Part B: Critically discuss the challenges regulators face when regulating international banks.
Table of contents
1. Need for regulating international banks 1
2. Challenges regulators face when regulating international banks 2
3. The challenges of banking reglulatory in Vietnam 3
In view of economists is Samuelson (1958), competition is a rivalry between firms together to win customers, the market”. In the market economy, banks are a special type of corporate intangible products, does not exist as a matter of business as usual. When banking integration with the world, created a lot of opportunities but also many challenges for bank regulator in planning policy, regulation of banks.
1. Need for regulating international banks
According to H. R. Machiraju (2008) the commercial banks and international banks is essentially the business, but the business is special, so the bank regulators do not affect the value of the banks and their cost, but also impact on the cost of the enterprise and the borrower. The organization and regulation in the bank will directly impact not only on the value of the bank, but also to the position and reputation of the bank.
In general, the regulation of the bank affects the ability to accept the risk of the bank, which is a measure of the resistance of the the bank before the fluctuations of the economy. Moreover, the bank’s activities affect the output of the economy because the banks mobilize and allocate society’s savings. Especially in developing countries, while the the bank is financing a huge outside of the business, banking regulations will contribute to promoting good corporate governance in companies they lend (Scott-Quinn, 2012).
Singh (2012) have shown that the banks are special companies, so the activities of the the bank are also “special” with other companies. It is the financial activities associated with the risk; the diversity of the beneficiaries, it is difficult to manage; large risks, many short-term debt risk is very high activity and very easily lead to bankruptcy; are managed closely with many strict rules and details due to the importance of the system, if broken can cause major losses and wide-ranging. Thus, the banks themselves must make the rules very specific, clear restrictions on activities (product, branch), requirements for safety (credit rating, expected required reserves …).
At the same time, Stanley (2003) also stated that banks are subject to an insignificant risk of corporate governance over the business because of the uncertainty means that the scope of management, risk transfer, the benefit of the individual and the occupied public capital (underground lending, insider lending, capital appropriation …) greater than the non-financial enterprises. Therefore, the role of bank regulators bigger than good governance. Banks may be more transparent, higher values and facilitate more effective supervision.
2. Challenges regulators face when regulating international banks
Continuous development of new trading strategies and new “products”
The administrator of the banks greatly increase the types of products and services to put on the market. The international banks can meet a range of services encompasses most of the area of operations of banks and financial services are concerned. However, banks are not the same skills, how to make the products and services on the market specifically.
According to the Machiraju (2008), most banks provide services to the market lack the institutional capacity of their own, the results showed administrators if there is only limited knowledge about the their products and services will certainly at risk during product development, banking
Singh and Dutta (2013) have argued that to develop new products and services, marketing issues is a very important factor in the development of new products and services of the bank. Many services can be developed and introduced with little cost as established service network. Similarly, the introduction of specific services to supplement the expertise or skill system imply strong promise on time and financial resources. Careful analysis services will find that there are services that will bring high profits while other services are not profitable even negative profit, also known as the lost. A large banks often arrange their own services in order using a variety of criteria with the following questions. This is one of the major difficulties in the regulation of banks.
+ Services, products are important or closely related to the basic operations of the bank, and related services of the bank .+ This service can be profitable for the banks best + These services can bring more confidence and operational risks are less than zero? + These services can automate more? + Services arising stable? + The service has no separate or unique? The service in banks sorted order using the proposed standards and recognize that some services may be critical, although they may be lost.
Building a coherent theory of regulatory practice is one of the challenge of the regulator of bank.
If the bank want to have consistent income from credit operations, regulators must accept a level of risk at the rate allowed. In the operation of the the bank, if removed all credit risk is not possible unless the the bank do not lend to any customers yet. Therefore, the first principles of credit risk management is to know the risk, this job is an important condition to help regulate but the negative impact of credit risk in the governance process risk (Stanley, 2003).
Changing in nature of banks: size and complexity of financial conglomerates, level of individual FI, degree and nature of spillovers.
In the race to win the market, foreign banks are trying to hold market share in the domestic banking market, while domestic banks are going to reverse that trend. Merger acquisition activities are developed in developed countries, but very early in the economies of developing countries, particularly in the banking sector. However, it should be acknowledged that the impact of the world financial crisis in 2008 and 2009, the number of successful mergers within two years of very modest. But by 2010, the time when crisis has gone through the worst phase, the merger has accelerated suddenly (Sakata, 2013). Therefore, the regulation of banks increasingly more difficult.
3. The challenges of banking reglulatory in Vietnam
Vietnam banks now have the financial resources small, low-quality assets, product catalog poor service, quality products and services is low, the organizational structure is not really reasonable and not specialized professional, managerial and executive level is low, banking technology also has significant gap compared to the level of the region and the world. Vietnam banks currently only has the advantage of branch network distribution and customer service widely knowledgeable about local customs and business environment. However, this is not a long-term advantages, decisive and fades away when the banking sector actually fully liberalized (Alpert, 2005).
International economic integration increases the risk capital transactions and the banking system, while management mechanism is not perfect, especially the mechanism of inspection and supervision, lack of close coordination, synchronization between the relevant ministries will be a big challenge for local banks. If management capacity and legislators do not keep up and unforeseen rapid development of the financial transactions – banks, there will be two possibilities occur (James et al, 2006): Either the banking sector lost the ability to control lead to a national crisis or will re-apply restrictions to maintain control. Both the two cases are harmful to the development of the banking sector.
Furthermore, integration requires banks to have a human resources professional is not only about banking but also to understand international trade law. Bank staff should also fully equipped with the knowledge and skills of research, analysis, evaluation and forecasting models and according to international standards, while the human resources of the commercial banks in the country developing very weak in the knowledge and skills on (James, R. et al, 206). This is a big problem for the bank regulators.
The ability to control monetary are limited in terms of bank in financial open market be also very easy to cause systemic risk to the commercial banks in some developing countries. To avoid this risk, the inspection and supervision of macro and remote monitoring of the central bank requires a large capacity and is based on inspection standards, international monitoring. This is one of the major difficulties that the bank regulators are facing ( Machiraju, R., 2008).
Thus, the process of international economic integration will create greater pressure than the operations of commercial banks in Vietnam as a potential advantage will belong to foreign banks. The competition takes place not only abroad but also takes place in the domestic market, where banks Vietnam still has many advantages if they take advantage of that advantage. In other words, the bank regulators in Vietnam faces a lot of challenges in the regulation of banks. To be able to grasp the advantage, take advantage of opportunities and increased competitiveness Vietnam banks need to know their position, to assess their competitiveness based on the criteria mentioned, then take steps to improve internal capacity to improve their own competitiveness. /.
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