CHAP 1. WHAT IS SPECIAL ABOUT BANKS?

- Financial markets: markets on which financial instruments (securities) are traded.

Examples: bond market, stock market -> Financial intermediaries transform the
characteristics (liquidity, risk) of acquired funds.

Depository financial intermediaries: Commercial banks, Mutual funds: Savings

and Loan associations (US), Building societies (UK), Credit unions

Non-depository financial intermediaries: Pension funds, Financial companies,

Insurance companies

Lenders’ requirements Borrowers’ requirements

+ The minimization of risk + Funds at a particular specified date
+ The minimization of cost + Funds for a specific period time
+ Liquidity + Funds at the lowest possible cost

FIs can bridge the gap between borrowers and lenders and reconcile their
incompatible needs and objectives through size – maturity – risk transformation

1) The role of banks

(a) Size transformation: Savers/depositors are willing to lend smaller amounts of
money than the amounts required by borrowers. Banks collect funds from savers in
the form of small-size deposits and repackage them into larger size loans. Banks
perform this function exploiting economies of scale associated with the
lending/borrowing function

(b) Maturity transformation: Banks transform funds lent for short period time into
medium- and longterm loans. Banks’ liabilities are mainly repayable on demand or
at relatively short notice. Banks’ assets: repayable in the medium to long term

- ‘borrowing short and lending long’ may lead to ‘mismatch’ between banks’
assets and liabilities, hence create problems in terms of liquidity risk

(c) Risk transformation: Individual borrowers carry a risk of default (credit risk) - the
risk that they might not be able to repay the amount of money they borrowed. Savers
wish to minimize risk and prefer their money to be safe

• Banks are able to minimize the risk of individual loans by diversifying their
investments, pooling risks, screening and monitoring borrowers and holding capital
and reserves as a buffer for unexpected losses

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2) Functions of a commercial banks

•To change cash for bank deposits and bank deposits for cash

•To transfer bank deposits between individuals and/or companies

•To exchange deposits for bills of exchange, government bonds, the secured and
unsecured promises of trade and industrial units

•To underwrite capital issues

Special features of commercial banks

• Banks are just one of the financial intermediaries. However, banks are the most
popular financial institutions (large proportion)

• The bank has the most extensive relationships with almost all entities in the
economy -> reach many different audiences, diversifying all sectors of the economy.

-> If the bank has problems, it will affect many sectors of the economy. Therefore,
banks are subject to the strictest management by the Central Bank.

• Being the only financial intermediary allowed to open payment accounts and
mobilize deposits, capable of creating money from two activities: receiving deposits,
lending and transferring between banks

INFORMATION ECONOMIES
Transaction costs

Transactions costs relate to the costs of searching for a counterparty to a financial

transaction: obtaining information, negotiating the contract, monitoring the
borrowers, the eventual enforcements costs should the borrower not fulfill its
commitments.

Economies of scale and economies of scope

-> Financial intermediaries reduce transaction, information and search costs mainly
by exploiting economies of scale: increasing the volume of transactions, focusing on
growing in size, training high-quality staff

Economies of scope refer to a situation where the joint costs of producing two
complementary outputs are less than the combined costs of producing the two
outputs separately: C(Q1,Q2) < C(Q1) + C(Q2)

2
Asymmetric information
• not everyone has the same information

• everyone has less than perfect information

• some parties to a transaction have ‘inside’ information which is not made available
to both sides of the transaction.

(1) Adverse selection - lựa chọn đối nghịch: Người đi vay được chọn lại là người không
có khả năng thanh toán được khoản vay => Xảy ra trầm trọng hơn khi lãi suất cho vay
trên thị trường cao hơn.

• Occurs before transaction takes place; Refers to the selection of borrowers who are
more likely to produce an adverse outcome for lender; Gets worse with higher
interest rates

(2) Moral hazard – rủi ro đạo đức: Người đi vay không thực hiện những hành vi mong
muốn trong hợp đồng cho vay

• Occurs after transaction takes place

• Refers to the incentives of borrowers to act ‘immorally’ once loan is approved: quyết
định của người vay thay đổi theo hướng bất lợi cho người cho vay

(3) Principal-agent problem – vấn đề đại lý và người ủy thác

• The agent can choose his or her behavior after the contract has been established

• Managers in control (the agents) may act in their own interest rather than in the
interest of shareholders (the principals) because the managers have less incentive to
maximize profits than shareholders:

(4) Free-rider problem: Người ăn theo

• Free-rider problems occur when people who do not pay for information take
advantage of the information that other people have paid for

Người không bỏ ra chi phí để mua thông tin lại có lợi ích như người bỏ ra chi phí để
mua thông tin. NHTM định giá khoản vay theo điều kiện của người đi vay riêng nên
giảm thiểu được vấn đề người ăn theo trên TTTC.

