Lessons Learned for Vietnamese Commercial Banks

The surplus of unsold homes caused U.S. housing prices to peak and begin to decline in mid-2006. This left borrowers unable to make their high-interest payments and unable to borrow more to pay off their existing loans. The result was increased delinquencies, foreclosures, and a continued increase in the supply of homes, which in turn caused home prices to fall, reducing the equity in the home to the value of the home relative to the equity in the home. This was a vicious cycle that led to the financial crisis.

A closer look at the credit approval process and conditions reveals the extent of moral hazard that financial institutions face in granting credit to high-risk borrowers. In the years leading up to the crisis, financial institutions’ lending behavior had changed significantly. Institutions increasingly extended credit to high-risk borrowers, including undocumented immigrant borrowers. Subprime lending increased from $35 billion in 1994 to $600 billion in 2006 [89]. At the same time, the average interest rate spread between prime and subprime loans fell significantly between 2001 and 2007. The reduction in risk premiums and the loosening of credit conditions were the underlying conditions that led to the credit boom. At the same time, credit institutions also encouraged borrowing by reducing the initial down payment to only 2% and even up to 43% of borrowers did not have to make an initial down payment [93]. Comparing this figure to the 20% down payment of the Chinese market, it can be seen that the credit conditions of the US market at that time were very loose.

At the same time, many credit standards changed during that period. Initially, credit institutions did not require borrowers to report their income and assets; borrowers only had to report their income and prove to the bank that they had money in their accounts. Next, the occupational requirements were also removed. Borrowers only had to prove that they had money in their bank accounts. Credit standards were gradually relaxed to allow more loans and create more securities. In fact, in the first period, borrowers did not have to pay the principal but only the interest.

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Alternatively, the borrower is paid an interest rate that is not fixed and the unpaid interest amount is added to the principal. This leads to the risk that in the initial period, the interest rate is low but in the later period, when the interest rate is adjusted to increase, the borrower has to bear the burden of paying higher interest [95].

With the encouragement of banks to borrow, real estate brokers also provided subprime loans at adjustable rates even to qualified borrowers. The use of automated credit approvals allowed banks to make loans without proper assessment and documentation. In 2007, approximately 40% of subprime loans were made through automated approvals through real estate brokers [95]. The president of the Real Estate Lending Bankers Association argued that real estate brokers profited from the boom in real estate lending, but failed to properly review the borrowers’ creditworthiness [77].

Second, the massive securitization process to issue bonds secured by real estate loan contracts (MBS) also stems from the level of moral hazard in the business operations of commercial banks. In the traditional real estate lending model, a bank provides credit to a customer, specifically a home buyer, and throughout the lending process, this bank will have to bear credit risk. With the securitized lending model, the bank is still the real estate credit provider, but then transfers the credit risk to investors through the issuance of securities secured by real estate. This means that the real estate credit issuer will not need to hold that credit until maturity. By selling real estate credits to investors, the original credit granting banks will have capital to continue to make new credits and collect transaction fees; This process has given rise to moral hazard because banks will focus on creating as many real estate credits as possible without ensuring the quality of the credits granted [94].

Third, central bank policies are also a source of moral hazard. Some studies suggest that the actions of

The Federal Reserve's frequent intervention to bail out large financial institutions in previous crashes may have led large financial institutions to believe that the Federal Reserve would intervene if high-risk loans failed, since these institutions believed that "it is impossible to fail if you have a large scale of operations." As a result, commercial banks relying on government bailouts invested heavily in risky businesses [74].

Fourth, moral hazard is reflected in the high level of financial leverage maintained by credit institutions. Many credit institutions, especially investment banks, borrowed heavily during the period 2004-2007, and invested that money in the MBS market, betting that housing prices would continue to rise and thus that homeowners would continue to repay their real estate loans. Borrowing at low interest rates and investing at higher interest rates provided high returns during the housing boom, but would lead to large losses if housing prices began to decline and the loans defaulted. In early 2007, financial institutions and individual investors holding MBS suffered large losses from defaulted loans, and as a result, MBS prices fell [75]. During the period 2004-2007, the five largest US investment banks increased their leverage ratios significantly, making them vulnerable to the decline in MBS prices. In 2008, the three largest US investment banks declared bankruptcy like Lehman Brothers or were sold at very low prices to other banks like Bear Stearns and Merrill Lynch, while two other investment banks, Morgan Stanley and Goldman Sachs, were forced to convert into commercial banks and thus subject to stricter management [95].

