Soutenance mémoire
Overview of the banking system in Vietnam
After the transition from central planning to a market oriented system initiated in 1986, Vietnam faced a lot of difficulties (low productivity, hyperinflation, high deficit and inefficiency of monetary policy); this situation urged Vietnam to reform the financial sector and to reduce the State’s investments in state-owned enterprises. In 1989, the two-tier banking system replaced the mono-tier system. The State Bank of Vietnam (SBV) became solely a central bank instead of playing both the roles of a central bank and of a commercial bank. The commercial banking function was transferred to state-owned commercial banks (SOCBs). These banks have been supervised by the SBV through its central bank’s function. The SOCBs’ operations were decided by the government and served principally state-owned enterprises (SOEs) or government plans (for example, any operation related to foreign trade was the responsibility of the Bank for Foreign and Trade of Vietnam-Vietcombank; or Agribank mainly served in rural areas and supported the agricultural sector and some poverty reduction programs). As a result of the reform of the banking system initiated in 1989, the government also allowed the establishment of other types of financial institutions such as credit cooperatives and private and joint-stock commercial banks (JSCB). The reform also allowed limited foreign bank presence through joint-venture banks and foreign bank branches which nevertheless faced restrictions in their activities. From 1989, the financial sector has experienced a boom followed by a burst of financial institutions. There have been thousands of newly founded credit cooperatives (around 7,180) but they have been shut down rapidly mainly due to their risky capital structure, their weak professionalism, and the inappropriate monitoring from the authorities (Vuong, 2010). Consequently, in 1993, there remained around 750 credit cooperatives. Some credit cooperatives have been restructured and became private and joint-stock commercial banks (JSCB). Thus, the number of commercial banks significantly increased between 1991 and 1993 (from 5 banks in 1991 to 48 banks in 1993,including 4 state-commercial banks). However, most of them were unprofitable and accumulated non-performing loans granted to SOEs resulting from inefficient investments (Pham and Vuong, 2009, and Vuong, 2010). In such a context, the government aimed to improve banks’ capacities and competitiveness through reforms of joint-stock banks in 1999 then SOCBs in 2001, and allowed some international institutions (including the International Monetary Fund-IMF and the World Bank-WB) to invest in private banks under a limitation of stakes. These reforms aimed to recapitalize banks, to enhance their profitability and to increase transparency. At the end of 2005, to speed up the reforms and improve the performance of Vietnamese banks, the government has launched a program, namely “Banking Sector Reform Roadmap” to privatize SOCBs, to improve the competitiveness of JSCBs and to apply international prudential standards (Basel framework) to the banking system in Vietnam.Besides, Vietnam has engaged in removing barriers to entry of foreign investors. Indeed, the reforms and the economic boom initiated in 2006, when Vietnam became a member of WTO, required a reduction of government involvement in the economy and the access of many sectors to foreign investors. The government aimed to equitize SOCBs or partially privatize them and, to support this process; it made the entry of foreign investors easier. Until 2004,foreign banks were only allowed to take a minority share in joint venture banks and establish branches. With the implementation of the credit institutions law of 2004, foreign banks have been allowed to set up a commercial bank in Vietnam. A foreign bank had a right to deposit under 650% of their chartered capital from 2007, raised to 800% in 2008, 900% in 2009,1000% in 2010 and has had the same right as a domestic bank since 2011. Regarding the investment of foreign investors – under the government’s decision of 2007 – the total shares of foreign shareholders cannot exceed 30% of bank shares and one foreign investor cannot hold more than 20% of bank shares. To improve the competitiveness of Vietnam’s domestic banks, foreign presence increased. In November 2006, the government also raised the minimum notional capital levels required for all credit institutions. It required all commercial banks to hold at least VND 3 trillion (USD 143 million) in capital, up from the prior minimum of VND 70 billion (USD 3.3 million). In October 2010, it also increased the required minimum capital adequacy ratio from 8% to 9%.