3
Theories of financial intermediation
Delegated monitoring (ủy quyền giám sát)

• Surplus units delegate the task of monitoring to specialised agents (i.e. banks) due
to the cost of doing by their own. Who is monitoring the monitor?

Information production: Banks take advantages of economies of scale and other

expertise in processing information

Liquidity transformation: Banks can diversify their portfolios of liabilities and assets
of different liquidity features; Lower the risk of default

Consumption smoothing: Banks enable economic agents to smooth consumption by

offering insurance against shocks to a consumer’s consumption path

Commitment mechanisms: Bank deposits have evolved as a necessary device to

discipline bankers

The benefits of financial intermediaries

(1) Benefits to ultimate lenders: Greater liquidity; Less risk is involved; Marketable
securities may be issued; Transaction costs can be reduced; Lending decision is
simplified

(2) Benefits to ultimate borrowers: Long-term loans, Borrowing larger amounts,

Lower transaction costs, Lower interest rates, Loans will be available as required

(3) Benefits to society as a whole: Cause a more efficient utilisation of funds within
an economy, Cause a higher level of borrowing and lending to be undertaken, Cause
an improvement in the availability of funds to higher-risk venture

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CHAP 2. TYPES OF BANKING
Traditional vs Modern banking
Traditional banking Modern banking

Products, services Limited Universal

- Loans, Deposits - Loans, Deposits, Insurance,

Securities/Investment banking,
Pensions, Other financial services

Income resources Net interest income Net interest income

Chênh lệch giữa lãi mà các Fee and commission income

NH đánh lãi suất cho vay
với DN

Competitive Restricted High competition

environment
Trước đây các thị phần
thương mại xem xét ở
phần tiêu thụ của DN (sp
chính của NH).

Strategic focus Assets size and growth Return to shareholders

Tài sản của NHTM càng Creat shareholder value

tăng thì thu nhập tăng, lãi
ròng tăng

Customer focus Supply led Demand led: NH chủ động hơn

trong việc tìm kiếm nguồn khách
hàng cho mình bằng cách tạo ra giá
trị cho khách hàng

Create value for customers: Cung

cấp những dịch vụ thuận tiện nhất,
đáp ứng nhu cầu KH

-> Chủ động tìm kiếm KH bằng cách

tăng giá trị làm hài lòng KH
o

5
Retail or Personal banking
- Retail or personal banking relates to financial services provided to consumers and
is usually small-scale in nature.

- Personal banking services: Payment services, Loans, Mortgages, Insurances,

Pensions, Other services

- Types of banks offer personal banking services: Commercial banks, Savings banks,
Building societies (Hiệp hội xây dựng), Credit unions (Quỹ tín dụng)

Private banking: Dịch vụ ngân hàng cá nhân cho người có thu nhập cao:

• Ngân hàng tư nhân liên quan đến việc cung cấp chất lượng cao của một loạt
các dịch vụ tài chính và liên quan đến các khách hàng giàu có, chủ yếu là các
cá nhân và gia đình họ (HNWIs – các cá nhân có giá trị ròng cao)
• Phân khúc thị trường và cung cấp dịch vụ chất lượng cao tạo thành bản chất
của ngân hàng tư nhân và các thành phần chính bao gồm:

Commercial banks
They are the main providers of credit to the household and corporate sector and
operate the payments mechanism: well- diversified deposit, lending; generally, offer
a full range of financial services

Savings banks
- Similar to commercial banks: huy động khoản tiền tiết kiệm của các cá nhân trong
xã hội; Traditionally have had mutual ownership, being owned by “members” or
“shareholders” who are depositors or borrowers

- In US, Savings and Loans Association (S&Ls) are mainly financed by household
deposits and lend mortgages.

