On regulatory barriers to trade in banking services

Abstract

This thesis examines whether further trade reforms are necessary and worth undertaking in Vietnam's banking sector in response to recent backward regulatory steps - the reimposed interest rate ceilings and the increased minimum capital requirements. The thesis also explores whether trade reform would be a better economic stimulus policy as compared to the interest rate subsidy, which has been one of the most important components of the economic stimulus package that Vietnam has introduced in order to cope with the 2008 global financial crisis. For the purpose of the research, a panel data set of trade restrictiveness indexes is constructed for 36 countries for the period 1997-2006 using the principal component analysis, in order to compare the degree of restrictiveness in banking services between Vietnam and other countries. This panel data set, together with the Bankscope data for 7,314 banks in 28 countries for the period 1997-2006, is used to measure the cost and price markup impacts of trade barriers. These first-round impacts are estimated via structural, functional forms of cost and profit using the fixed-effects estimation. The first-round impacts are then incorporated into a general equilibrium model of Vietnam using GTAP 7 Database in order to evaluate the economy-wide effects of trade liberalisation in Vietnam's banking sector. In contrast to the government's current perception, the Vietnamese banking sector is highly restricted, thus requiring further trade reforms in this sector. In the period 1997-2006, from among 36 countries, Vietnam was found to be among the top-ten most restrictive countries in banking services. Three main residual areas of required reforms exist in Vietnam's banking sector, namely: (i) reducing the high participation of the government in the banking sector; (ii) easing restrictions on new entry, foreign participation and banking operations; and (iii) reversing two recent backward steps - the re-imposed interest rate ceilings and the increased minimum capital requirements. Further trade reforms in Vietnam's banking sector are worth undertaking because of their non-trivial, positive effects on the economy. Trade reforms in the banking sector not only promote real GDP, but also bring about a significant gain in economic welfare. Trade reforms benefit both domestic and foreign banks, in contrast to the government's current sceptical perceptions of the crowding-out effects of foreign banks on the operation of domestic banks. So Vietnam should broaden its scope of reform to both domestic and foreign banks. Among the possible trade reforms, removing restrictions on banking operations will be the most beneficial, so should be given priority over the other possible trade reforms. Further trade reforms in Vietnam's banking sector are necessary because the damaging effects of recent backward steps not only make resource allocation less efficient, but also escalate real costs in the financial sector, leading to a fall in real GDP and a loss in economic welfare. In both the short and long run, trade reform in Vietnam's banking sector would be a better economic stimulus policy compared to the interest rate subsidy. This is because, first, the combined trade reforms generate a higher real GDP gain and better labour market outcomes than the interest rate subsidy, regardless of whether this subsidy is funded or not. Second, trade reforms are less costly than the subsidy. The subsidy rewards foreign-invested firms more than domestic ones, leading to an increase in net international interest and rent payments and thus a non-trivial welfare loss to the whole economy. In other words, the subsidy is not a "free lunch". This finding implies that for a long-run economic growth aim, Vietnam should replace the subsidy with trade reforms in Vietnam's banking sector. Show more