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Legal Status of Open Market Operations Tools and Practical Application


1/2009

in VND

12 months and up

1

1

Deposit

in foreign currency

Under 12 months

7

6

12 months and up

3

2


March 2009

Deposit in VND

Under 12 months

3

1

12 months and up

1

1

Foreign deposits

bad

Under 12 months

7

6

12 months and up

3

2


January 2010

Deposit in VND

Under 12 months

3

1

12 months and up

1

1

Deposit

in foreign currency

Under 12 months

4

3

12 months and up

2

1


April 2011

Deposit in VND

Under 12 months

3

1

12 months and up

1

1

Foreign deposits

bad

Under 12 months

6

5

12 months and up

4

3


June 2011

Deposit in VND

Under 12 months

3

1

12 months and up

1

1

Foreign deposits

bad

Under 12 months

7

6

12 months and up

5

4


August 2011

Deposit in VND

Under 12 months

3

1

12 months and up

1

1

Deposit

in foreign currency

Under 12 months

8

7

12 months and up

6

5

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Legal Status of Open Market Operations Tools and Practical Application

Source: Decisions of the State Bank

From January 2008 to January 2011, the required reserve ratio has been adjusted down. This adjustment by the State Bank, on the one hand, aims to send a signal of monetary easing; on the other hand, by increasing the official money multiplier, it expands lending capacity, stimulates commercial banks to boost credit activities, and actively supplies capital to the economy. In our country, the required reserve ratio is divided according to the nature of the term, the type of deposit, and usually, short-term deposits and foreign currency deposits must maintain a higher required reserve ratio. In addition, the difference in required reserve ratios between banks is also of interest. According to the provisions of Decision No. 379/QD-NHNN applied from February 24, 2009 (for VND) and Decision No. 74/QD-NHNN applied from January 18, 2010 (for foreign currencies), the required reserve ratio is prescribed as follows:

To encourage some commercial banks to lend to agriculture and rural areas on December 8, 2010, the State Bank issued notices No. 457; 458; 459; 460; 461 on the application of the required reserve ratio for credit institutions with a high proportion of agricultural and rural loans according to Circular 20/2010/TT-NHNN dated September 29, 2010 of the State Bank. Accordingly, the Central People's Credit Fund is applied a required reserve ratio of 1/20 compared to the normal required reserve ratio; the Bank for Agriculture and Rural Development of Vietnam, Vietnam International Commercial Joint Stock Bank, Kien Long Commercial Joint Stock Bank, and Mekong Commercial Joint Stock Bank are applied a required reserve ratio of 1/5 compared to the normal required reserve ratio. With this regulation, the State Bank has added a new basis for determining the required reserve ratio, which is that the required reserve ratio also depends on the investment objects of commercial banks.[30]

For most of 2009, 2010 and the first months of 2011, inflation was no longer a concern but a reality to be faced, yet the required reserve ratio for VND remained unchanged.

In 2011, the State Bank of Vietnam increased the required reserve ratio in foreign currency three times. According to the Decisions of the State Bank of Vietnam, the required reserve ratio for demand deposits and deposits with terms of less than 12 months in foreign currency applied to State-owned commercial banks (excluding the Bank for Agriculture and Rural Development of Vietnam), joint-stock commercial banks, 100% foreign-owned banks, joint-venture banks, and foreign bank branches increased from 6% - 7% - 8% of the total balance of deposits subject to mandatory reserves. Particularly, the Bank for Agriculture and Rural Development

Vietnam, Central People's Credit Fund, cooperative banks increase from 5% - 6% - 7% on total deposit balance required reserve.

The compulsory reserve ratio for deposits of 12 months or more in foreign currency applied to State-owned commercial banks (excluding the Vietnam Bank for Agriculture and Rural Development), joint-stock commercial banks, 100% foreign-owned banks, joint-venture banks, branches of foreign banks, finance companies, and financial leasing companies will gradually increase from 4% - 5% - 6% of the total balance of deposits subject to compulsory reserves. Particularly, the Vietnam Bank for Agriculture and Rural Development, the Central People's Credit Fund, and cooperative banks will increase from 3% - 4% - 5% of the total balance of deposits subject to compulsory reserves. The decision of the State Bank of Vietnam to increase the foreign currency reserve ratio is completely reasonable, aiming to control and limit foreign currency credit growth; reduce pressure on exchange rates, especially at the end of the year, creating conditions to stabilize the money and foreign exchange markets.

It can be said that, through the regulation of DTBB, the State Bank can directly or indirectly affect the increase or decrease of the amount of money in circulation because, when the State Bank decides to reduce the DTBB of credit institutions deposited at the State Bank to a certain level, it also means that the actual capital that credit institutions put into circulation will increase. This action means expanding the money supply in circulation. On the contrary, in the case of having to reduce the money supply in circulation to push back inflation, the State Bank can decide to increase the DTBB ratio for credit institutions to narrow the credit granting capacity of these entities to customers, at the same time preventing adverse consequences that may occur to credit institutions in the future when customers simultaneously withdraw their deposits at the same time. By deciding to increase or decrease the reserve requirement ratio, the State Bank will implement a "tight" or "loose" monetary policy for the socio-economy, aiming to push back inflation and promote the country's socio-economic development.

