1.2.5.2. Negative impacts
a. Negative impact on the financial system and domestic economy
Recent studies have shown that the increasing and deeper participation of foreign banks in the domestic market also has negative impacts on the financial system and economy in developing countries. Because of their ability to capture information globally and have many options for investment locations, foreign banks often tend to "run away" when their investments do not meet expectations. On the contrary, domestic investors often have vested interests, so they cannot immediately abandon their investments and therefore often incur higher transaction costs.
The stronger the international integration process in the banking sector, the more likely the impact and mutual influence between financial markets may occur. As one of the banking and financial groups with global operations, foreign bank branches or their subsidiaries may not be negatively affected when the banking and financial systems of the country where they invest fall into difficulty. However, because international banking groups always apply a common policy to their subsidiaries and branches globally, in the event of an event occurring in a certain country or to cope with shocks from the parent bank's own country, foreign banks often apply policies or mechanisms that can have a negative impact on the banking and financial systems of the host country. Maybe you are interested!
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Empirical studies by Peek and Rosengren (1997, 2000) have shown that the problems of the Japanese financial and banking system that occurred in the late 1980s and early 1990s were transmitted to the United States through the operations of Japanese banks in the U.S. market. In addition, another study by Golderg (2001) has shown that the influence of U.S. banks on developing countries often reflects the state and fluctuations of the U.S. economic conditions rather than the growth and interest rates of the developing countries where they have branches or subsidiaries. This is especially true when foreign bank branches or subsidiaries dominate the market.
If the parent bank has a large share of the total foreign banks in the host country (the country where the foreign bank has a branch or subsidiary), the negative impact on the host country's economy is likely to be negative in the event of a shock in the parent bank's country. According to a study by Hull (2002), of the five largest foreign banks in New Zealand, which account for over 90% of the total assets of the banking system, four are Australian banks. Hull concluded that the concentration of Australian ownership and the interdependence between the New Zealand and Australian economies could mean that if the Australian economy were to destabilize, it would likely have a negative impact on New Zealand. In many Latin American countries, Spanish banks have a significant position in the banking systems of these countries.
b. Impact on business performance of domestic banks
Recent studies have shown that there are differences in the market participation of foreign banks in developing countries and industrialized countries. In developing countries, foreign bank branches tend to have higher interest rate spreads and higher profitability than domestic banks; while in industrialized countries, the opposite is true.
Studies also show that the increasing participation of foreign banks will reduce the lending interest rate spread, profitability and general costs of domestic banks. In addition, the impacts on the business efficiency of foreign banks on the domestic banking system often occur immediately after the entry of these banks into the domestic market and do not depend on the market share they occupy after entry.
c. Impact on credit portfolio of domestic banks
In fact, in some cases, the participation of foreign banks does not play a positive role in the effective allocation of credit resources to the economy. In many cases, foreign banks
“picking the pieces” is a common practice in less developed countries. Foreign banks only choose the most profitable, low-risk customers and push the remaining businesses that are considered to have a higher risk level to domestic banks, making the credit portfolio of domestic banks riskier. When foreign banks carry out a “picking the pieces” campaign, they only choose healthy, high-credit customers and usually they assess the risk level better than domestic banks, or they find other ways to transfer the risk to domestic banks such as only lending wholesale, lending through domestic banks.
d. Impact on highly qualified human resources
Empirical studies show that when foreign banking groups open branches or establish subsidiary banks in developing countries' markets in the context of international economic integration and globalization, foreign bank branches or subsidiary banks often quickly attract a highly qualified workforce to work because of their attractive salary regime. Normally, the average salary that foreign bank branches or their subsidiary banks pay to highly qualified workers is about 4 to 6 times higher than that paid by domestic banks. Therefore, foreign banks will quickly attract the best quality human resources from domestic banks to work. This "brain drain" phenomenon is very common and has become an inevitable trend in developing countries as the economic integration process takes place more and more strongly and deeply.
Without a proper and appropriate policy to attract, recruit, reward and develop human resources, domestic banks will certainly lose their best staff. Obviously, the human factor plays an extremely important role for any organization or institution. It determines the success of that organization, especially in increasingly fierce and harsh competition and in the context of international integration. Having a highly qualified and well-trained staff will play a key role in approaching and grasping new requirements, advanced technology and the demands of an organization in the process of international integration.
e. Impact on management and supervision activities in banking activities
The entry of foreign banks into the domestic market also means importing management technology for at least part of the banking system and may contribute to improving the quality of staff and standards of banking supervision. However, some observers believe that when banking activities go beyond the scope of a country, the issue of supervision and management becomes more complicated. In the process of international integration, banking systems in each country are closely linked and dependent on each other, restraining each other in their operations, so there is a need for standard solutions in all aspects of banking supervision and inspection activities.