Building societies (hiệp hội xây dựng)

- focus primarily on retail deposit-taking and mortgage lending: cung ứng hoạt động
nhận tiền gửi cá nhân và cho vay thế chấp (xây dựng hoặc mua nhà ở)

- Membership rights: Vote in the election of directors and on resolutions; Attend

Annual General Meeting (AGM)

- Example: Nationwide Building Society: http://www.nationwide.co.uk

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Credit unions (quỹ tín dụng)
• A member owned not-for-profit financial cooperative: hợp tác xã tài chính phi lợi
nhuận (tổ chức nhỏ có tính chất hợp tác xã

• Member deposits are used to offer loans to the members. Board of Directors: group
of volunteers elected by the members

Example: ONE Credit Union (US)

Corporate banking
Provides services to relatively large firms whereas business banking may relate to a
wide range of activity ranging from financial services provided to small start-up firms
as well as larger companies

Investment banks
• financial advisory (M&A advice), underwriting of securities issues, trading and
investing in securities on behalf of the bank or for clients => this activity can include
trading and investments in a wide range of financial instruments including bonds,
equities and derivatives products

• Asset management – managing wholesale investments (such as pension funds for

corporate clients) as well as providing investment advisory services to wealthy
individuals (private banking) and institutions

• Other securities services – brokerage, financing services and securities lending

Universal vs Specialist banks

• trading in financial assets on behalf of their customers and for their own accounts;
helping to create financial assets for their customers and then selling these assets to
others in the market; providing investment advice to personal customers or business
advice to firms on mergers and takeovers fund management; insurance services

Islamic banking
• Islamic banking adheres to Islamic Shariah law that prohibits the payment of riba
or interest => do not charge or pay interest => Depositors earn a return (instead of
interest). Borrowers repay loans based on the profits generated from the project on
which the loan is lent. Example: Musharakah

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8
CHAP 3. BANKING SERVICES
3.1 Deposit services
3.1.1 Deposit functions: safty and customer convenience

3.1.2 Deposit account products:

+ Transaction deposits: non-interest bearing transacaction deposits; interest

bearing transaction deposits (Negotiable order of withdrawal NOW account; Super
NOW accounts; Money market deposit account MMDAs)

+ Savings deposits: Passbook savings deposits; Statement savings deposits

+ Time deposits: Certificate of Deposits, negotiable CDs

Types of CDs:

(1) Bump-Up CDs: a depositor switch to a higher interest rate if market rates rise

(2) Step-Up CDs: permit periodic upward adjustments in the promised interest rate –
điều chỉnh tăng lãi suất định kỳ theo cam kết

(3) Liquid CDs: permit the depositor to withdraw some or all of their funds without a
withdrawal penalty – có thể rút một phần hay toàn bộ số tiền mà không bị phạt

Bank deposits

o Where can the bank raise fund at the lowest possible cost?

o How can managers ensure that the bank has enough deposits to support lending
and other services?

3.1.3 Deposit – related services

• Account access facility

• Check writer services

• Automated teller service

• Point of Sale (POS) facility

• Online banking services

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Interest rates of deposits: the maturity of deposit, the size and risk of the offering
bank; marketing philosophy and goals of the offering banks

Composition of bank deposits: trend toward interest bearing and non-transaction

deposits; the importance of core deposits; changes in the relative importance of
other types of deposits

Core deposit: A stable base of funds that is not highly sensitive to movements in
market interest rates and which tend to remain with the bank

3.1.4 Ownership of deposit accounts

individual account, paybale on death account; joint account with rights of

survivorship => The form of ownership affects who has access to the account and
who receives the proceeds of the account upon an account owner’s death.

3.1.5 Opening a deposit account

• To individual customers: the Account Opening Form; The Identity Proof; Signature
Sample

• To corporate customers: The Account Opening Form with a signature of account

holder, Certified copy of Business License or vendor permits, Certified copy of
decision on appointment of manager and/ or chief accountant, Sample of account
holder signature

3.1.6 Deposit regulations

• Circular No. 23/2014/TT-NHNN

• Circular No.02/2019/TT-NHNN

• Circular No. 48/2018/TT-NNHNN, 05/07/2019

• Circular No. 49/2018/TT-NHNN, 05/07/2019

3.1.7 Pricing deposits

(1) Cost plus profit deposit pricing

Unit price charged the customer for each service = Operating expense per unit of
deposit service + Estimating overhead expense allocated to the deposit function +
Planned profit from each service unit sold

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(2) Marginal cost approach
Many financial analysts would argue that the added cost of bringing new funds into
the bank should be used to price deposit

• Marginal cost = Change in total cost

• Marginal cost rate = Changes in total cost/Additional funds raised

Market penetration deposit pricing: The method of selling deposits that usually
sets low prices and fees initially to encourage customers to open an account and
then raises prices and fees later on.