Literature review
In the literature on bank efficiency, net interest margin is considered as an indicator to measure the efficiency of banking activities. Various studies attempt to express the costs of financial intermediation through the difference between the lending and the deposit rates and assume that higher spreads of bank interest rates imply less efficient institutions. But a high margin can also reflect an inadequate regulatory banking environment and a high degree of asymmetric information (Claeys and Vander Vennet, 2008). More precisely, banks can use their market power by setting higher lending rates (Claeys and Vander Vennet, 2008, Maudos and Fernandez de Guevara, 2004, Maudos and Solís, 2009). In that case, the higher interest rate spreads do not reflect bank inefficiency. Higher interest margins can also indicate a higher risk premium (Thorsten et al., 2003). Besides, Gary and Andrew (1998) argue that, in transition economies, there is a necessity for high interest margins that maintain and shield bank values to ensure the stability of the financial system as a whole. There are two different approaches to analyze the determinants of bank net interest margins. Some studies split the determinants of net interest margins into two components that differently influence net interest margins: bank-specific components and macro factors. The bank specific determinants are explored in a first stage and, in a second stage, the effects of macro factors are analyzed. This approach does not take into account the heterogeneity across banks (Ho and Saunders, 1981, Saunders and Schumacher, 2000). The alternative approach incorporates the bank specific variables and the macro factors in a single-stage analysis taking into account heterogeneity across banks (Demirguc-Kunt and Huizinga., 1999, DemirgucKunt et al., 2003). These two approaches conclude that the net interest margin is explained by both bank performance and macro environment variables. According to banking theory, banks operate traditionally as a financial intermediary; banks receive money from depositors and provide loans to borrowers. The difference between lending rates and deposit rates is the bank’s margin. How banks set their interest margins is a broad topic in the literature. Ho and Saunders (1981) introduce the term “dealership”, which explains the intermediary role of banks. They construct a two-step estimation to analyze the determinants of net interest margins. Banks have to decide both optimal deposit and lending interest rates, and banks set fees for provisions of their services. The fees are expected to cover the costs that banks incur for providing their banking services (Entrop et al., 2012, Kit,1997, Maudos and Fernandez de Guevara, 2004). Hence, banks might transfer their costs to their customers by charging higher fees or setting higher (lower) lending (deposit) rates. Consequently, a bank with a higher operating cost will presumably generate higher interest margins to cover this cost. For example, Maudos and Fernandez de Guevara (2004) find that the fall of NIM in European banking sectors (Germany, France, Italy, Spain and the United Kingdom) is explained by a reduction of operating cost. Entrop et al. (2012) also find that the operating cost has a positive effect on German banks’ NIM during the 2000-2009 period.Beyond operating costs, holding capital is recognized as an opportunity cost for banks.Under regulatory restrictions, banks have to maintain a certain ratio of equity to total assets, and this ratio can also be viewed as a proxy for the degree of risk aversion (Maudos and Fernandez de Guevara, 2004). Thus, banks with a high ratio of equity to total assets, that is banks that are more risk averse, require a higher margin in order to cover the higher cost of equity financing compared to external financing. By contrast, using a sample of 456 banks in Sub-Saharan Africa, Ahokpossi (2013) explains that if a bank has a high ratio of equity to total assets (or well-capitalized bank), it has a low cost of borrowing and a low risk of bankruptcy. Thus, these banks charge low margins. Using a theoretical model Kit (1997) also finds that equity can have a negative effect on the bank interest rate spread. In order to reduce risk-taking, the reserve requirement is an instrument to protect depositors. This requirement is also recognized as an economic cost of funds or an opportunity cost of holding reserves. It causes a fall in bank capacity to supply loans, whereas banks continue paying depositors.
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Table des matières
INTRODUCTORY CHAPTER
CHAPTER 1 THE IMPACT OF ECONOMIC REFORMS AND OWNERSHIP STRUCTURE ON BANK EFFICIENCY
1. Introduction
2. Overview of the banking system in Vietnam
3. Related Literature
4. Methodology
5. Data and variables
6. Results
7. Robustness checks
8. Conclusion
CHAPTER 2 BANK NET INTEREST MARGIN, OWNERSHIP STRUCTURE AND INTEREST RATE REGULATION BY THE CENTRAL BANK
1. Introduction
2. Background and Literature review
3. Data and Methodology
4. Results
5. Conclusion
CHAPTER 3 BANK CAPITAL AND BANK LENDING CHANNEL
1. Introduction
2. Monetary policy and capital requirements in Vietnam
3. Related literature and methodology
4. Data
5. Results
6. Conclusion
CONCLUDING CHAPTER
BIBLIOGRAPHY
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