1.3. INTERNATIONAL EXPERIENCE IN IMPROVING THE COMPETITIVENESS OF THE COMMERCIAL BANKING SYSTEM IN THE ENVIRONMENT OF INTERNATIONAL ECONOMIC INTEGRATION
1.3.1. International experience
The trend of increasingly deep integration has become a pressure forcing developing countries to take active measures to quickly improve the capacity of domestic commercial banks. Since the 1990s, especially after the 1997 financial and monetary crisis in Southeast Asia, commercial banks in Southeast Asia, China and even Japan have revealed their weaknesses in capacity such as: high overdue debt, low safety ratios, outdated technology... Therefore, improving competitiveness has become a trend in recent years and not only occurs for commercial banks in developing countries but also developed countries with strong commercial banks. This is an issue that needs to be assessed to draw lessons for the operation of commercial banks in Vietnam.
1.3.1.1. Liberalization of financial markets
Financial market liberalization is one of the prerequisites for the integration process. Most countries with developed market economies such as European countries, the US, and Japan have many years of experience in the integration process. These countries have liberalized their financial markets to facilitate the movement of capital flows from one country to another by floating foreign exchange transactions; floating interest rates, interest rates are determined by
determined on the basis of supply and demand in the market, the State only participates in the role of macro-regulation without direct intervention.
Experience drawn from a WB report shows that “financial liberalization needs to be carried out in parallel with macroeconomic reform, efforts to liberalize finance before implementing reforms will be affected by phenomena such as unstable capital flows, high interest rates and distressed companies ”.
1.3.1.2. Set goals to improve financial capacity
The goal of improving financial capacity is taking place strongly in each bank, especially the State-owned commercial banks, the State-owned commercial banks in China, specifically at the Construction Bank; the Industrial and Commercial Bank, which have set goals in their strategy to strengthen their competitiveness such as:
+ Build a mechanism for banks to be responsible for their own investments and loans, increase transparency and reduce bad debts. At the same time, strengthen the internal management and supervision capacity of commercial banks, reduce staff and improve efficiency in banks.
+ Improve information infrastructure to become a global bank with international capital management capabilities. Enhance the ability of organizations to use electronic banking, develop software to help with credit risk assessment and evaluation.
1.3.1.3. Providing additional capital and equitizing state-owned commercial banks - restructuring banks - handling bad debts
+ In China: The Chinese government decided to spend 45 billion USD from the national foreign exchange reserve fund to modernize two state-owned banks, Bank of China and Construction Bank, with the main purpose of enhancing indicators reflecting capital balance capacity, as well as converting from state-owned to joint-stock.
In 1998, China announced the implementation of the Bank for International Settlements (BIS) rules, regulations, norms and safety ratios, raising the capital adequacy ratio (CAR) to 8%; new regulations on loan classification. This provided a clearer picture of subprime debt and a plan to clean up the balance sheets of state-owned commercial banks. Four asset management companies were established to handle all subprime debt.
The estimated standard is up to 670 billion yuan (RMB), these companies are given special privileges to handle, buy back bad debts, even invest and profit from them. The bad debts of SOEs account for 70% of the total outstanding loans in the banking system and are taken off the balance sheet for handling. The government then set aside 40 billion yuan in the budget in 1998 for the purpose of clearing bad debts of these SOEs. This figure was 30 billion yuan in the previous year and similarly in the following years, there was a budget provision for clearing bad debts. At the same time, SOEs with bad debts were reorganized to prevent the risk of reducing the asset quality of the lending banks. Regarding liquidity, the recapitalization plan for state-owned commercial banks was implemented in parallel. The required capital was mobilized through an off-budget mechanism, that is, through government bonds issued with a term of 30 years.
In the next step, the Chinese government encourages state-owned commercial banks to promote their plans to list on the stock market. This move forces banks to build governance mechanisms according to international standards, conduct business in a more commercial direction, improve management and operational efficiency, and increase transparency in operations, investment plans, and accounting books. In order to create a healthy environment to prevent banks from falling into the vicious cycle of a new wave of subprime debt, the People's Bank of China firmly requires banks to improve the quality of corporate governance, as that is the first step in managing banking risks. Each bank is required to make plans with specific targets on transforming business models, introducing differentiated services, overall risk management plans, applying information technology, developing human resources, etc.
