Basic Contents of International Integration in Banking Sector

financial system development is a way to create and/or lose money. This implies that the government can safely ignore financial system development (i.e. without causing any harm to the economy), and even financial sector development is detrimental to growth and income distribution. (Kitchen, 1986) after studying the case of Nigeria wrote: “In general, the development of the financial system should follow rather than precede economic development. Political independence and the establishment of a central bank are not fundamental to development. The main trends of development are determined by the prosperity of export markets, foreign capital flows, fiscal policies and political events. The financial system plays an important role in promoting these influences”.

Second view : In contrast to the above view, this view (often called the Neo liberal view) argues that a developed financial system will have a positive impact on economic growth, thus playing an important role in stimulating economic growth. According to this view, the lack of a developed financial system will limit growth, therefore, government policies need to aim at encouraging the development of the financial system.

The Keynesian theory of investment, saving and growth is the basis of the first view. According to this theory, high economic growth is always accompanied by investment-induced inflation – not necessarily savings at a point in time. The government can actively influence the growth rate by pursuing an inflationary financial policy that forces people to save, called forced savings, to make up for the gap between investment and savings. Thus, the financial system plays a passive role in mobilizing savings and allocating resources. By dividing individuals into two categories: (i) those with income above wages and (ii) those with income above profits; Keynesian theory argues that a policy of high inflation and low real interest rates will be more attractive to individuals in the latter category and thus they will have an incentive to save for investment and reduce consumption. The first type will suffer a fall in real income, which encourages them to consume rather than save. The financial system is tasked with accepting deposits from the second type of individuals until they have enough resources to invest again. Thus, the financial system has a very passive role and it only develops later if the economy develops.

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sustainable. But the inflation-led growth policy has been criticized on many fronts: “There are unavoidable dangers associated with the inflation-led growth policy. The biggest threat is the balance of payments if foreign currency is scarce. High inflation will put a country's balance of payments under heavy pressure and necessitate import substitution or exchange control policies, which lead to inefficient allocation of resources. The threat to investment may be that when inflation is too high, investment in machinery and equipment becomes unattractive compared to speculative investment in inventories, foreign assets or real estate, etc.

Shaw and McKinnon's theory of a repressed financial system contrasts with the Keynesian theory of the passive role of the financial system in promoting economic growth. Theories that advocate the view that the financial system has an active role in promoting economic growth share the same assumptions that the financial system is the best allocator of financial resources through risk sharing and maturity transformation mechanisms and that under conditions of relatively scarce investment capital, especially in poor countries with low incomes, a liberalized financial system will allocate resources most efficiently. In 1973, in his work "Money and Capital in Economic Development", McKinnon, based on Shaw's views, put forward the theory of financial repression and liberalization. The focus of this theory is that the government should not intervene in the financial system but let it operate on the basis of the free market. Thus, the principle of efficiency will be respected and financial resources will be allocated in the best way. McKinnon's theory is based on the assumption that investment and savings both depend on interest rates, in which: High interest rates increase savings (positive dependence). In addition, savings also depend on income. Investment depends negatively on interest rates. (Some government investments with public welfare objectives are not considered in this theory). McKinnon also pointed out that in most developing countries, the Government often prefers to intervene in the financial system of that country to keep a real interest rate lower than the competitive level, causing the financial system to be constrained and unable to develop. When interest rates are constrained below the equilibrium level, there will be no allocation of resources, because some more profitable projects may not receive investment capital, causing the average efficiency of investment to decrease. Thus, the economy will achieve a slower growth rate than the others.

The results achieved when interest rate controls are partially removed. The analysis of McKinnon's theory proves that when the financial system is repressed (financial repression), investment will decrease and government intervention often does not bring economic efficiency. On that basis, McKinnon recommends that governments in developing countries should not intervene in their financial systems and should let them operate according to market rules or in other words, should let the financial system be free (financial liberalization). Thus, according to this theory, the financial system should develop first to promote economic growth rather than be a product of development. Today, this theory has been more or less accepted in developing countries and in the two decades of 1970 - 1989, a number of countries have reformed the financial sector in the direction of loosening government intervention in the financial system.

The Neoclassical school reflects a view that is contrary to McKinnon's theory of financial liberalization. Authors of this school argue that government impacts on the financial system are positive and have an impact on improving the efficiency of capital allocation. Stiglitz argues that the positive impact of government on the financial system is reflected in the following points: Low interest rates will improve the quality of loans; Financial repression will encourage capital raising by companies because the cost of capital is now lower; Financial repression can be combined with other structural changes such as changes in exports to encourage economic growth; Credit-directed programs encourage lending to high-tech industries.