UPSCALE TARGET PRICING: Bank aggressively goes after high balance, low activity
accounts. Bank uses carefully designed advertising to target established business
owners to managers and other high income households

Factors household & business customer’s choice of a bank for deposit account

Hold checking Hold saving Supply deposits and other

account deposits services:
1. Convenient 1. Convenient 1. Financial health of lending
location location institution
2. Availability of 2. Availability of 2. Whether bank will be a reliable
many other services many other source of credit in the future
3. Low fees and low services 3. Quality of bank officers
minimum balance 3. Low fees and low 4. Whether loans are competitively
4. High deposit minimum balance priced
interest rates 4. High deposit 5. Quality of financial advice given
interest rates 6. Whether cash management and
operations services are provided

(3) Conditional pricing

• Schedule of fees were low if customer stayed above some minimum balance – fees
conditional on how the account was used. Conditional pricing based on one or more
of the following factors:

– The number of transactions passing through the account

– The average balance held in the account during the period

– The maturity of the deposit

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(4) Relationship pricing
• The bank prices deposits according to the number of services purchased or used

• The customer may be granted lower fees or have some fees waived if two or more
services are used

3.2 Payment services

+) Cash transactions – Cash payment system

Deposit cash: Customer => Teller => Cahsier; Withdraw cash

+) Non-cash transactions: A method of paying for goods or services that use does
not involve the exchange of cash.

Ex: cheques, credit transfers, standing orders, direct debtit, bank cards

- Benefits: convenience, 24 hrs 7 day access, speed

- Risks: online access security; cheque security, card access security

Plastic cards: Credit cards, Debit cards, Cheque guarantee cards, Travel and
entertainment cards, Smart cards

3.3 E-Banking
• With online processing feature, electronic banking service provides inquiry and
payment utilities for all customer (individuals, corporates, financial institutions) who
have opened account at the bank: E-money, Remote payments

SMS banking
• Information Inquiry: Account balance and recent transactions; Total balance of
savings accounts, loan accounts; Credit card limit; Credit card balance and payment
schedule

• Urgent services: Disable online payment for credit cards; Disable services from the
offering bank; Notify loss cards and lock card temporarily; Change password for
Phone Banking; Credit cards authorization request

• Other services: Exchange rate inquiry, bank services information, bank promotion
programs inquiry…

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Phone banking: help customer perform banking transactions through phone
channel 24 hour 7 day at Bank Contact Center’s telephone number

Internet banking
• Information Inquiry: Account information and balance inquiry, Account statement
inquiry, Credit and debit cards statement inquiry

• Individuals customer: Fund transfer, Financial services, Billing Payment

• Corporate customer: nationwide fund transfer (transfer limit day set by the bank)

• Register/Request for other services: SMS Banking, Phone Banking, Receiving

monthly account statements via email… and other added services

3.4 Lending services

• The largest single source of bank income depends on the amount of its loans.

• Loans and deposits complement each other, as the amount of loans a bank could
extend will depend largely on its ability to attract and retain large deposits.

• The earning capacity of a bank will be enhanced when it has a large available
loanable fund.

As to purpose Commercial and Industrial; Agricultural; Personal

=> If If the proceeds are diverted by the borrower other than the
purpose applied for, the bank reserves the right to accelerate the
loan’s maturity and call for its payment at once.
As to maturity Short term, medium term, long term
=> Call or demand loans are those which are payable upon call
or demand of the lending institution
As to security Secured; Unsecured (character loan/ clean loan)
=> Unsecured loans may require a co-maker. In some cases even
secured loans may also require a co-maker
As to method Self-liquidating (loans are easier to pay
of payment Non-self-liquidating
As to method Installment; Lump Sum
of release => Sometimes, the installment release is resorted to in order to
control use of the proceeds
As to source Bank credit, Mercantile credit (tín dụng thương mại)
Private credit, Public credit

13
Commercial loans
A debt-based funding arrangement that a business can set up with a financial
institution. The proceeds of commercial loans may be used to fund large capital
expenditures and/or operations that a business may otherwise be unable to afford.

Industrial loans
granted to finance the establishment, rehabilitation, development, expansion
and operation of industrial projects,

enterprises engaged in the purchase, processing and transformation of raw

materials, manufacture goods,

the marketing thereof, including the purchase of industrial machinery,

equipment and implements used or to be used therein, and loans granted to
Participating Financial Institutions (PFIs).

