The Inevitability of Forming a Financial

consumer lending, mortgages, business lending, ... and capital market penetration. From the objective needs of business, giant financial and banking groups have been formed in the world, including Citigroup (USA), Deutsche Bank (Germany), HSBC Holdings Plc (UK), ... However, financial and banking group is still a fairly new phrase in Vietnam.

1. Concept of financial - banking group

From the knowledge about economic groups and parent companies - subsidiaries, we have partly had an initial overview of financial - banking groups. The reason is because financial - banking groups are economic groups whose business sector is banking and financial services, operating mainly according to the parent company - subsidiary model.

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A financial group is usually headed by a large bank, with the group's revenue coming largely from the bank's operating revenue. Given the important role of the bank in such a financial group, a financial group is often synonymous with a financial-banking group. Thus, in this thesis, the author uses these two terms interchangeably without changing their meaning.

The definition of financial-banking group as well as economic group is not unified worldwide, due to differences in economic-political-social conditions, customer needs, and legal regulations between countries.

In European Union (EU) countries

A financial group is called a “financial conglomerate” (conglomérat financier). According to Directive 2002/87/EC, to be called that, the association must satisfy three conditions:

- There must be at least one company engaged in banking or securities activities and at least one company engaged in insurance activities.

- The company that conducts banking, securities and insurance activities is the core of the group. Specifically, the ratio of total assets in the financial sector in the group's balance sheet must be greater than 40%.

- In each financial sector (banking/securities and insurance), the average ratio of its assets to total assets in the group must be greater than 10%, or the total assets of the smallest company operating in the financial sector must be greater than 6 billion euros.

In the United States , a financial holding company is called a financial holding company. Under the provisions of the Gramm-Leach-Bliley Act (GLB Act) passed in 1999, a holding bank (parent bank) that is allowed to provide diversified services as a financial holding company must meet capital requirements. All subsidiaries must be well managed and satisfy capital adequacy requirements: a minimum capital adequacy ratio of 10%, a minimum Tier 1 capital ratio of 6%, and a debt leverage ratio (Tier 1 capital/total assets) of at least 5%. In addition, this holding company or parent company in a financial holding company does not necessarily have to provide financial services; its main function is to make strategic decisions, then manage and operate all common activities of the subsidiaries in accordance with that strategic direction.

At the 2001 Joint Forum , economists from many countries defined a financial group as follows: a financial group is "any group of companies under common management, whose primary business activity is the provision of financial services or a priority in at least two of the three financial sectors (banking, securities, insurance)".

Thus, from the above perspectives, a general definition of a financial-banking group can be given as follows:

A financial-banking group is first of all an economic group that includes two or more different financial institutions operating in different financial fields.

The main companies (banking, securities or insurance) are closely linked together to exploit each other's strengths, providing banking and non-banking services; headed by a large bank that controls other member companies through relationships of holding shares, lending capital and coordinating personnel, deciding on long-term strategies and plans of the entire group, aiming to maximize profits, expand business areas, invest and increase competitiveness.

In Vietnam, there is currently no official document regulating the formation of financial-banking groups. However, the establishment of Bao Viet Insurance Financial Group in 2005 and the Project of equitization of State-owned commercial banks have led to the need for a legal document to uniformly regulate the establishment and operation of financial-banking groups.

2. The inevitability of forming a financial - banking group

Since the late 20th century, the trend of forming financial groups has been strong and widespread throughout the world. Large financial institutions have a strong tendency to transform from a specialized financial institution to a multi-functional operating model in all financial fields. So what are the inevitable causes of this transformation or, in other words, on what basis and general conditions are financial and banking groups in the world formed? According to the synthesized documents, there are six main causes.

2.1. Changes in financial needs

The more society develops, with the explosion of information technology, human needs also become more diverse and complex, especially the needs of each individual and each company for financial services based on modern technology platforms. E-banking services were born to meet that demand. Banks cannot be alone.

To provide this service well, it is necessary to link forces with other telecommunications service providers.

People tend to prefer comprehensive product packages, one-stop shopping. Customers not only come to banks to deposit money, credit, and make payments, but also want to entrust banks with asset management, financial consulting, investment consulting (project investment, stock investment, etc.), securities issuance, insurance purchase, etc. Specialized banks, with limited capacity, cannot provide these comprehensive needs of customers. This model has become outdated, giving way to the development of the universal banking model. The financial-banking group model was born from that objective need of the market.

2.2. Efforts to find new sources of income

To cope with the decline in profits from traditional banking services, banks have become more proactive in providing their target customers with superior benefits. Customers achieve maximum satisfaction when using a full package of products. Satisfaction determines the willingness to pay of service users, thereby banks can increase profits. However, to maximize customer satisfaction, small-scale banks cannot do it, so they must form larger models and operate more professionally.

The development of information technology brings diverse financial services at low cost, promoting companies operating in the telecommunications and information sector to participate in the financial services market. Competition in financial services exists not only between traditional banking and financial service providers but also between financial service providers and non-financial companies. The increase in the number of competitors is a factor that requires financial service providers to improve management activities, expand

Expand operational capabilities by linking together, creating synergies, or establishing subsidiaries.

