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The development process of Vietnam
banking system can be divided into four
periods :

Period from 1951 to 1954: National Bank
of Vietnam was established in 6 May 1951
and operated independently in the financial
system. The National Bank manage the
State Treasury, and unify the budget system.
Moreover, it developed bank credit for
production and circulation of goods,
enhances economic to fight with the

History of Vietnam banking system
Period 1955-1975:
This was the era of resistance against the American invader.
National Bank implemented the following basic tasks:
Strengthening the currency markets, keeping the currency
stable, stabilize pricing, creating favorable conditions for the
economic recovery in war
Improve credit activities to enhance food production, restore
and promote the development of agriculture, industry, trade.

Period 1975-1985:

A period of economic recovery after the war and the reunification of
the country. National Bank (South) was nationalized and merged into
the state bank of Vietnam (North), to unify the national currency.
After that, SBV issued and implementing monetary policies, credit,
foreign exchange management, payment to stabilize the economic
situation, and monetary circulation.

However, the prolonged war has caused our economy to fall into
severe recession, budget deficit at a high level for many years,
inflation at 3-digit level. The manufacturing operations, goods
distribution and life of people face many difficulties.

The period 1986 to present: This period was a comprehensive
innovation of Vietnam's banking system. Here is some notable events:

-26/03/1988: The Council of Ministers has issued a new decree with
basic orientation is " transfer the banking system to commercial
operation" Accordingly, four specialized banks were established on the
basis of transfer and separated from the State Bank, including: Vietnam
commercial Bank for Industry and Trade, Agricultural Development
Bank, the Bank for Investment and Construction, and Foreign Trade

- 5/2002: Electronic Payment System Interbank officially put into
operation, the electronic banking services include E-Banking, Internet
Banking, ...
-2006: State Bank participated in the WTO negotiations and actively
implementing the commitment to international integration in the
banking sector.

- 2008: the global financial crisis occurred. Since 2009, problems
began to break out across the world but the effect on banking and
finance was not much because the level of integration was not high.

- More importantly at that time, banks started to enter to the growth
period. 2009 was the prosperity moment of them. This situation
differs from the U.S. and the rest of the world.

However, 5 years after the global crisis,
Vietnam's banking system start to face many
difficulties. Actually, the expression of
difficulties in the banking sector began in
2010-2011 when the subprime mortgage
increases, but banks still can keep the bad
debt ratio less than 3%.

Latest Report of the National Bank said, by
the end of the month 9/2013, total bad debts
of the banking system of Vietnam is 142
trillion, 24 trillion higher than the same
period last year.

Market-based and Bank-based financial
Market-based system Bank-based system
Having very developed share and bond markets. Having less developed financial markets
Strong competition between banks and non-banking
financial intermediaries to raise funds and provide
loans to the economy.
Bank is a main intermediary. Bank is a more
dominant providers of external finance to firms
Widely-held listed firms (dominant shareholders are
Dominant shareholders are common
High level of customer/investor protection with
sophisticated laws and regulations.
Less sophisticated laws and regulations tend to
have civil law legal systems
Customers prefers to raise funds via debt and equity
Households are less exposed to financial markets
The effects of bank-based systems on
financial markets
With respect to the relationship between economic growth and
the degree to which countries are bank-based, the effects of bank-
based systems on financial markets are:
- Acquiring information about firms and managers and thereby
improving capital allocation and corporate governance
- Managing cross-sectional and liquidity risk and thereby
enhancing investment efficiency and economic growth
- Mobilizing capital to exploit economies of scale
Market-based and Bank-based financial
Sources of inefficiencies in bank-based and market-based systems
Feature In bank-based system In market based system
Borrows know more about the
repayment prospects for a loan than
Management knows more about the firm's
performance than analysts and
Bad borrowers take out loans; good
borrowers will find them too
expensive. Result: the overall
riskiness of banks' credit portfolios is
too high compared to returns.
Badly performing firms face a higher
demand for their shares, higher liquidity
and better financing conditions than
justified under full information. Better
performing companied face worse
conditions than expected and thus are
driven out of the market.
Moral hazard In a system with deposit insurance,
or central banks willing to act as
lender-of-last-resort, banks may be
more willing to take risks than
otherwise in search of higher returns.
Managers not wholly liable for the
consequences of their decisions may be
more willing to take risks than otherwise
Agency cost Under insufficient monitoring dealers
may become tempted to take more
risks than justified in search of profits
and promotion.
A principal-agent problem may arise in the
relationship between shareholders or
firms owners and managers if owners
want managers to run the firm maximizing
share values, while managers' priorities
are elsewhere.
Weakness of Vietnam Banking System
Improper accounting
practices and the dearth
of timely and accurate
information in Vietnam
has led the lack of
security revaluation
losses, inventory
revaluation losses are
not included
More vulnerable
to financial crisis
Moral Hazard
Weakness of Vietnam Banking System
Asymmetric Information:
Banks did not reveal information instantaneously in the public market and it
could leads firms facing lack of sources of information to undertake misguided
Improper accounting practices and the dearth of timely and accurate
information in Vietnam has led the lack of transparency. Companies in
Vietnam are reluctant to declare their actual business and financial figures,
this leads to inaccurate credit information for bankers.
Vietnams accounting system uses statements of income and expenditure but
items such as security revaluation losses, inventory revaluation losses are not
included. A foreign company operating in Vietnam may need two accounting
systems so that the company is able to report to its parent company in
accordance with international practices.

Weakness of Vietnam Banking System
More vulnerable to financial crisis: Firms under bank-based system are
likely to more agonize over the global financial crisis than firms under market-
based system.
After the 2008 financial crisis a dramatic banking reform was taken by the
Government, a new minimum capitalization requirement approaches was
released. This leads to the merger or closure of smaller banks that are unable
to meet the new requirements. The approach stated that any commercial bank
that could not meet the requirement by December 31, 2010, would be forced
to merge, have its scope of operations reduced, or have its banking license
Weakness of Vietnam Banking System
Weakness of Vietnam Banking System
Moral Hazard: when the banking system is in trouble, state-owned
commercial banks (SOCBs) appear to be safe havens for deposits because
the public assumes that they are guaranteed by the government.. Because,
SOCBs have no clear incentive to maximise profit, due to the subsidy
mechanism and reward system, which are not performance-based. This moral
hazard or problem weakens the ability state-owned commercial banks to
provide an objective and appropriate assessment of corporate profitability
and to ensure that resources are distributed efficiently

Recover from 2008 financial crisis
Vietnams economic is considered bank-based and also recover slower than other market-
based system. Bank-based economies will have problem in long time period and affect
saving activities as it affect psychosocial of society. Bonds and shares in financial market
should be developed and flown to make recoveries as they have long term maturity. But
bank on the other hand rely on short term deposit. This problem could be easily seen in
Vietnam as people go to banks and withdraw money that makes banks get shortage. Plus, in
bank-based economies, people are not very familiar to financial market; therefore, the capital
within the country is frozen. This make Vietnams economic slowly recover from financial
crisis 2008. In conclusion, even that it is various in recover speed within economies; bank-
based economy in Vietnam is still in slow recover group of economies as well as bank-based
economies in the world compare to market-based ones.