Experience in Foreign Exchange Business Development of Some Banks in the World and Lessons for Vietnam

present at the points of the forward rate. The forward point is the difference in interest rates between two currencies. Therefore, when the interest rate of a country changes, the forward rate changes accordingly. This has a great impact on the development of foreign exchange business of commercial banks. Therefore, if the interest rate policy is flexible, in accordance with changes in the international market, with the relationship between supply and demand of domestic foreign currency credit, it will create conditions for commercial banks to increase the scale of capital mobilization, the scale of lending, promote economic growth, stabilize the value of the local currency and thus promote the development of foreign exchange business.

On the contrary, if the interest rate policy is not flexible and rigid, it will hinder the circulation of foreign currency flows, imbalance in foreign currency supply and demand, lack of liquidity in foreign currency deposits and a large amount of foreign currency capital flowing out. As a result, the supply of foreign currency decreases, not fully meeting the needs of import enterprises. This has hindered the development of foreign currency business of banks.

Foreign factors

The activities of the international financial market have an important impact on foreign exchange trading when foreign capital flows fluctuate. Especially when the world economy develops, international financial activities also develop, cash flows circulate faster, the demand for foreign exchange transactions also increases, helping to improve the environment for the development of foreign exchange business of commercial banks. However, the development of the world economy is cyclical. Fluctuations and adjustments may occur, creating recessionary periods, trade and investment decline. Therefore, slower capital flows reduce the demand for foreign exchange transactions and ultimately affect the foreign exchange business activities of commercial banks in both quality and quantity, and may increase risks.

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Other effects:

Devaluation: Devaluation is the fall in the purchasing power of currency in

country compared to foreign currency or increase the exchange rate of a foreign currency unit. In an economic crisis, when the purchasing power of the currency declines sharply and cannot represent its nominal purchasing power, when the exchange rate fluctuates sharply over a long period of time, the issue of re-determining the exchange rate is inevitable. Countries often do not admit to devaluation of their currency because devaluation depends on the economic and political purposes of the devaluing country. Devaluation of currency has the effect of encouraging the export of goods. This is an opportunity for import-export enterprises as well as an opportunity for the development of foreign exchange business activities of banks.

1.3 Experience in foreign exchange business development of some banks in the world and lessons for Vietnam

1.3.1 Experience of US banks

American commercial banks have a lot of experience in using derivative transactions such as options and futures. The turnover of derivative transactions of American commercial banks in 2010 increased by 9% compared to 2007. Diversifying transactions in foreign exchange business helps American commercial banks develop foreign exchange business while providing customers with many choices in transactions to minimize risks for customers. Although the American foreign exchange market is not the largest market in the world in terms of scale, American commercial banks have shown to be very effective in foreign exchange transactions. That is because American commercial banks are very creative and daring in applying new business operations to meet market demand while fully exploiting traditional operations. In addition, American commercial banks have known how to develop a large network of branches not only domestically but also abroad, which has made foreign exchange business grow at such a rapid pace. Thanks to the revenue from foreign branches, American commercial banks have more conditions to invest in foreign exchange business activities domestically. Indeed, if we only count in London, the turnover

The business of American commercial bank branches is three times that of British commercial banks. In addition, American commercial banks act as agents for each other throughout the country and regularly trade with each other to find customers to ensure a balanced foreign exchange position and prevent the risk of a spillover effect.

Finally, US commercial banks have increased their foreign exchange business by increasing their currency risk management and active portfolio management in some of the euro area financial markets.

1.3.2 Experience of Japanese banks

Japanese commercial banks have experience in establishing relationships between banks and customers, especially large corporate customers with import and export activities. These customers have large payment activities through banks. This is a factor that promotes foreign exchange business activities of banks. Therefore, in order to maintain banking relationships with customers, they are willing to invest in companies and become shareholders of these customers. On the other hand, when Japanese commercial banks regularly conduct foreign exchange business in the international market through buying and selling foreign bonds, they also issue bonds to the international market to mobilize foreign currency capital to meet domestic credit needs.

One factor that makes the foreign exchange business of Japanese commercial banks develop stably is that Japanese commercial banks always strengthen their competitive power when the domestic foreign exchange market is liberalized by Japanese commercial banks merging with each other and establishing close business relationships with other commercial banks, becoming banking groups such as Mizuho Financial Group owning three banks Dai - Ichi Kangyo, Fuji Bank and Industrial Bank of Japan, Sumitomo Mitsui Banking Corporation was formed from the merger of Sumitomo Bank and Sakura Bank in April 2001... As a result, among the 5 largest banks in the world,

Currently, there are 4 Japanese banks in the world, and 7 of the 15 largest banks in the world are Japanese. Thanks to that, Japanese commercial banks can lend foreign exchange capital for long-term and in large quantities. With their financial strength, Japanese commercial banks can improve foreign exchange-related banking services such as international payments, deposit taking, support and encouragement of private capital provision to cover exports, imports, foreign investment and economic cooperation.

1.3.3 Experience of UK banks

The experience of UK commercial banks is that the use of a variety of different currencies in transactions, local currency transactions account for only a small proportion of 18% compared to 66% in Germany, 41% in France and 39% in Switzerland. On the other hand, UK commercial banks pay special attention to applying modern technology in foreign exchange transactions. The deployment of a network linking commercial banks with each other and with the market has helped increase the average daily foreign exchange transaction turnover of UK commercial banks in 2010 to 25% compared to 2007.

In addition, UK commercial banks have effectively applied electronic brokerage systems and electronic trading systems. As a result, foreign exchange trading turnover through electronic brokerage systems and electronic trading systems was 393 billion USD and 376 billion USD respectively in 2010.[43]. Furthermore, the effective application of interest rate derivatives transactions in the OTC market has contributed significantly to the increase in foreign exchange trading turnover of UK commercial banks in 2010.

