International Banking BAV Top up program

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: 169154426/1

Student Name: Mai Le Phuong

Module Code UGB322

Module Name/Title: International Banking

Centre / College: Banking Academy of Viet Nam

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 4

Introduction: 4

II BODY 5

1 Reasons for banks going abroad 5

2 Presence of international banks in Vietnam 8

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

1 Income opportunities available to international banks 16

2 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

1 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 do 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

(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

2 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)

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

Number of Vietnam Commmerical banks

State commercial banks Joint-stock commercial bank Foreign Branch Bank

Joint-venture bank Wholly foreign bank

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 andmore 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, e-wallet (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)