Consumer loans
loan made by the lender to a person which is payable in installment for which a
finance charge is or may be imposed.

This term includes credit transactions pursuant to an open-end-credit plan other

than a seller credit card.

Personal loans
• Personal loans are used for paying immediate needs like tuition fees, debt
consolidation and to some buy gadgets.

A personal loan bears an interest rate agreed upon by two parties (the lender and
the borrower), usually quoted on a monthly basis.

3.5 Other banking services

Investment products; Pensions and insurance services; Financial advisory services;
Foreign exchange services; Safe-keeping facilities

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METHODS USED TO PRICE BUSINESS LOANS
(1) Cost plus loan pricing
Loan Interest Rate = Marginal cost of raising loanable funds to lend to borrower +
Non-fund bank operating costs + Estimated margin to compensate bank for defalt +
Bank’s desired profit margin

(2) Pricing leadership model

Loan Interest Rate = Base or Prime rate + Default risk premium for non-prime
borrowers + Term risk premium for longer term credit

* prime rate: It was the lowest interest rate charged their most credit worthy
customers for short-term working capital loans

* LIBOR (The London Interbank Offer Rate) the rate offered on short-term eurodollar
deposits with maturities ranging from a few days to a few months

(3) Below-prime market pricing

Loan Interest Rate = Interest cost of borrowing in the Money Market + Markup for
risk and profit

(4) Customer Profitability Analysis (CPA)

• Estimate Total Revenues From Loans and Other Services; Estimate Total Expenses
From Providing Net Loanable Funds; Estimate Net Loanable Funds; Estimate Before
Tax Rate of Return By Dividing Revenues Less Expenses By Net Loanable Funds

Net before-tax rate of return to the lender from the whole customer
relationship = (Revenue from loans and other services provided to this
customer – Expenses from providing loans and other services to this
customer)/Net loanable funds used in excess of this customer's deposits

Pricing consumer loans

Loan rate paid by the consumer = Bank’s cost of raising loanable funds + Non-funds
operating cost (including wages and salaries of bank personnel) + Premium for risk
of customer default + Premium for term risk with a longer-term loan + Desired profit
margin

15
16
Chap 4. Central banking
4.1 Introduction to Central Bank
- A central bank can generally be defined as a financial institution responsible for
overseeing the monetary system for a nation, or a group of nations, with the goal of
fostering economic growth without inflation.

Functions of a central bank

1. The central bank controls the issue of notes and coins (legal tender)

2. It has the power to control the amount of credit-money created by banks

3. some control over non-bank financial intermediaries that provide credit

4. use the relevant tools and instruments of monetary policy in order to control credit
expansion; liquidity; and the money supply of an economy.

5. oversee the financial sector in order to prevent crises and act as a lender-of-last-
resort

6. acts as the government’s banker

7. acts as the official agent to the government in dealing with all its gold and foreign
exchange matters

4.2 Monetary Policy

Monetary policy is concerned with the actions taken by central banks to influence the
availability and cost of money and credit by controlling some measure (or measures)
of the money supply and/or the level and structure of interest rates.

- Monetary aggregates: Narrow money (M1), Intermediate money (M2), Broad money
(M3)

17
4.3 Monetary functions of a Central bank
Monetary Policy Objectives: high employment, price stability, stable economic
growth, interest rate stability, financial market stability, stability in foreign exchange
markets

Monetary policy intruments, targets and goals

Tools of Monetary Policy

• Open market operations: Affect the quantity of reserves and the monetary base

• Discount policy: Affect the monetary base

• Reserve requirement: Affect the monetary multiplier, Target of monetary policy:

interest rate

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(1) NHTW Mỹ mua chứng khoán CP đối với các NHTM => NHTM có tiền, Fed có lô
chứng khoán tương đương với khoản tiền đã chuyển cho NHTM

=> Mục đích của NHTW là tăng cung tiền bơm cung dự trữ cho NHTM; NHTM có nhiều
khả năng cho vay và tạo tiền gửi tốt hơn => Cung tiền nền kte tăng

=> Giá của hai khoản vay: Fed Fund Rate và Discount rate. Dr dịch chuyển theo FFr;
nếu Dr > FFr thì NHTW áp giá các khoản vay cho NHTM giá cao nhất

(2) NHTW Mỹ bán chứng khoán CP đối với các NHTM => NHTW thu tiền về còn
NHTM có lô chứng khoán (tăng tài sản)

=> NHTW hút tiền về để siết chặt tiền trong nền kinh tế => Thắt chặt chính sách tiền
tệ => Giảm cung dự trữ trong các NHTM

19
The effect of changes in the discount rate and in reserve requirement

Changes in the Discount Rate: Since 2003 Fed kept discount rate > target for the
federal funds rate. So, discount rate is penalty rate, as banks pay a penalty when
borrow from Fed rather than other banks.

