institution losses, that credit institutions loss financial security Even creditinstitutions losses or reduced profits compared with the previous year, will also lead tofinancial insecurity of the whole system

c The indicators to evaluate the endurance credit shocks of credit institutions on the financial markets

For each specific risks in banking operations, there has been different technicalendurance testing The following risks are common risks that supervisory, inspection andmanagement agencies, the bank to measure to evaluate in order to avoid the crisis canhappen to the monetary and banking market:

+ Credit risk;

+ Interest rate risk;

+ Exchange rate risk;

+ Liquidity risk;

+ Risk interbank spreads

Each kinds of risk have different technical endurance testing and request different data

c1 ST on credit risk

+ The method is based on the provision

+ ST macro approach

c2 ST on interest rate risk

+ Method of gap analysis revaluation

+ Method of analysis period

c3 ST to exchange rate risk

+ direct ST method with the exchange rate risk

c4 ST on liquidity risk

+ The method is based on the balance sheet

+ Approach based on the period (cash flow method)

c5 ST to spread risk

+ ST method for the risks of inter banking

+ ST method to spread macroeconomic risks

1.3.2 Financial Security for the securities market

1.3.2.1 The definition of financial security for the securities market

Similar to the monetary and baking market, financial security for the operation of thesecurities market is to ensure market operate stable, secure, developing and avoid of crisisfor the market activity

The nature and content of: stability, security, development and non crisis will beidentified in the concentrated market, decentralized market and market participants in thesecurities market

1.3.2.2 Financial security factor for the operation of the stock market

a Stable operation of the ssecurities market

b Safe operation of securities markets

c Develop the activities of the securities market

d Enhancing the ability to prevent the crisis of the securities market

Thus, to prevent the crisis of the market, there should be macro policies to stabilize anddevelop economy to avoid economic crisis In addition, it is necessary to avoid the negativeeffects of economic crisis from the outside , stabilize and develop stable the primary market(release market) , the secondary market (the market for trading the released securities), strictlycontrol the activities of participants in the securities market such as stock trading center,companies issuing securities , the securities trading companies, investors, speculators

1.3.2.3 Financial security factor for the operation of the securities market

1.3.2.3 The principles, international standards for monitoring securities trading activities, the indicators reflect the financial security of the securities market.

a The principles and standards of international securities trading activities.

The principle is directly related to the financial intermediary institutions participatingsecurities market, include:

+ The supervisory agency has to ensure minimum conditions for market access for marketintermediary institutions while ensuring fairness to these organizations The purpose ofmonitoring is to reduce the risk of loss causing to investors due to the error or illegalbehavior or capital inadequacy of the financial intermediary

+ Must have requirements on initial capital and capital in the business process, thesafety regulations reflect the risks that the financial intermediaries may encounter

+ The financial intermediary must comply with standards for internal structure,professional operations to protect the interests of investors and appropriate managing risk.+ There must be provisions on bankruptcy procedures of financial intermediaries inorder to minimize losses to investors and risk control systems

b The indicator reflects the financial security of financial institutions participating securities market

+ Develop financial safety indicators based on the criteria applied to the bankingsystem on the principles of Basel I and Basel II European Union system has been applying

these principles for the financial institutions participating in the securities market Securitiestrading organizations must always meet:

Self financing

capital =

Self financing captial I + Self financing

Total assets at risk

To meet financial security standards the PhD student believes that this ratio shouldalways greater than 9%

+ Apply the method of capital net (Net Capital Approach) The minimum of net capitalmaintained of securities companies is 2% of total customers’ loans and will receive awarning if the level is lower than 5%

In view of the PhD student, the minimum ratio to ensure financial security should notless than 5%, according to a warning by the U.S supervisory agency

1.3.3 Financial security for the insurance market

1.3.3.1 The concept of financial security for the insurance market

Thus, financial security for the insurance market is to make markets operate safely, stabile,

developing and avoid the impact of the market crisis.

1.3.3.2 The principles and international standards of supervising insurance business.

ICP includes 28 principles ICP with 7 cluster with the following main topics:

+ The principle of cluster to ensure the conditions of effective supervision,including principles 1 for effective supervision;

+ The principles of cluster monitoring system from principles 2 to 5;

+ The principle of cluster being monitored from principle 6 to 9;

+ The principle of cluster being monitored the activity from principle 10 to 15.The principle of the prudential supervision, from principle 15 to principle 23

+ The principle of cluster markets and customer, including the principles from 24 to 27;+ Cluster on anti-money laundering and combating the financing of terrorism in theprinciple 28

1.3.3.3 The criteria ensure financial security for the operation of the insurance market

For the direct supervision of solvency, in some countries based on the provisions of "solvency margin"(Solvency margin), in some other countries apply the "risk-based capital "(risk-based capital)

The supervisory agency requires the company to maintain this ratio is not less than100% in order to meet capital adequacy requirements

This ratio is being calculated as follows:

