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VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS VAN THU HUONG LIQUIDITY RISK MANAGEMENT IN LIEN VIET COMMERCIAL JOINT STOCK BANK MASTER OF BUSINESS ADMINISTRATION THESIS Hanoi - 2010 TIEU LUAN MOI download : skknchat@gmail.com VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS VAN THU HUONG LIQUIDITY RISK MANAGEMENT IN LIEN VIET COMMERCIAL JOINT STOCK BANK Major: Business Administration Code: 60 34 05 MASTER OF BUSINESS ADMINISTRATION THESIS Supervisors: Dr Chu Thanh MBA Ha Nguyen Hanoi - 2010 TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS ACKNOWLEDGEMENTS i ABSTRACT ii TÓM TẮT iv LIST OF ABBREVIATIONS x LIST OF TABLES xi LIST OF FIGURES .xii INTRODUCTION CHAPTER I: LITERATURE REVIEW 1.1 Commercial bank 1.1.1 Concepts 1.1.2 Products & services provided by commercial banks 1.1.3 Roles of commercial bank in economics 1.2 Risk management in Commercial Bank 1.2.1 Risk in commercial bank .7 1.2.2 Main risks in Commercial Bank 1.2.3 Risk Management in Commercial Bank .8 1.3 Liquidity Risk Management in Commercial Bank 10 1.3.1 Defining liquidity risk 10 1.3.2 Basel and Basel II requirements 12 1.3.3 International Framework for Liquidity Risk Management in Commercial Bank 16 1.3.3.1 Liquidity risk tolerance 18 vi TIEU LUAN MOI download : skknchat@gmail.com 1.3.3.2 Strategy & Policy 18 1.3.3.3 The responsibilities to manage liquidity risk 19 1.3.3.4 Liquidity Risk Management Process 21 1.3.3.5 Contingency Planning 25 1.3.3.6 Internal Audit 27 1.4 Liquidity risk in Vietnam Commercial bank system 27 1.4.1 Some typical events of liquidly risk in Viet Nam before year 2006 27 1.4.2 From the beginning of year 2006 to the end of year 2007: 28 1.4.3 From the beginning of year 2008 – the end of year 2008 29 1.4.4 From the beginning of year 2009 to the ending of year 2009 30 1.4.5 The first six months of year 2010 31 1.4.6 Summarized main reasons for liquidity crunch 32 1.5 State Bank of Vietnam regulations 33 1.6 Practices for liquidity risk management 37 1.6.1 The Hongkong and Shanghai Bank Corporation 37 1.6.2 Asia Commercial Bank 38 CHAPTER 2.1 LIQUIDITY RISK MANAGEMENT IN LIENVIETBANK 41 Overview on LienVietBank 41 2.1.1 Introduction 41 2.1.2 Business Results 44 2.1.3 Organization structure 44 2.2 Liquidity risk in LienVietBank 45 2.2.1 SBV’s regulations on liquidity ratios in the activities of credit institution vii TIEU LUAN MOI download : skknchat@gmail.com 46 2.2.2 Supplies of Liquidity 47 2.2.2.1 Liquid Assets 48 2.2.2.2 Loans repayment 53 2.2.2.3 Total mobilized funds and chartered capital 55 2.2.3 Measurement of Liquidity risk via Gap Analysis 59 2.2.3.1 LienVietBank’s Liquidity Gap report in VND (see table 2-11) 60 2.2.3.2 LienVietBank’s Liquidity Gap report in USD (see table 2-12) 63 2.2.4 Assessment on current status of liquidity risk 65 2.3 General situation of risk management at LienVietBank 67 2.3.1 From establishment to end 2008 67 2.3.2 For the year of 2009 68 2.3.3 From the beginning of 2010 to now 69 2.4 Liquidity risk management in LienVietBank 69 2.4.1 Strategy and Policy 69 2.4.2 The responsibilities to manage liquidity risk 71 2.4.3 Process of liquidity risk management 74 2.4.4 Internal Audit 75 2.4.5 Contingency Plan 75 2.5 Assessment on liquidity risk management in LienVietBank 76 2.5.1 Achievements 77 2.5.2 Drawbacks on the current liquidity risk management in LienVietBank 78 2.5.2.1 Strategy and policy 78 viii TIEU LUAN MOI download : skknchat@gmail.com 2.5.2.2 Organization structure 78 2.5.2.3 Process of liquidity risk management and contingency plan 79 2.5.2.4 Management information system 79 2.5.2.5 Human resource 80 CHAPTER RECOMMENDATIONS AND SOLUTIONS 82 3.1 Some petitions for LienVietBank 82 3.1.1 Building a culture of risk management in LienVietBank 82 3.1.2 Building Liquidity risk strategy and policy 84 3.1.3 Improving organizational structure 87 3.1.4 Building process of liquidity risk management 90 3.1.5 Building contingency plan 97 3.1.6 Improving management information system 99 3.1.7 Improving human resources 100 3.1.8 Action planning 102 3.2 Some petitions for SBV 107 3.3 Some petitions for Government 108 Conclusion 109 REFERENCE 110 Appendix 112 Appendix 113 Appendix 114 Appendix 115 ix TIEU LUAN MOI