In general, the trend toward financial liberalization is a larger trend toward reducing direct state intervention in the economy. However, in some developing countries, financial liberalization is also a deliberate attempt to move away from “financial repression,” a policy that previously aimed at financing government budget deficits and subsidizing favored sectors. The move from financial self-repression to financial liberalization was strongly promoted by the influential works of McKinnon (1973) and Shaw (1973). According to McKinnon and Shaw, financial repression, through the mechanism of forcing financial institutions to pay low and often negative real interest rates, reduces private financial savings, thereby reducing the resources available for capital accumulation. Viewed from this perspective, through financial liberalization

In the main, developing countries can stimulate domestic savings and growth, while reducing their over-reliance on foreign capital flows.

The work of (McKinnon and Shaw, 2004) also sparked a rapidly growing stream of research that analyzes how financial development can promote economic growth through productivity gains rather than savings mobilization. This includes a number of empirical studies on the relationship between financial development and growth; most studies have found that various measures of financial development are positively correlated with both current and future GDP growth rates, suggesting that financial liberalization, by enhancing financial development, can increase the long-run growth rate of the economy (Robert G. King and Ross Levine, 1993).

However, the positive view of financial liberalization was somewhat undermined by the marked increase in financial fragility experienced by both developed and developing countries in the 1980s and 1990s. In particular, the banking sector worldwide was rocked by severe problems, some of which turned into systemic crises as documented extensively by (Gerard Caprio, Daniela Klingebiel, 1996). These experiences suggest that one needs to weigh the benefits of financial liberalization against the costs of increased financial fragility. And some compelling voices in the policy debate have argued for a certain degree of financial control rather than hasty liberalization in developing countries (Wassim Shahin, Elias El-Achkar, 2016).

2.2.1.2. Basic contents of international integration in the banking sector

Based on the economic theory of international integration and the trend of financial liberalization, many domestic and foreign studies have been conducted to determine factors to measure the level of international financial integration such as (Baele, L., Ferrando, A., Hördahl, P., Krylova, E. and Monnet, C., 2004), or the study of (Saab, SY and J. Vacher, 2007) on the contents of integration and competition in the banking industry. In Vietnam, many studies have been conducted to assess the level of financial integration such as the study of (Tran Thi Thu Huong, 2018), the training documents of (Center for Training Elected Representatives) on the basic contents of banking integration. In general, the above studies focus on determining the main factors and contents.

used as a measure to assess the level of international integration in the financial sector in general and the banking sector in particular. The basic content of international integration in the banking sector can be summarized as follows:

Firstly , it is the level of financial liberalization in the banking sector. Financial liberalization in the banking sector is the process of transforming from a rigidly and tightly regulated banking and financial system using mainly administrative tools to a flexible banking and financial system using economic tools, based on factors of the market economy; with such a transformation, it will create a financial system that is mainly influenced and governed by market factors with little or no direct intervention from authorities and the Government. The deeper the level of financial liberalization in banking, the faster the international integration in banking will be, because at that time the domestic banking and financial system will be more consistent with international practices.

Second , it is the issue of international relations and openness of the domestic banking system to the region and the world. This is measured by the level of removing the limits and barriers separating the domestic banking and financial system from the region and the world, there is no longer a clear boundary between the domestic banking system and the world banking system; the level of penetration of banking activities of that country in the foreign market. International integration in banking helps domestic commercial banks through a competitive environment that is increasingly freer and in line with international practices. At the same time, it helps domestic banks to be aware of the new situation to improve themselves and improve in order to cope with competition and maintain the stability of the banking and financial system in the context of integration with the region and the world.

Thus, the basic contents of international integration in the banking sector include the following contents:

Interest rate liberalization

Interest rate liberalization is an interest rate mechanism in which there is little or no intervention by authorities in the formation of interest rates, but interest rates are formed on a market basis, operating according to the law of supply and demand. Interest rate liberalization is understood as interest rates being completely adjusted according to market requirements. Intervention of the central bank (CB)

Market interest rates are managed through indirect tools such as rediscount or refinancing rates to influence the supply and demand of capital in the money market to establish an equilibrium interest rate. Thus, interest rate liberalization can be understood as the complete removal of interest rate constraints, allowing interest rates in the economy to reach their equilibrium point.

