Lecture 1: Introduction

Bank Management
Dr. Le Anh Tuan

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Lecturer Info

► Le Anh Tuan, Ph.D. in Finance at National

Central University, Taiwan.

► Email: tuan.le@isb.edu.vn

► Page:
https://sites.google.com/view/anhtuanle

► Research Interests: corporate finance,

corporate governance, labor economics,
banking, institutional quality, policy
uncertainty shocks, gender diversity,
bank stability and risk.

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Course Information
► Course requirements:
► In-class participation 5%
► In-class discussion, exercise, homework
► Group Presentation 10%
► Group of 4 – 5 students, minimum = 9 groups per class
► Bank Project 20%
► Group of 4 – 5 students
► Final Presentation (Week 12)
► Mid-term exam (Week 7): 15%
► In-class and close-book exam
► 100% MCQs
► Final Exam 50%
► MCQs
► Short/Long/Essay questions
► Close-book exam

► Students will not be allowed to sit in the final examination if absences

from over 3 sessions.
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Mid-term exam
►50 multiple choice questions (a), 90 mins

►Cover materials from Weeks 1 – 6, including teaching

notes, presentations, exercises, and problems.

►An in-class closed-book exam, no cheat sheet.

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Bank Project
►Work in group of 4-5 students.

►Discuss in details in Week 2 by Industry Guests

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Course Information
►Required reading:
►Lecture notes and presentations.
►Saunders, A, Cornett, MM, & Erhemjamts, O, 2021,
Financial Institutions Management: A Risk
Management Approach, 10th edition, McGraw-Hill,
North Ryde.
►Rose, P, Sylvia, H, 2013, Bank Management &
Financial Services, 9th Edition

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Course Information

► Recommended reading:
► Casu, B, Girardone, C & Molyneux, P 2021, Introduction
to banking, 3rd edition, Pearson Education Limited.

► Saunders, A & Cornett, MM, Erhemjamts, O, Financial

Markets and Institutions, 2022, 8th Edition, McGraw Hill.

► Additional reading materials could be handed out in the

class.

► Journal of Finance, Journal of Financial Economics,

Journal of Banking and Finance, Journal of Financial
Quantitative Analysis, and Journal of Corporate Finance.

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Tentative schedule
►Please refer to Unit Guide

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 Session 1. Introduction

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 Introduction

►Bank introduction

►Why are financial institutions special?

►Commercial banks in Vietnam

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 What is a bank?

► A bank can be defined in terms of:

► The economic functions it performs

► The services it offers its customers

► The legal basis for its existence

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 What is a bank?
► The economic functions it performs: financial intermediary

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 What is a bank?
► The services it offers its customers

► Traditionally, banks offer a great range of financial services

► Checking and debit accounts, credit cards, and savings
plans to loans for businesses, consumers, and
governments

► Bank services are expanding rapidly today

► Investment banking, insurance protection, financial
planning, advice for merging companies, the sale of
risk-management services to businesses and
consumers, and numerous other innovative financial
products.

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 What is a bank?

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 What is a bank?
► The Legal Basis for Banking

► A bank is any business offering deposits subject to

withdrawal on demand and making loans of a commercial
or business nature.

► Congress then defined a bank as any institution that could

qualify for deposit insurance administered by the Federal
Deposit Insurance Corporation (FDIC).

► Banks are heavily regulated by the governments.

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 Bank regulation
► Bank regulation is the process of setting and enforcing rules for
banks and other financial institutions.

► Banking regulation imposes various requirements, restrictions, and

guidelines on banks.
► Highest interest rate
► Reserve ratio
► Special control/supervision/scrutiny

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 Banks under special control in Vietnam

2015

2018 2022
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 SCB case

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 What is a bank?

??? Why are banks heavily

regulated?

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 Why are financial institutions
special?

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 Financial institutions' specialness

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 Financial institutions' specialness

► Without financial institutions:

► excess savings could only:
► be held as cash
► invested in corporate securities.
► the flow of funds is likely to be low.
► little or no monitoring would occur.
► Reduce the attractiveness and increase the risk of investing
in corporate debt and equity.

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 Financial institutions' specialness

► Households might find direct investments in corporate securities

unattractive because of:
► monitoring costs
► liquidity costs
► price risk

► Financial institutions stand between households and the corporate

sector.

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 Financial institutions' specialness
► Financial institutions fulfill two major functions:
► brokerage function:
► agent for the saver by providing information and
transaction services (i.e., buying and selling stocks
and bonds for clients).
► intermediation (asset-transformation) function:
► purchase the financial claims issued by
corporations—equities, bonds, and other debt
claims called primary securities
► selling financial claims to household investors and
other sectors in the form of deposits, insurance
policies, called secondary securities.

► Financial institutions are better able to resolve the costs facing an

individual making a direct investment.
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 Information costs
► Household savers must monitor the actions of firms in a timely
and complete fashion after purchasing securities.