The DTBB tool is related to input interest rates and capital supply for the economy. Therefore, the adjustment of the DTBB rate should be more flexible for foreign currency deposits because the current foreign currency mobilization situation of commercial banks is very difficult while the economy's borrowing demand is very high and cannot be met.

2.5. STATUS OF LAW ON OPEN MARKET OPERATIONS AND PRACTICAL APPLICATION

2.5.1. Current regulations on open market operations tools

In the world, open market operations are used by central banks of countries as the most popular and effective tool in managing monetary policy. In Vietnam, this tool has also been used by the State Bank recently, but its effectiveness is still limited. According to Clause 1, Article 15 of the Law on the State Bank of Vietnam 2010, it is stipulated that: "The State Bank conducts open market operations through the purchase and sale of valuable papers with credit institutions". According to Clause 1, Article 2 of the Open Market Operations Regulations issued together with Decision No. 01/2007/QD-NHNN dated January 5, 2007, "open market operations are the short-term purchase and sale of valuable papers by the State Bank with credit institutions". Goods that can be bought and sold in open market operations include short-term, medium-term and long-term valuable papers such as treasury bills, deposit certificates, State Bank bills, treasury bonds, etc. but with a payment term of less than 1 year.

Open market operations are one of the tools used by the State Bank in managing the national monetary policy in recent years, because this activity has the ability to flexibly regulate the money supply in circulation, which is very suitable for the situation of rapid and frequent fluctuations in the value of domestic currency in the market economy that other activities do not have. Applying this operation will allow the State Bank to be more proactive in regulating the money supply, directly affecting the credit supply capacity of credit institutions.

Because the open market operation tool plays an important role in implementing the national monetary policy, since this tool was officially used (from July 12, 2000), there have been many legal documents regulating it. Currently, in addition to the Law on the State Bank of Vietnam, legal documents regulating open market operations in Vietnam include:

- Regulations on open market operations issued together with Decision No. 01/2007/QD-NHNN dated January 5, 2007. According to these regulations, the list of valuable papers, the difference between the value of valuable papers at the time of valuation

and payment prices and transaction rates of valuable papers through open market operations are prescribed by the Governor of the State Bank of Vietnam from time to time (Clause 2, Article 8 of the Regulations).

- Decision No. 27/2008/QD-NHNN dated September 30, 2008 on amending and supplementing a number of articles of the Regulations on open market operations issued together with Decision No. 01/2007/QD-NHNN dated January 5, 2007. Accordingly, the methods of buying or selling valuable papers include: term purchase transactions (the State Bank purchases and receives ownership of valuable papers from credit institutions, and at the same time the credit institution commits to repurchase and receive back ownership of such valuable papers after a certain period of time); term sale transactions (the State Bank sells and transfers ownership of valuable papers to credit institutions, and at the same time commits to repurchase and receive back ownership of such valuable papers after a certain period of time); outright purchase transactions (the State Bank purchases and receives ownership of valuable papers from credit institutions, without a commitment to resell the valuable papers); outright sale transaction (the State Bank sells and transfers ownership of valuable papers to credit institutions, without a commitment to repurchase the valuable papers).

- Other relevant legal documents, for example: Regulations on management of available capital issued together with Decision No. 37/2000/QD-NHNN dated January 24, 2000 on promulgating regulations on available capital...

All the above legal regulations are fundamental factors for open market operations. Basically, the system of legal documents for the establishment and operation of the open market has been and is being completed. It ensures the smooth and convenient operation of the open market operations of the State Bank from the stages of securities issuance, securities trading, intervention activities of the State Bank to payment and securities custody activities [16]. The Law on the State Bank of Vietnam took effect from January 1, 2011, so the above documents are no longer suitable in practice. Currently, the State Bank of Vietnam has a Draft Circular regulating open market operations, is receiving comments from relevant organizations, and will soon complete it and put it into practice.

2.5.2. Practical application of the law on open market operations tools

NVTTM is an indirect monetary tool put into use by the State Bank of Vietnam since July 2000. This is a fundamental change that creates a foundation for the State Bank of Vietnam to shift its management from direct monetary tools to indirect monetary tools.

continuously to regulate available capital and market interest rates more effectively. Since July 2000, NVTTM has been continuously improved. NVTTM is flexibly managed by the State Bank of Vietnam, closely coordinating with other monetary policy tools to regulate available capital for credit institutions at a reasonable level, contributing to stabilizing the monetary market.

In the early days of operation in July 2000, the number of members participating in the open market was only 21 credit institutions. The number of members participating in the open market increased gradually over the years but at a slow pace, only 1-2 members per year. By December 31, 2005, 30 credit institutions were recognized as members participating in the open market. In 2006 and 2007, this number increased and remained at 35 members. In 2008, the number of members increased dramatically by 27.3% compared to 2007, to 56 members. The reason for such a sharp increase is that credit institutions have become more fully aware of the importance of the capital supply channel through the open market operations of the State Bank in the context of tightening monetary policy in the first half of 2008. By the end of 2012, the number of members participating in the open market had reached 80, attracting the participation of both joint venture banks and foreign banks.