download : skknchat@gmail.com LIST OF ABBREVIATIONS ACB Asia Commercial Bank ALCO Asset and Liability Committee BOD Board of Directors BOM Board of Management CAR Capital Equity Ratio HR Human Resource LVB LienViet Commercial Joint Stock bank NPLs Non performing loans SBV State Bank of Viet Nam Sacombank Sai Gon Thuong Tin bank TCB Vietnam Technological and Commercial Joint stock bank VCB The Bank for Foreign Trade of Vietnam x TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 1-1: Products & services provided by commercial banks Table 1-2: Summarized the principles of Basel 14 Table 1-3: International Framework for Liquidity Risk Management in Commercial Bank 17 Table 1-4: The differences between Decision No.457 and Circular 15 & 13 36 Table 2-1: Business Results - LienVietBank 44 Table 2-2: Comparison of the liquidity ratios 46 Table 2-3: The ratio of liquid assets to total assets 49 Table 2-4: Comparison of the ratio of liquid assets to total assets 50 Table 2-5: The average ratio of the component to liquid assets 51 Table 2-6: Comparison of the portion of the items out of liquid assets 52 Table 2-7: Some indicators of loans quality 54 Table 2-8: Comparison of loans quality by NPL ratio 55 Table 2-9: Comparison of LDR 55 Table 2-10: Mobilized funds from corporate and individuals of LienVietBank 57 Table 2-11: LienVietBank’s Liquidity Gap report in VND 62 Table 2-12: LienVietBank’s Liquidity Gap report in USD 64 Table 2-13: Summarize assessment on current status of liquidity risk in LienVietBank 65 Table 3-1: Recommendation for Process of liquidity risk management (content) 91 Table 3-2: Recommendation for Contingency plan sample 98 Table 3-3: Recommendation for Action planning 103 xi TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 1- 1: Three pillars of Basel II 13 Figure 2-1: Comparison of the ratio of liquid assets to total assets 50 Figure 2-2: Total mobilized funds of LVB 56 Figure 2-3: The number of accounts of incoming customer deposits 58 Figure 2-4: Rating liquidity risk management in LVB 77 Figure 3-1: Overview on chapter 3……………………………………………… 81 Figure 3-2: Recommendation for Organization structure 87 Figure 3-2: Recommendation for Process of liquidity risk management (procedures) 95 xii TIEU LUAN MOI download : skknchat@gmail.com INTRODUCTION Necessity of the thesis The nature of the bank is making a profit based on business risk In banking activities many types of risk exist (credit risk, liquidity risk, market risk, etc.) In Vietnam, the banking activities are often associated with credit risk However, liquidity risk, the type of risks that can immediately make a bank collapse is less focused, because if the banking activities took place on a normal schedule, the risk was not disclosed Only when a certain event happens to have a negative impact on the bank, then the liquidity risk is exposed, in the worst case, banks have no liquidity, leading to bankruptcy, and affecting the entire banking system In Vietnam, liquidity risk can be a problem just say "old problem" was just a matter of "new problem" Calling it "an old problem" is because any bank manager knows about this kind of risk, understands the importance of it and they are also managing liquidity risk based on experience and traditional methods And calling it "a new problem" is because not many banks in Vietnam really understand it and find ways to reach new approaches to liquidity risk management by international standards Only after the events on the liquidity risk from 2006 through to now did banks begin to explore and consciously implement the management of liquidity risk, according to a scientific and more systematic method The starting point of that process must be derived from the banks which are fully equipped with theoretical knowledge about liquidity risk management LienVietBank was established in April 2008, and in more than years the bank has gained outstanding achievements in business results, but besides that, the issues of risk management are all complex The organizational structure is not stable, risk management personnel frequently change, the bank only cares about TIEU LUAN MOI download : skknchat@gmail.com The first is to recruit new employees to the risk management department should have at least the