2.3. Economic globalization trend

It can be said that the process of economic globalization and world trade liberalization has never been as strong as it is now. Tariff and non-tariff barriers have been gradually removed, creating favorable conditions for the flow of goods between countries to increase, and at the same time, the flow of cash has also increased accordingly. Banks, therefore, must strengthen their links and joint ventures with foreign financial institutions to provide the best financial and banking services, especially international payment services for import-export enterprises.

Along with the process of trade liberalization, investment liberalization has also become more active. Foreign investment activities are expanding, financial providers are targeting countries with strong growth potential, especially when increased competition in old markets becomes a threat to reduce profits. Financial providers penetrate foreign markets mainly through mergers and acquisitions (M&A), because they can take advantage of facilities that can meet the business practices of the target market well. Therefore, the global banking model is also becoming popular.

Thus, the globalization trend is the reason why banks expand their scope and network of operations. In order to effectively manage the operations of banks on a large international scale, the emergence of the financial-banking group model is an objective necessity.

2.4. Competitive advantage from brand

Banking is considered a trust business. When a bank gains the trust of its customers, it affirms its brand, and thus, gains a competitive advantage from the brand.

Banks, thanks to their competitive advantage in brand reputation, will penetrate other financial service markets such as insurance and securities by establishing subsidiaries, joint ventures and associations. Companies often use the name, logo and operate under the brand of the parent bank. At that time, the image of these member companies is guaranteed by the reputation of the parent bank, so it is easier to approach customers and penetrate the market more successfully, especially the current market of the bank. Thus, the financial - banking group was formed from the practical needs of that operation.

2.5. Relaxation of regulations in the financial sector

In countries with developed market economies, the gradual relaxation of financial regulations by competent authorities has created a foundation for the emergence and development of financial corporations. The reduction of detailed regulations in financial laws of countries not only helps the financial integration process to take effect, but also helps these organizations to be more autonomous and flexible in their business operations. The relaxed regulations also create a favorable environment for the consolidation of financial service providers, thereby diversifying business operations.

On the part of financial services market regulators, improvements in risk management technology and especially financial disclosure of business entities have facilitated effective supervision and control without the need to impose overly detailed and harsh regulations and laws.

For example, in the United States, the Glass-Steagall Act of 1933 prohibited banks and securities firms from engaging in each other's business, and the Bank Holding Company Act of 1956 restricted mergers between banks and insurance companies. But in 1999, the Gramm-Leach-Bliley Act lifted the provisions of both acts, facilitating mergers.

between businesses in the fields of banking, insurance, securities and other financial institutions.

In 1993, Japan first allowed banks and securities companies to enter each other's fields by establishing subsidiaries. In Europe, the relaxation of regulations took place from the late 1980s of the last century, and in 2002, the European Union EU officially issued a unified Directive on financial groups including banks, securities, and insurance (Directive 2002/87/EC).

2.6. Improvements in information technology

The information technology revolution that exploded in the 1980s is one of the factors that strongly influenced the trend of forming financial groups in the world. The influence of this factor is reflected in the following aspects: First, the development of information technology creates new business opportunities with financial products applying modern techniques, such as online banking, home banking, phone banking, etc., not only provided by banks but also by non-financial companies, creating fierce competition in this field. When using new services based on high technology, customers will save more costs and be more convenient than traditional services. Therefore, opening up a lucrative retail market for

banks and other suppliers.

Second, advances in data processing and communications have dramatically reduced the operating and administrative costs of banking. Lower costs enable financial service providers to further expand their existing operating boundaries into other potential markets. This has led to the choice of a new organizational structure for operating – that of a larger, more efficient financial conglomerate.

Third, the development of information technology provides administrators with more sophisticated and effective risk management techniques, which is especially meaningful in the financial industry - a field considered to be a risky business. The risk management cycle is a closed cycle consisting of four stages: risk identification, risk quantification, risk management, and risk control. These techniques help financial institutions not only evaluate and manage themselves but also evaluate other organizations, serving the purpose of mergers and acquisitions.

3. Conditions for forming a financial - banking group

In terms of macroeconomics: a stable and highly competitive economic environment based on a complete and synchronous legal system is a prerequisite for the formation and development of economic groups in general and financial and banking groups in particular.

People's income increases, life is improved along with the expansion of production and business of other entities in the economy, making market demand more diverse, complex and comprehensive. In the face of the constantly increasing demand of the market, under increasingly fierce competitive pressure, banks that want to survive and develop stably must increase their scale by establishing more subsidiaries or associating with other economic organizations.

Therefore, the combination to create an effective financial group must be based on the principle of voluntariness, and cannot use administrative measures or orders from the State. State intervention is only a necessary condition to support and promote the development of groups. The State should only intervene by building a system of clear regulations on general conditions for a financial institution to develop into a group; on mechanisms and policies to promote investment, linkages between institutions, etc.

The Inevitability of Forming a Financial - Banking Group

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