11 July 2019 at 4:00 p.m. (CET)
ESCP Europe – Campus République – Room 4310
Essays on Banks in the Emerging and Transition Economy of Vietnam
- Prof. Michael TROEGE,
- Prof. Joerg LAITENBERGER,
Martin Luther University Halle-Wittenberg
- Prof. Frédéric LOBEZ,
Université de Lille
- Prof. Alberta di GIULI,
- Prof. Chan NGUYEN VAN,
Centre Franco vietnamien de Gestion
- Prof. Joël METAIS,
Université Paris Dauphine
In this thesis, we try to identify the efficiency of these different dimensions of bank regulations for the particularly interesting case of Vietnam. After the government’s decision of reform (“doi moi”) in 1986, the country has succeeded in the gradual privatization of different economic sectors, including banking and finance, leading to a more prosperous economy and better living conditions. However, when looking closer at this process, it is possible to identify a number of problems in the financial sector that threaten to slow down economic growth. If Vietnam is to keep growing and catch up with more developed economies, it is essential to understand the root causes of these problems and address them with better financial regulations. We believe that our results will be a step in this direction.
We also think that many of our insights should be transferrable to other emerging and transition countries. More generally, Vietnam can also be used as a laboratory to better understand the economic mechanisms that exist in developed countries.
The first paper of this thesis analyzes the impact of “strategic partners”, which are foreign banks holding a strategic amount of shares in Vietnamese banks. In our study, we integrate the governance factors to better understand the role of strategic partners in improving the performance of Vietnamese banks. In particular, foreign ownership and foreign management are often assumed to improve the efficiency of emerging market banks. The study adds to the existing literature on foreign bank management by distinguishing between strategic and non-strategic investors’ ownership and between the dependence or not of foreign managers on the strategic partner. Evidence shows that only the presence of independent foreign executives has a positive impact on banks, implying conflicts between local shareholders and the strategic partner which hamper efficient technology transfer.
The second article focuses on the erosion of depositor discipline in Vietnam, first during the banking turmoil caused by the global financial crisis 2007-2008, when inflation reached 23.12%, and then during the country’s bad debt crisis in 2011. In these two periods, we observed the State Bank of Vietnam’s intervention in the form of implicit bail-outs. They ensured that no bank would fail, independently of its financial situation. Our tests show that depositor discipline over banks became much weaker after these two episodes. Depositors then only care about deposit interest rates and pay much less attention to how risky the banks are. As a consequence, banks who have to pay high interests to attract deposits will be prone to taking riskier projects in order to cover their costs of capital, which in turn will lead to a higher portion of non-performing loans on their balance sheets.
Finally, we carry out a study of the way bank mergers in Vietnam have been used as a tool to restructure the banking system. Even though since 2007, there has been an explicit bankruptcy law for credit institutions, no bankruptcy has ever occurred. Instead, the State Bank of Vietnam typically forces the weak bank to merge with a stronger institution. We analyze the effect of these mergers on the acquiring banks and observe that they are worse off in terms of profitability and liquidity, evidenced by lower Return on Average Assets (ROAA), Return on Average Equity (ROAE) or Recurring Earning Power, higher Cost to Income Ratios, and higher Net Loans to Deposit ratios. It is worth noting that these banks are worse off not just after the acquisition due to the burden of the weak acquired banks, but that this effect persists for a period of 5-6 years after the acquisition. This finding illustrates that mergers in Vietnam are not an effective method to save failing banks and might actually weaken the entire financial system.
The following sections of the thesis are organized as follows. Chapter 1 presents a literature review on financial systems in transition economies as well as some institutional background for Vietnam’s banking system. Chapters 2, 3, and 4 correspond to the three empirical articles presented above. Chapter 5 concludes the thesis.