William Chittenden edited and updated the PowerPoint slides for this edition.
AN OVERVIEW OF
BANKING SECTOR
Chapter 1
Key topics
1. Bank definitions
2. Bank regulation

Goals of regulation

Regulators

Rationality of regulation
3. Bank functions
4. Bank services
5. Bank organization
6. Fundamental sources of changes
1. What is a bank?

Definition by functions it serves

Institutions involves in transferring funds from
savers to borrowers (financial intermediation)
& in paying for goods and services (payment
intermediation)

Definition by services it offers to
customers

Accept deposits, make commercial loans,
offer trust services, manage cash, etc.


VN: "Banking activities" are monetary
business activities and banking services, the
regular operation of which is the receipt of
deposits and use of that to extend credits,
provide payment services.
Financial service competitors of banks

Savings associations

Credit unions

Money market funds

Mutual funds (investment companies)

Hedge funds

Security brokers and dealers

Investment banks

Finance companies

Financial holding companies

Life and property-casualty insurance companies
2. Goals of bank regulation

Ensure safety and soundness of banks protecting


State Bank of Vietnam (SBV)

Deposit Insurance of Vietnam (DIV)

Ministry of Finance (MOF)

State Securities Commission of Vietnam (SSC)
Why banks are closely regulated?

Banks are among leading repositories of public’s
savings

Bank’s power of creating money in form of
readily spendable deposits

Banks provide individuals and businesses with
loans for consumption and investment, which
should be equally and adequately supplied.

Government rely upon banks in conducting
economic policies, collecting taxes and
dispensing government payment.
Shortcomings of restrictive bank regulation

May encourage monopoly due to conditional entry

Does not prevent bank failure

Cannot eliminate economic risk


Open market purchases (sales) increase
(decrease) reserves & the money supply

Discount Rate

Decreasing (Increasing) the discount rate
makes bank borrowing less (more)
expensive, which leads to an increase
(decrease) in the money supply

Reserve Requirements

Decreasing (Increasing) reserve requirements
increases (decreases) the money supply
3. Commercial banks and the economy
-Bank functions

Banks are the primary conduit for monetary policy

Banks are the primary source of credit for most
small businesses and many individuals

Banks are the major repository of public savings

Banks are the principal operator of payment
system.
4. Traditional services offered by banks
– Bank services
1. Carrying out currency exchange

making business loans

Discounting commercial notes/making loans to
merchants based on accounts receivable

Making direct loans for purchasing inventories
of goods (short-term) or for constructing new
facilities (long-term)

Be provided by banks and many other financial-
service competitors

Be the core and main revenue-earning service
of many banks
Offering savings deposits

Be the earliest and major source of fund for
making loan

Compose of many types different in maturity,
form of currency, interest, etc.

Be the most stable funding source

Deposit is subject to reserve requirement and
insurance
Safekeeping of valuables

Keep gold and other valuables of customers in
secure vaults in return for fee


Banks manage financial affairs and property of
individuals and firms in return for fee

In property management, banks acts as a
trustee for wills, managing the deceased
customer’s estate,…

In commercial trust department, bank manages
pension plan for businesses and acts as an
agent issuing stocks and bonds.