The process of interest rate liberalization, in addition to positive impacts, also has negative impacts, affecting many aspects of the economy. However, in the context of integration, countries need to liberalize interest rates. The problem is which way should countries choose to suit the current market economy and how to take advantage of and maximize the positive aspects that interest rate liberalization brings as well as minimize the negative impacts of this mechanism. Interest rate liberalization is considered the core, the core issue of financial liberalization in the banking sector, because it makes financial flows operate smoothly. Interest rate liberalization is an objective trend in the integration process. To liberalize interest rates, the following conditions are needed: First , the legal corridor for financial economic activities is relatively synchronous and complete. Second , the financial market including the money market and the stock market has been established and operates effectively. Third , economic organizations have ensured the ability to use capital thoroughly and effectively. Fourth , the macroeconomic environment has been stable and relatively secure. Fifth , the banking system has been stable and operating effectively. Sixth , domestic resources such as capital, resources, labor, etc. have been distributed and used relatively reasonably. Liberalization of credit mechanisms

Credit liberalization requires the removal of restrictions, orientations or constraints on quantity in the process of providing and distributing credit in order to improve the efficiency of credit activities for all economic sectors. The content of credit liberalization does not mean completely lowering the role of the Government. In developing countries, to maintain the necessary and important ratio of credit for the economy as designated by the Government, the Government can intervene in the investment structure as well as ensure the health of financial intermediaries. However, credit liberalization, recognizing the main role, is not consistent with the Government's too deep intervention because its consequences can lead to financial market distortion, low efficiency in using financial resources, and even waste.

As analyzed above, credit liberalization does not mean that the Government has no role in the use of financial resources, leaving the market to self-regulate. If so, it will lead to misguided investment, capital sources are concentrated in profitable sectors, while other sectors lack capital due to low profitability or lack of attractiveness and slow capital recovery, especially those sectors that play an important role in the development of the economy, related to the interests of the nation and people, and public interests. The State should not intervene too deeply in the field of credit distribution to create conditions for capital flows to find where they are needed, according to the principle of taking full responsibility for the capital received, ensuring the ability to recover and make profits. Specifically: First , completely abolish the setting of credit limits and related rates. Second , eliminate subsidies in credit activities. Third , expand credit to all economic sectors to take advantage of existing and potential resources in the economy. Fourth , remove constraints of the banking system in credit activities, enhance self-responsibility and autonomy, and create an open environment for capital supply to the economy.

Exchange rate liberalization

Liberalizing the exchange rate is to let the exchange rate on the market fluctuate mainly under the influence of supply and demand, the State management agency avoids direct and excessive intervention. The exchange and trade of goods between countries is increasing day by day. The exchange rate is one of the factors that strongly and directly affects that activity. Therefore, it is required that countries gradually abandon the overly tight control of exchange rates, making the local currency highly convertible.

When the government and central bank give up their intervention and let the exchange rate be determined freely in the market, that country is pursuing a free exchange rate policy. Therefore, exchange rate liberalization is a process towards allowing the exchange rate to be determined freely in the market. Exchange rate liberalization includes the following main contents:

First , abolish the fixed exchange rate with the announcement of the official exchange rate.

Second , loosen the trading band and move towards eliminating the exchange rate trading band in the business activities of commercial banks.

Third , let the exchange rate fluctuate according to supply and demand in the market and only intervene with limits when deemed necessary.

Exchange rate liberalization also has potential instabilities, especially for developing economies. For example, high exchange rates affect imports, low exchange rates affect exports... In addition, other economic issues will have negative developments when exchange rates change too suddenly, such as inflation rates and foreign currency supply and demand. Therefore, most countries that apply financial liberalization mechanisms will have exchange rates that are floated but managed, meaning not completely floated.

To implement exchange rate liberalization, certain conditions must be met: First , the exchange market must be formed in advance and operate smoothly. Second , domestic currency circulation must be relatively stable and well controlled. Third , foreign economic and financial activities must be relatively stable.

Fourth , foreign exchange reserves must be large enough, the current account balance must be in surplus and relatively stable.

Fifth , the banking system in the economy operates effectively and stably.

Liberalization of foreign exchange management and international capital flows

In essence, it is the activity of making foreign and domestic capital sources circulate freely, creating effective absorption of capital sources from outside for economic development, besides expanding economic and trade exchanges with countries around the world, especially in the field of finance and banking. Financial resources for economic development are not only mobilized from within each country but also from outside from bilateral and multilateral relations with other countries. Foreign trade relations are necessary and objectively inevitable, especially in the current context where countries tend to participate in free trade and trade blocs, the liberalization of foreign exchange activities will help trade relations take place more smoothly and quickly.

With the trend of movement and development of the world economy, gradually integrating into the world economy in the spirit of "building an open economy", "accelerating the process of regional and world economic integration". The problem is: "how to integrate but not dissolve". The general trend of countries in the world is opening borders, abolishing trade barriers and gradually loosening financial control measures to integrate globally if they do not want to fall behind, standing on the sidelines of the economic growth race. With the important position of financial resources, the banking sector plays a vital role in the economy, through policies and tools to manage the economy. To integrate successfully, it is necessary to create a legal corridor.

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