It can be said that in the context of international integration, banking activities are increasingly complex and difficult to control, banking products and services are more diverse and complex, causing difficulties for many countries in controlling risks based on traditional methods. Especially controlling the issue of financial ethical risks. Learning from this crisis, financial management agencies as well as banks themselves have revised many regulations in a tightening direction to control.

potential risks from moral hazard. Here is the experience of the US National Securities Commission,

a. Experience from the National Securities Commission (SEC)

Through the crises, the legal framework regulating the capital market in general and the operations of the commercial banking and investment banking system in particular has been supplemented and improved. For example, the Gramm-Leach-Billey Act 1999 regulates the operations of commercial banks and investment banks, allowing commercial banks, investment banks, and insurance companies to merge into a financial group model (general bank). The Sarbanes-Oxley Act 2002 established an accounting oversight committee for public companies and prescribed new requirements on corporate governance and financial reporting for public companies; supplemented regulations on accounting for financial products at fair value, operations of credit rating companies, capital safety regulations, risk management of financial institutions, operational functions of commercial banks and investment banks, and salaries and bonuses in the financial sector, etc.

b. Bank of America's experience

The new Bank of America Code of Ethics was revised and issued on March 1, 2011, including ethical rules applicable to both the Board of Directors and bank officers. The Code of Ethics issued this year compared to the previous Code adds new provisions on the responsibilities of the Board of Directors, social responsibility and risk framework. The Code of Ethics includes 5 core values of the Bank's Code of Ethics and is illustrated specifically through 8 main contents.

Five Core Values of the Code of Ethics

Doing the right thing: Banks have a responsibility to do the right thing for customers, shareholders and communities.

Trust and Teamwork: The Bank is collectively responsible for customer satisfaction and for the success of the Bank.

Talent treatment: The Bank always focuses on developing talents, appreciates the unique value of each member and focuses on striving results to help all members develop their full potential.

Winning Goal: The Bank has a passion for achieving results and winning for the Bank's customers, the Bank's shareholders and the Bank's community.

Making the right decisions: The Bank will always be a leader, making the right decisions at every level, expanding vision and taking action to help build a better future.

Eight main contents of the Code of Ethics

- Management and operation activities: This section regulates the actions of the Board of Directors, the Board of Supervisors and the Bank's Board of Management regarding related transactions such as the publication of financial statements, transactions with regulatory agencies, training plans and staff development.

- Conflicts of interest: Bank staff need to avoid and properly handle conflicts between personal interests and bank interests, shareholder interests and customer interests. Conflicts of interest arise when related interests influence your decisions or ability to perform your duties. Conflicts of interest often arise when dealing with suppliers, related parties or customers, such as receiving gifts, disclosing information, deposit or loan transactions, etc.

- Information security and confidentiality: Bank staff are responsible for keeping information about customers, the bank, partners or suppliers confidential and secure. Specifically, for Customer Information: You are not allowed to access customer information except for appropriate business purposes and must protect customer information. The bank has specific policies and regulations on protecting customer information, which bank staff must strictly comply with; for information about the bank, any information of the bank that is not publicly available must be carefully kept. Bank staff are not allowed to share this information outside or between bank staff unless otherwise specified; for information about partners and affiliates of the bank: the bank has specific policies on information security for partners and affiliates of the bank.

- Bank assets: Bank staff are obliged to preserve bank assets. Bank assets include, but are not limited to, the following items: specialized software, customer information, bank databases, bank equipment, bank ideas and inventions, information about related parties, intellectual property, money and funds, internal reports, etc. Bank staff are not allowed to use bank assets for personal transactions, nor are they allowed to steal, embezzle, or appropriate bank money, funds, or assets.