Table 2.6: NVTTM transaction turnover in 2008-2011

Unit: Billion VND



Year

Buy

Sell


Total sales

Average sales per session


Number of sessions

Purchase volume


Number of sessions

Sales

0

1

2

3

4

5=2+4

6=5/(1+3)

2008

260

947,207

142

76,972

1,024,179

2548

2009

262

971,772

68

10,193

981,965

2976

2010

490

2,094,772

1

7,295

2,101,420

4280

2011

431

2,800,872

431

0

2,800,872

6499

Source: State Bank Transaction Office

In 2008, open market operations were the main tool for monetary policy management and had the largest trading volume in the money market. Trading turnover reached VND 1,024,179 billion, an increase of 148% compared to 2007, of which purchasing valuable papers accounted for 64.67% of the total number of trading sessions with winning bids accounting for 91.42% and 15 times higher than in 2007. This demonstrated the SBV's quick and strong response to market instability [31].

In 2008, open market operations were flexibly managed in close coordination with other monetary policy tools to regulate available capital for credit institutions at a reasonable level, contributing to stabilizing the monetary market. Open market operations were conducted daily, mainly by volume bidding, announcing interest rates to stabilize the market. However, the application of volume bidding also made small commercial banks, holding few valuable papers, unable to compete in bidding volume with large commercial banks, so they only won bids with small volumes and had to borrow from large commercial banks at higher interest rates. In the first 7 months of 2008, along with implementing monetary policy management solutions such as increasing the reserve requirement ratio, issuing compulsory SBV bills, and increasing the base interest rate to contribute to curbing inflation, the SBV offered SBV bills with terms of 182 and 364 days; The common interest rate for the 182 term is 7.5

%/year, term 364 is 7.75%/year. At the same time, to support short-term capital for credit institutions and overcome the situation of the money market not being really smooth, the State Bank has conducted short-term purchase offers of valuable papers (7, 14, 21, 28 days), the daily purchase volume is determined on the basis of payment capital needs and developments in the money market. The above-mentioned open market operations have contributed to stabilizing the money market, especially when the reserve requirement ratio and interest rates announced by the State Bank are changed. Since August 2008, in response to positive signals on inflation control, the State Bank has gradually loosened monetary policy to promote production and business development and proactively limit the impact of the financial crisis and prevent the risk of economic recession. To stabilize market sentiment and support commercial banks that are really facing capital difficulties, the State Bank of Vietnam continues to conduct buying sessions of valuable papers with terms of 7-14 days with reasonable volume and interest rates, in line with the adjustment of the basic interest rate and other interest rates announced by the State Bank of Vietnam.

During the first 9 months of 2008, due to difficulties in commercial bank liquidity, while the open market was very active, the treasury bill auction market was quiet.

quiet, no auctions were held. In fact, only 2 auctions were held at the end of January and the end of March 2008, but no members participated in the auctions. In the second quarter of 2008, no auctions were held, and in the third quarter, 3 auctions were held. This market became active again from the beginning of October 2008, when the State Bank increased the trading frequency from 1 auction/week to 2 auctions/week, with 24 auctions held in the fourth quarter of 2008. In total, up to December 25, 2008, the State Bank held 34 auctions, a decrease of 9 auctions compared to the 43 auctions held in 2007 [12]. This development is consistent with the 4 different stages of the State Bank's monetary policy management in 2008. Through that, this market plays a very important role in intervening in the available capital of commercial banks, as well as creating a tool to prevent liquidity risks of commercial banks, improving the effectiveness of monetary policy management according to the set goals of the State Bank.

In 2009, when inflation was controlled, along with the Government's general stimulus policy, the State Bank continued to implement a cautious loose monetary policy, expressed through the open market with valuable paper trading sessions, mainly buying 14-day terms, to supply more money to credit institutions. However, at this time, credit institutions had excess capital, so the average winning bid volume only reached about 74% of the State Bank's forecast, the average winning bid volume only reached about 1,000 billion VND/session. By the end of 2009, the demand for available capital of credit institutions tended to increase, so the average winning bid volume also increased, reaching 7,000-8,000 billion VND/session, especially up to 15,000 billion VND/session in December 2009 due to a serious liquidity shortage in some credit institutions. However, the interest rate of open market operations was always kept stable.

In 2010 and 2011, NVTTM was operated flexibly, closely following the developments of capital supply and demand in the market, contributing to stabilizing market interest rates. In the first 9 months of the year, NVTTM was operated to support VND payment capital for credit institutions, stabilize the monetary market and support credit institutions to reduce capital mobilization: implementing GTCG purchase offers with terms of 7, 14, 28 days; interest rates were adjusted down (interest rates for 7-day term decreased from 7.8%/year to 7.5%/year and down to 7%/year; interest rates for 14-day term decreased from 8%/year to 7.5%/year); the average purchase offer volume was about 5,400 billion VND/session, the average winning bid volume was about 3,200 billion VND/session. In the last three months of the year, in the context of high inflationary pressure, credit and total means of payment exceeded the target, NVTTM

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