COSTOS ESTIMADOS

The degree of government involvement in banking regulation is still the sub- ject of vigorous debate among academics. However, there is broad agreement that liberalization of financial markets without adequate banking regulation will most likely lead to macroeconomic instability. Unregulated financial mar- kets are dangerous, as events in Russia and some Asian countries have indi- cated (PILL and PRADHAN 1997; STIGLITZ 2002). Safeguarding financial mar-

kets and institutions from shocks that might pose a systemic risk is the prime objective of financial regulation. The failure of one non-bank firm often im- proves business prospects for the remaining firms in the industry. In contrast, a shock that seriously damages one bank can spread to other banks (HERRING and

SANTOMERO 2000).

One regulatory measure often recommended by academics to encourage develop- ment of the banking system is the adoption of a deposit insurance scheme (RIEDEL 2000). In Vietnam, the Deposit Insurance Agency began operating in

2000 (WORLD BANK 2002a). However, the implementation of a deposit insurance

scheme is a matter of controversy among academics. BARTH et al. (2002) found a strong link between the generosity of the deposit insurance system and bank sector fragility. This result is consistent with the view that deposit insurance

may not only substantially aggravate moral hazard but can also produce delete- rious effects on bank fragility. The results suggest that the reverse effects from deposit insurance overwhelm any stabilizing effects that these safety nets may also have.22 DEMIRGÜC-KUNT and KANE (2001) showed that where effective

bank regulation is lacking (as it is in Vietnam), deposit insurance can do more harm than good.23 In general, if the government is too willing to help insolvent banks, this will create the impression that it will continue to do likewise in the future (SCHRIEDER and HEIDHUES 1998). It is not clear, therefore, that imple-

mentation of a deposit insurance scheme in Vietnam will have beneficial effects on bank development (KOVSTED et al. 2003).

Vietnam is still a cash economy, with cash accounting for about 50% of the M3 money supply.24 This may reflect a popular reluctance to use the banking system. Experience elsewhere has shown that a sound banking system in which business and ordinary people have confidence is an essential mechanism for mobilizing domestic savings for productive investment (UNDP 1999; WOLFF 1999). One of the major tasks ahead is to strengthen popular faith in the

financial system. The very low degree of financial deepening, as well as the prevalence of US dollar holdings in Vietnam, indicate that the degree of information opaqueness is well below the intermediate range. The govern- ment therefore needs to promote regulations relating to the dissemination of financial information. This would include laws relating to the regular issuance, on the part of publicly traded companies, of financial information on a stan- dardized basis using internationally accepted accounting and auditing practices (LEUNG and RIEDEL 2000). Accounting and auditing standards in Vietnam,

which differ from international practice, are another element that undermines confidence in the banking system (UNDP 1999). Up to now, SBVN banking supervisors fail to act in line with international standards because they lack

22 _{Banks do have a reason for taking on more risk than they should. The reason, paradoxi-}

cally, is the safety net that governments put in place to prevent bank failures. By trying to make banks safer, governments give banks the means and motive to behave recklessly (THE ECONOMIST 2003).

23 _{The biggest problem with Vietnamese regulations is the lack of enforcement. To effec-}

tively implement the banking laws and regulations, a much stricter and standardized penalty system must be established (TAM 2000).

the power and competence to change bank accountancy standards accordingly.25 Providing greater transparency and reliable information is essential to strengthen the faith of the population in the financial system.

Rural finance in Vietnam basically means microfinance. So far, there is no spe- cial law regulating microfinance activity in Vietnam. MCGUIRE et al. (1998) state that a number of prudential banking standards applied to normal banks may not be appropriate for MFIs. This was confirmed by an SBVN official, who ac- knowledged that the existing regulations are too strict and narrow for the micro- finance sector (NHGIA 2001). Governments should ensure that capital require-

ments for establishing financial intermediaries are realistic for small institutes operating at the local level, and that there are no other restrictions affecting the establishment of such entities (MCGUIRE et al. 1998). Like all types of regula- tion, banking regulation can do more harm than good if it is not well designed. The policy of more restrictive banking regulation impedes the most promising initiatives in microfinance (SCHMIDT 1999). In general, the question is not so

much whether or not MFIs should be included in formal banking regulation, but rather when and how (CHRISTEN and ROSENBERG 2000). There is thus room for

improvement and, as mentioned before, particularly as regards reducing market entry barriers for MFIs to promote competition in the rural financial market. However, it is very unlikely that any viable financial intermediary will emerge as long as the government continues to supply highly subsidized loans to the rural population through the VBSP.