+ In Japan: In the mid-1980s, with the commitment of the Bank of Japan to keep the Yen exchange rate stable, companies focused only on production activities, leaving the capital creation to banks, causing the economy to grow rapidly, with large investment levels (about 30% of GDP). Real estate prices increased rapidly, increasing the value of mortgaged assets. Loans continued to be invested in real estate and the stock market, causing the real estate "bubble" to become increasingly inflated. Statistics show that prices
Real estate and stocks soared from 1987 to 1990, increasing Japan's wealth fourfold.
The entire island nation of Japan occupies only 0.3% of the world's area, but at one point, the converted land value of Japan accounted for 60% of the world's land value. The boom in the Japanese stock market was unlike any other industrialized country. In 1988, the value of NTT Telephone Company's shares alone was greater than the combined value of all major German companies (such as Daimler, Siemen, Alianz, Krupp, Thyssen, BMW, Bayer, Hoechst, BASF) and German banks. The P/E ratio of Japanese companies at that time was up to 90 - 100, while the average in Western countries was 17 - 20. By 1990, the economy was overheating and the result was the real estate "bubble" burst. Real estate and stock prices plummeted rapidly, and the “main sponsor” of all these activities was Japanese banks. Therefore, when asset prices fell sharply and for a long time, the value of mortgaged assets also decreased, debtor enterprises suffered massive losses, overdue debts and bad debts increased, causing a credit crisis in the banking system.
By March 1997 alone, the total amount of overdue debt in the banking system had reached over 585 trillion yen (about 4 trillion USD). Many commercial banks could barely recover their capital. The bad debt ratio at some banks accounted for up to 13% of total outstanding debt. According to statistics, by July 1998, the total loss of Japanese banks was 100 trillion yen, about 556 billion USD. This situation forced many Japanese banks to close their overseas branches to concentrate capital on solving domestic debt problems, including big names such as Nippon Credit, Sumitomo, Sakura, Sanwa and Fuji.
The wave of financial institution bankruptcies reached its peak in late 1997 when five major Japanese financial institutions went bankrupt, with huge debts, including the Bank of Tokyo and the Bank of Hokkaido, with debts of 59 billion yen and nearly 200 billion yen respectively. In addition, the 20 largest banks in Japan had to declare bad debt write-offs with a total debt of 7,000 - 8,000 billion yen.
Japan's banking system and financial institutions are in a state of near-complete paralysis. The Japanese government previously planned to pour 13 trillion
The Japanese government requested 50 trillion yen in government bonds and guarantees in February 1998, of which 13 trillion yen was earmarked for capital support for banks and the financial sector and 17 trillion yen for depositor protection. The money was to be transferred to the Japan Deposit Insurance Corporation to pay off or purchase preferred securities from weak banks that might become insolvent and to support the Deposit and Securities Compensation Fund, which the government guarantees for loans from Japanese banks and bonds issued by the fund. At the same time, the Japanese government had just decided to allocate an additional budget of 43 trillion yen to revive the country's banking system. The Industrial Bank of Japan was the first bank to request additional public funds to restore stability. This will allow the State to inject money into a bankrupt bank, financial company or securities company to reinsure investors, increase the responsibility to repay assets and prevent loss of credibility in the stock market. The Japanese Ministry of Finance also decided to relax the risk assessment standards of commercial paper held by banks, to make it easier for banks to meet the requirements of the international settlement bank. In addition, the Japanese Ministry of Finance also decided to lower short-term lending rates to create opportunities for Japanese banks to borrow short-term credits to invest in long-term securities and earn profits. The central bank's rediscount rate was also reduced from 0.5% to 0.25%, the lowest level ever, to reduce the burden on commercial banks. Even the Governor of the Bank of Japan, Mr. Hayami Masaru, declared: If applying a 0% rate can lift the economy, the Bank of Japan is ready to apply this interest rate.
+ In the US: In 2008, the real estate "bubble" appeared in the US with over a million homeowners facing the risk of foreclosure. Bad debts caused many banks to suffer heavy losses. Many banks had to merge and even declare bankruptcy such as: Lehman Brothers, Merrill Lynch, Countrywide Financial, Bear Stearns, Ameribank... The reason was: the real estate "bubble" burst. This was the main reason leading to the "half-dead" banks. Before 2006, profits created the motivation for US banks to underestimate customers' ability to pay, promoting mortgage loans.