- Financial obligations: Bank staff are not allowed to receive any commission or fee paid by customers, unless otherwise stipulated by the bank; Bank staff are obliged to report arising costs promptly and accurately; bank cards are not allowed to be used for purposes other than performing appropriate banking transactions.

- Compliance with the law: Bank staff are not allowed to commit illegal acts, whether personally or as representatives of the bank. It is impossible to list all illegal acts. The Code of Ethics only introduces some major and common violations such as: money laundering, profiteering, corruption, information trading, discrimination.

- Restrictions on securities trading and insider trading: Bank staff in possession of documents, information on securities or financial information are not allowed to buy, sell, introduce or act as brokers in securities trading or financial instruments. In addition, you are not allowed to communicate or disclose such information to acquaintances or family members.

- Social responsibility: The bank always acts to build a better future. Social responsibility is demonstrated through the bank always promoting and encouraging; Linking to create and maintain a stable business environment, contributing to the development of the economy in general and helping to promote the growth of the bank itself.

c. Golmach Sachs's experience

Major investment banks proactively develop and publish ethical codes on their websites to create a transparent, accountable business culture.

The effect of encouraging employees to comply with the law, general ethical rules of society, while protecting the reputation and brand of the bank. The bank has built a framework of advanced corporate governance standards including specific policies such as:

- Business principles

- Charter of committees under the board of directors

- Guidelines on corporate governance

- Code of ethics and standards of professional conduct

- Report concerns and complaints

- Policy to determine the independence of board members

- Corporate citizenship responsibility

- Environmental protection policy

1.3.2. Lessons learned for Vietnamese Commercial Banks

1.3.2.1. Experience for macro management levels

- Building a code of business ethics in the banking sector

The code of business ethics of each bank emphasizes the relationship between administrators, executives and shareholders; between banks, bank employees and customers and partners, which is demonstrated through service quality, commitment to responsibility, diligence and honesty in operations. The essence of this code of business ethics is to determine the internal and external ethical relationships of the bank. The goal of this code of business ethics is to ensure the safety of banking operations, ensure the maintenance of the function of transmitting capital to the economy, protect the rights and interests of depositors, maintain the trust and stability of the financial market. The development of this code of ethics is specific to each bank, reflecting core values to establish differences and orient the brand value of each bank. However, basically, some general ethical rules need to be mentioned such as honesty, fairness, reliability, legality, transparency, etc.

- Develop training programs and issue banking practice certificates/licenses

Other financial service sectors such as accounting, auditing, insurance, securities, customs, etc. all have professional practice certificates/licenses according to law.

prescribed by law. One of the standards for being granted a practice certificate is to have professional ethics in addition to professional requirements. When there is a violation of the practice regulations, that person must be subject to sanctions according to the law, the highest being revocation of the practice license and being permanently banned from practicing, along with other levels of handling according to the law.

- Enhance the role of Banking Association

As an organization representing credit institutions, the Banking Association has a certain charter, purpose, and direction of operation aimed at protecting and guiding members to operate in accordance with the law as well as the rules set by the industry association. The Banking Association plays an important role in forming codes of conduct for member credit institutions, which is the premise for forming standards of conduct approved and complied with by the member business community. These standards of conduct are the basis for making judgments when conflicts arise between members. In other words, through its charter, purpose, and direction of operation, the Banking Association will form standards of conduct between members in accordance with the characteristics of the industry and business sector, as a premise for judging violations by members.

- Building a foundation of business ethics through the bank's culture and core values

Currently, Vietnamese commercial banks have built core values as well as chosen business slogans, expressing their bank's business philosophy. These contents need to be designed to further emphasize business ethics because core values as well as business slogans allow commercial banks to act according to the standards they set, which is the basis for current and future development orientation.

- It is necessary to build a basic foundation for the development of financial systems and markets.

It is necessary to build a basic foundation for the development of the financial system and market, in which it is necessary to establish a legal framework for supervision and compliance to allow managers to fully exercise their rights and responsibilities towards the

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