Coefficient of solvency margin =

Variable ability to make payments

100%

Solvency margin standard

In view of Ph.D student, to ensure the financial security of the system, this ratiomust be ≥ 110% (absolute safety area is 10%)

For the second method of "risk-based capital", the minimum amount of capital tocompensate for the risks that insurance companies face will be calculated based on the

degree of risks

CONCLUSION OF CHAPTER 1

Thus, financial security for the financial markets means to ensure the stable, secure,devlop and non crisis of market’s operations The financial market consists of a variety ofmarkets operating together of which, particular importance is the operation of monetary andbanking markets, ssecurities market, insurance market to be stable, safe, developing andprevent the crisis that will create the conditions to ensure financial security for the financialmarkets The monetary and banking market, securities markets, insurance markets havetight relationships with each other, the operations of this market will ensure that financialsecurity will have positively impact on the security of other markets and vice versa, oncethis market not ensure financial security, it will have negatively impact on other markets andhave negatively impact on the operations of financial markets nationally as a whole and insome cases could adversely affect the financial markets of the region and negatively affectglobal financial markets With this special meaning, the solutions of financial security forfinancial markets is of important to secure financial security for every country , contributing

to the security for global financial markets

Monetary and bank market including the first, second, third market, market of which the firstmarket plays a decisive role To ensure financial security for monetary and banking market, eachcomponent market have to ensure adequate factors and indicators to ensure financial security forsafety, stability, development and prevent crisis

+ Criteria to ensure financial security for monetary and banking market includingcriteria for minimum capital adequacy for organizations and the whole systems, criteria ofcredit limit and the ratio of solvency payment; limit of capital purchasing equity; the rate oftotal granted credit of the total capital mobilization; maximum limit on overdue loan ratio,rate of profits The criteria to assess the stamina of each organization participating in themarket and the system as a whole to ensure the system can avoid the effects of the crisis + The factors that affect the financial security for the securities market including:security, stability, development and ability to prevent a crisis The indicator reflectingfinancial security for financial institutions participating into securities market also includeratio of minimum capital, the ratio of net capital to meet the market liquidity

+The factors that affect the financial security for the insurance market include the followingfactors: safety, stability, development and crisis prevention capabilities…The factors affectingfinancial security for financial institutions participating in the insurance market including theminimum criteria of solvency margin, the criteria of minimum capital

The monetary and banking market, ssecurities market and insurance market operateconsistently within the financial markets

Today, financial markets are highly interconnected globally both in volume and value

of transactions, thus, the country needs global solutions to prevent criminals using financialmarkets to commit crime, to launder money

CHAPTER 2

THE FACTUAL FINANCIAL SECURITY OF FINANCIAL MARKET, ASSESSING, IDENTIFYING, CAUSING AND LEASON LEARNT

2.1 Overview of Vietnam financial market

By the end of 2012, total assets of the Vietnam’s financial system are 5,675 trillion,equal to 213.2% of GDP, of which the total assets of the banking sector were 5,502 trillionVND equal to 206.7% of GDP in 2012, the total assets of the securities companise are 82thousand billion N|VND and equal to 3.1% of GDP, the total assets of the insurancecompanies are 108 trillions of VND and equal to 4% of GDP By late 2012, the stockmarket capitalization is equal to 26% of GDP in the year 2012

2.2 The factual financial security of financial market, assessing, identifying, causing and lesson learnt

2.2.1 The factual financial security of Vietnam monetary and banking market, assessing, identifying, causing and lesson learnt

2.2.1.1 The factual financial security of Vietnam monetary and banking market

Up to present, the credit institution system in Vietnam comprises of 125 institutionsand braches of foreign banks, cooperative banks and local credit funds include:

+ 05 state commercial banks and state join stock commercial banks

+ Bank for Social Policies;

+ Vietnam Development Bank;

+ 35 Joint Stock Commercial Bank;;

+ 05 Joint Venture Banks;

+ 05 100% foreign capital banks;

+ 44 branches of foreign banks;

+ 17 financial companies;

+ 12 financial leasing companies;

+ Cooperative bank;

+ 1110 local credit funds;

As the operational scale of monetary and banking market is now quite large nowcompare with the entire operation of the economy, ensuring financial security for theoperation of the Vietnam monetary and banking market means ensuring the stability, safetyand development for the vital market to stabilize and develop economy

2.2.1.2.Assessing, identifying the financial security of the Vietnam’s monetary and banking market, causing and lesson learnt

In recent years, Vietnam's banking and monetary market are not highly stable operateddue to the impact of unfavorable factors of global macroeconomic and Vietnam’s internaleconomy Taking into consideration all the factors to ensure financial security for Vietnam’smonetary and banking market in recent years, that are stability, security, development andagainst the crisis of the outer or inner of the economy, then these factors are fragile,unstable Especially bad debt of credit institution if calculate properly and adequately, it is

in fact over 17% of total loans (more than 464 trillion VND, equivalent to more than 23billion U.S dollars)

Vietnam's banking system is of large scale and rapid growth compared with GDP over