1.3.4 Experience of some other Asian banks

1.3.4.1. Experience of Hong Kong banks

Hong Kong commercial banks have been able to capitalize on a low interest rate environment and the strength of Asian currencies to increase their foreign exchange trading revenues. In addition, the growth of

Hong Kong commercial banks' foreign exchange trading is mainly due to swap transactions. With market uncertainties and credit risks, Hong Kong commercial banks have increased their short-term forward contracts and participated in the market more frequently.

In 2010, the foreign exchange business of Hong Kong commercial banks developed impressively. The evidence is that the foreign exchange transaction turnover of Hong Kong commercial banks accounted for 4.7% of the global turnover. Hong Kong commercial banks developed interest rate derivative transactions strongly, occupying a dominant position in the market, making Hong Kong one of the main centers in interest rate derivative transactions.

1.3.4.2. Experience of Korean foreign exchange bank

The Korea Foreign Exchange Bank has experience in developing swap transactions. During the period 2003-2009, the swap transaction turnover of the Korea Foreign Exchange Bank accounted for a large proportion, 74.5%, while the proportion for spot transactions was 24.5%, and forward transactions accounted for 0.6%. The reason is that the Bank has a good and stable source of VND mobilization from customers. Meanwhile, some Vietnamese banks have a demand for VND and have surplus USD, so the Korea Foreign Exchange Bank conducts swaps with these banks. In addition, the bank has an abundant foreign currency supply, in addition to meeting the needs of customers, the bank also sells on the interbank market. The foreign currency supply of the Korea Foreign Exchange Bank increases by an average of 20-50% annually. Korean Foreign Exchange Bank has an advantage in maintaining and developing its customers, which are large enterprises and corporations from Korea such as Hyundai Group, Kumho Group, Korean Oil and Gas Group KNOC, DAEWOO Group... With loyal and trustworthy customers, it is a solid foundation for Korean Foreign Exchange Bank to develop its foreign exchange business activities.

In addition, to develop foreign exchange business, measures have been applied in

Minimizing risks in foreign exchange trading:

- Manage quantitative risks through value at risk (VAR), risk assessment, risk monitoring, risk management.

- Diversify risks in foreign exchange trading in accordance with the risk management strategy of the Korean Foreign Exchange Bank.

- Build, manage and train a team of risk management experts and operational staff.

- The risk management organizational structure is arranged from the headquarters to the dependent units.

1.3.4.3. Experience of Chinese banks

Chinese commercial banks have experience in diversifying foreign exchange transactions. Specifically, most of the foreign exchange transactions such as spot, forward, swap and options are commonly used in foreign exchange trading of Chinese banks. In 2010, the average daily turnover of spot transactions of Chinese banks reached 1,490 billion USD, an increase of 48% compared to 2007, and 286% compared to 2001. Meanwhile, the turnover of foreign exchange swap transactions reached 1,765 billion USD/day, an increase of 3% compared to 2007, and 169% compared to 2001. During the period 2001-2010, Chinese banks had much higher turnover of swap transactions than spot transactions. Futures and options transactions account for a large proportion of the foreign exchange trading turnover of Chinese commercial banks. Specifically, in 2010, the proportion of spot transactions was 37.4%, forward transactions accounted for 12%, foreign exchange swaps accounted for 44.3%, currency swaps accounted for 1% and options transactions accounted for 5%. In addition, the trading turnover in USD accounted for a higher proportion of 94% of the trading turnover. Thus, Chinese banks have effectively used derivatives operations to increase foreign exchange trading turnover.

1.3.5 Lessons for Vietnamese commercial banks

Based on research experience of some banks in the world that trade foreign currency in the international market:

Firstly, Vietnamese commercial banks need to maintain and expand their foreign exchange market share in the international market by making efforts to meet international banking standards and enhance their competitiveness against joint venture banks and foreign-invested banks. Whether or not they can maintain their foreign exchange market share in the domestic market will be a decisive factor in the success of Vietnamese commercial banks in their move towards the international foreign exchange market.

Second, Vietnamese commercial banks need to use a variety of derivative transactions such as forward transactions, options transactions, and futures transactions with solutions to stimulate customers to use these tools. Vietnamese commercial banks can advise customers on the benefits of using derivatives in each case to minimize risks for customers. For import-export enterprises, with the purpose of hedging exchange rate risks for import-export contracts or international financing transactions, the use of forward and futures contracts is appropriate and can be a very effective hedging tool. Meanwhile, if hedging exchange rate risks for the market value of enterprises, options transactions are considered an important tool. In addition, banks need to review the fees applied to foreign exchange transactions. This is a factor affecting the choice of transactions of banks.

Third, Vietnamese commercial banks operating in foreign currency trading in the international market need to apply modern technology in foreign currency trading activities to allow banks to process foreign currency transactions quickly and effectively, avoiding risks for the bank. Vietnamese commercial banks need to build an information technology system that must ensure compatibility.

for different technology systems, different trading partners. This trading system must be an Internet trading system and fully implement electronic trading functions.

Fourth, Vietnamese commercial banks need to develop a human resource strategy to serve foreign exchange trading activities. The success of foreign exchange trading activities of banks, in addition to input factors such as capital and equipment, human resources are one of the decisive factors.

Fifth , Vietnamese commercial banks need to create competitive strength through financial potential. The scale of foreign capital sources serving business activities is a factor creating stable and solid development of banks. The connection between domestic and foreign banks is also a factor enhancing the position of banks in the world market.

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