Changes in the Required Reserve Ratio: Fed rarely changes required reserve ratio.
Likely combined w/ offsetting open market operations to keep target federal funds
rate unchanged.

Phần (a) NHTM phải trích lập nhiều dự trữ hơn tại tài khoản tiền gửi của mình tại
NHTW => Phần còn lại NHTM để cho vay và tạo tiền gửi giảm => Cầu về dự trữ của
các NHTM tăng => Lãi suất trên thị trường tiền tệ liên ngân hàng tăng => NHTW làm
ổn định lãi suất Fed Fund Rates = mua/bán chứng khoán CP trên thị trường mở

20
Analyzing The Federal Funds Market

Use graphs for federal funds market to analyze the following two situations:

Cầu dự trữ của NHTM giảm => D1 dịch trái về D2 => Fed sử dụng công cụ bù lại là
bán chứng khoán trên thị trường mở => Cung sang trái => Lãi suất liên ngân hàng
không đổi

21
4 Why do banks need a central banks?
4.4.1 The lender-of-last-resort (LOLR) function
- Banks in need of liquidity may borrow from the Central bank at the discount rate

- While its role has helped avert some bank panics, it may help created moral hazard
costs: Banks know they will be bailed out by the CB if they fail; Encourages them to
take on high-return/high-risk loans; If the loan comes in, they keep all the profits; If
the loan fails, the CB subsidizes the losses

4.4.2 The free bank hypothesis

Main idea: if free trade is a good thing, why not also free banking?

Free banking would entail: Free entry (no need to obtain a bank license); No central
bank: LLR provided by a commercial bank; Commercial banks issue bank notes; If any
form of regulation is necessary, self-regulation is best

Laissez-faire banking: Modern version

- Modern advocates recognise the presence of information problems; however, they
also argue that gov’t intervention can be destabilising:

• LLR and deposit insurance make depositors reckless, encouraging excessive

risk taking

• Financial regulation and supervision unnecessary because of competition

and reputation (‘good’ banks would drive out ‘bad’ banks)

- Historical examples of free banking: US banks choose capital ratios of 40% when
they were unregulated, Scottish banking system flourished during free banking
period, Free banking era in the US

- History suggests that: free banking does not work (consensus view); central banks
are not an imposition on an otherwise well functioning banking system

• Bank of England transformation into a LLR was the result of demand by commercial
banks

22
- How about self-regulation?

• Club of bankers regulates entry and assigns a member to act as overseer and LLR

• Could work in principle but conflicts of interest likely (independent regulatory

agency preferable to most banks)

• Likely to excessively restrict entry (=>rents for existing members), not good for
consumers

• On balance, independent central banks or regulatory agencies better for both banks
and consumers

4.5 The development trend of central banks

• goal independence: the ability of the central bank to set its own goals for monetary
policy (e.g., low inflation, high production levels)

• instrument independence: the ability of the central bank to independently set the
instruments of monetary policy to achieve these goals

23
TRẮC NGHIỆM
1) Step-up CDs ____.

A. Permit periodic upward adjustments in the promised interest rate

B. Allow a Depositor to Switch to a Higher Interest Rate if Market Rates Rise (Bump-Up)

C. Both A & B D. None of the above

2) Core deposits refer to ____.

A. A stable base of funds that is not highly sensitive to movements in market interest
rates and which tend to remain in the bank

B. An amount of money that are remain constant over time

C. An amount of deposit that is highly sensitive to movements in market interest rates.

D. None of the above

3) _____are those which are payable upon call or demand of the lending institution.

A. Call of demand loan B. Unsecured loans

C. Clean loans D. Both B & C

4) Industrial loans granted to finance ___________.

A. the expansion and operation of industrial projects

B. the purchase of industrial equipment

C. Both A and B

D. commerical papers which are issued by firms

5) In cost-plus loan pricing approach, loan interest rate would be calculated by

nonfund bank operating costs, marginal cost of raising loanable funds to lend
borrowers, _____.