► Failure to monitor exposes investors to agency costs.

► Agency costs: costs relating to the risk that firm owners
and managers use savers' funds in a way that is not in the
best interest of the savers
► Principal (saver) – Agent (borrower) problem

► Agency problems also arise because the agent cannot be

efficiently or costlessly monitored. Unless these problems can be
solved, the agency costs involved can act as a serious problem to
financial contracting with resultant losses.
► The saver (the principal) could be harmed by the actions taken by
the borrowing firm (the agent).
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 Information costs
► To solve this problem, a large number of small savers to place their
funds with a single FI. This FI has:
► has greater incentive for information collection and
monitoring activities=> FI as a delegated monitor
► may develop of new secondary securities to more
effectively monitor

► FIs reduce the degree of information imperfection and asymmetry

between the savers and borrowers in the economy => FI’s Role as
Information Producer

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 Liquidity and price risk
► Financial institutions provide financial claims to household savers
► High liquidity
► Ability to diversify some of existing portfolio risk.
► Diversification benefits available as long as the
intermediary is sufficiently large to gain from
diversification.

► Less diversified institutions carry:

► high default risk
► more highly illiquid claims.

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 Transaction cost
Reduced transaction cost
► Transaction costs relate to the costs of searching for a counterparty to a
financial transaction; the costs of obtaining information about them; the
costs of negotiating the contract; the costs of monitoring the
borrowers; and the eventual enforcements costs should the borrower
not fulfil its commitments

► Economies of scale :
► By increasing the volume of transactions, the cost per unit of
transaction decreases => lower buy–sell spreads

► Economies of scope :
► joint costs of producing two complementary outputs are less
than the combined costs of producing the two outputs
separately.
► A bank might sell both mortgages and life insurance policies that
go with them, therefore creating cross-selling opportunities for
the bank.
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 Maturity intermediation

► Banks’ liabilities (i.e. the funds collected from savers) are mainly
repayable on demand or at relatively short notice. Meanwhile,
banks’ assets (funds lent to borrowers) are normally repayable in
the medium to long term.

► This process is called as “mismatch assets and liabilities”

► Transform short-term maturity funds (e.g. the money in your

current savers account) into long-term assets through contracts (at
least 60 months, 5 years).

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 The transmission of monetary policy

► Liabilities of depository institutions are a significant component

of the money supply that impacts the rate of inflation.
► Play a key role in the transmission of monetary policy from the
central bank to the rest of the economy.

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 Other special services
Payment services
► check-clearing and wire transfer services

Denomination intermediation
► take smaller amounts from savers, group them and allocate it to
bigger projects
► allow small savers to generate higher returns on their portfolios by
accessing to large denomination markets.

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 Breakdown in the provision of financial
services
Problems and risks if services are not provided
► Negative externalities affecting firms and households when
something goes wrong in the FI sector of the economy.
► Bank failures may destroy household savings and at the
same time restrict a firm’s access to credit => lower
investment, production, employment, sales.
► Net regulatory burden: the difference between the private costs
of regulations and the private benefits for the producers of
financial services.
► Regulation attempts to decrease these risks

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 Breakdown in the provision of financial
services
► Major types of regulation seeking to enhance the net social
welfare benefits of institutions' services:
► safety and soundness regulation
► monetary policy regulation
► credit allocation regulation
► consumer protection regulation
► investor protection regulation
► entry and chartering regulation

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 Breakdown in the provision of financial
services
► Safety and soundness regulation
► Layers of protective mechanisms
► First layer of protection:
► encouragement for institutions to diversify assets
► disclosure of large credit exposures
► Second layer of protection:
► capital requirements/ratio
► Third layer of protection:
► deposit insurance
► Fourth layer of protection:
► monitoring and surveillance

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 Breakdown in the provision of financial
services
► Monetary policy regulation
► Central bank only controls outside money.
► the quantity of notes and coin in the economy
► Inside money makes up the majority of the money supply.
► The part of the money supply produced by the private
banking system.
► Regulators commonly impose a minimum level of cash reserves to
be held against deposits.
► In Vietnam, required reserves ratio is 3% for short-term
savings, 1% for non-short-term savings.
► Cash reserves to institutions' net regulatory burden.

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 Breakdown in the provision of financial
services
► Credit allocation regulation
► Supports lending to socially important sectors, such as housing
and farming.
► restrict lending for real estate investment
► Set maximum interest rate
► Restrictions can result in private costs of meeting
regulations

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 Breakdown in the provision of financial
services
► Consumer Protection Regulation
► Investor Protection Regulation
► Entry Regulation

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 Notes
► Review Session 1
► Reading Chapters 5, 6 (Rose)
► Preparing Presentation
► Group 1 - The financial statements of banks and
their principal competitors (Chapter 5 – Rose)
► Group 2 - Measuring and evaluating the
performance of banks and their principal
competitors (Chapter 6 – Rose)

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