A. Estimated margin to compensate for default risk B. Bank’s desired profit margin

C. Prime rate D. A & B

6) In universal banking model, bank ‘s income resources are driven from ____.

A. Net interest income B. interest return charged on deposits

C. Fee and comission income D. A&C

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TỰ LUẬN
1) Explain how commercial banks can lower transaction costs.

Transactions costs relate to the costs of searching for a counterparty to a financial

transaction: obtaining information, negotiating the contract, monitoring the borrowers, the
eventual enforcements costs should the borrower not fulfill its commitments.

Commercial banks can reduce transaction, information and search costs mainly by
exploiting economies of scale:

- increasing the volume of transactions: As transaction volume increases, fixed costs such
as technology, management, security costs... are allocated to more transactions, reducing
the unit cost per transaction. Large transaction volumes help banks make the most of the
processing capacity of technology systems and human resources, reducing marginal costs
for additional transactions.

- focusing on growing in size: As the bank grows in scale through network expansion,
mergers and acquisitions, the number of customers and transactions will increase
significantly. Large scale allows banks to save on fixed costs, invest in technology more
effectively, and exploit professional human resources, thereby reducing unit costs.

- training high-quality staff: High-quality employees help improve transaction processing

efficiency, minimize the risk of errors and repair costs, and reduce costs per transaction.
Personnel specialization also helps save costs on training, searching and processing
information for each new type of transaction.

2) Explain rationale underlying banking regulations

- Special characteristics of banks:

• Politically sensitive and largely rely on public confidence

• The nature of their activities: illiquid assets, short-term liabilities

• The interconnectedness of banks

- Regulation is needed to ensure consumers’ confidence in the financial sector

• To ensure systemic stability

• To provide smaller, retail clients with protection

• To protect consumers against monopolistic exploitation

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 3) Calculate marginal cost

Suppose VCB expects to raise $25 million in new deposits by offerings its depositors and
interest rate of 7 percent. Manager estimates that if the bank offers a 7.50 percent interest
rate, it can raise $50 million in new deposit money. At 8 percent $ 75 million is expected
to flow in, while a posted deposit rate of 8.5 percent will bring in a projected$ 100 million.
Finally, if the bank promises an estimated 9 percent yield, manager projects that $ 125
million in new funds will appear in the form of new deposits. The manager believes it can
invest the new deposit money at a yield of 10 percent.

Calculate:

a. Total interest cost of new funds raised

b.Marginal cost of new deposit money

c. Marginal cost rate of additional funds

d. Difference between revenue and marginal cost rate

e. Total profits earned after interest cost

f. The volume of deposits the bank tries to attract => Họ cần tăng thêm bao nhiêu đơn vị
tiền gửi với lãi suất bao nhiêu để maximize profit? (ý nghĩa quan trọng cuối cùng)

Expected Interest Total Marginal cost (b) Marginal Marginal Different in Total profit
volume rates on interest cost rate revenue marginal earned (after
of new deposits cost on (c) rate revenue and interest cost) (e)
deposits deposits marginal cost
(a) rate (d)
mUSD % mUSD mUSD % % % mUSD
25 7% 25*7% = =1.75 (a) 7% 10% 10% - 7% = 3% 25%*10% -
1.75 25%*7% = 0.75
50 7.5% 3.75 3.75 – 1.75 = 2 8% 10% 10% - 8% = 2% 1.25
75 8% 6 6 – 3.75 = 2.25 9% 10% 10% - 9% = 1% 1.50
100 8.5% 8.5 8.5 – 6 = 2.5 10% 10% 10% - 10% = 0% 1.50 (max)
125 75
9% 11.25 11.25 – 8.5 = 2.75 11% 10% 10% - 11% = -1% 1.25

Lợi nhuận = Doanh thu – Chi phí = 25*0.1 – 25*0.07

Doanh thu = lượng tiền gửi tăng thêm * revenue

Chi phí = lượng tiền gửi tăng thêm * tỷ lệ chi phí cận biên

f) Các nhà quản trị ngân hàng thương mại sẽ chọn áp đặt mức lãi suất cao hơn 8.5% để hút
100 triệu đô => total profit earned như nhau, nhưng tiếp cận được nhiều vốn hơn, nhiều
tệp khách hàng hơn

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