following requirements:  Be regular training of bank or financing  Experience in risk management or related to risk management for at least one year  Ability of foreign languages, computer science and mathematical statistics The second, LienVietBank need to focus on human resource training:  Sort bank staff into groups, based on the workplace (branches or headquarters), the work being done (front, middle or back office), staff positions (staff or manager) for the classification of risk management training right subjects (e.g credit officers should be trained on credit risk management, customers, treasury officers should be trained on liquidity risk and market risk, PR and marketing staff need to know about reputational risk), and the right level of training (basic or specialize)  LienVietBank need to design specific training and expertise to staffs and managers of risk management depends on the type of risk that the employee in charge  LienVietBank can hire domestic training company reputation (Training and Consultancy Bank joint stock company) to (1) counseling program design, (2) as an intermediary to invite foreign experts on the management of teaching risk LienVietBank may appoint key staff to study the long-term training Besides, LienVietBank need to change perception of the risk management, improved remuneration for management staff on issues of risk assessment, salary and benefits For example, LienVietBank are now in application mode 101 TIEU LUAN MOI download : skknchat@gmail.com cross-evaluation between departments, the office of risk management has always been underestimated due to the subjective perception that the risk management department does not generate benefits not only profit but also hinder business activities 3.1.8 Action planning 102 TIEU LUAN MOI download : skknchat@gmail.com Table 3-3: Recommendation for Action planning 2011 ACTION PLAN 2012 2013 2014 Responsibility Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 I Building a culture of risk management in LVB BOD, ALCO, BOM, Risk Management and All other divisions Organization of seminars, which invite renowned experts on risk management presentation to banks Risk Management Division, PR& Marketing, HR, Officer Training courses on risk management, linking theory with practice Risk Management Division Establishing the system of discipline, sense of compliance with the law and internal regulations BOD, BOM, Legal Dept., Risk Management Division, HR Established consultants unit related to ethical issues in LVB BOD, BOM, HR, Legal Dept II Building liquidity risk strategy, policies, processes The project team members of Risk Management Division Build a project team member by the board on top The project team members of Risk management Division 103 TIEU LUAN MOI download : skknchat@gmail.com Select the appropriate consulting firm BOD, BOM, The project team - members of Risk Management Division Give out a comprehensive analysis of all types of banking risks The project team members of Risk management Division Build a model of integrated risk management The project team members of Risk Management Division Practicing Integrated Risk Management The project team members of Risk Management Division Building liquidity risk strategy and policy The project team members of Risk Management Division Review liquidity risk strategy ALCO-committee Approve the strategy BOD Develop liquidity risk management policy The project team members of Risk management Division 10 Review and Approve BOD, ALCO, BOM 104 TIEU LUAN MOI download : skknchat@gmail.com 11 Building process of liquidity risk management The project team members of Risk management Division 12 Review and Approve BOD, ALCO, BOM 13 Building contingency plan The project team members of Risk management Division 14 Review and Approve BOD, ALCO, BOM III Improving management information system Information technology Division Full re-evaluation of the level of satisfaction of existing bank technology for requirements management Information technology Division, The project team Building specific plans to improve information technology systems Information technology Division, The project team Implement Information technology Division, The project team 105 TIEU LUAN MOI download : skknchat@gmail.com IV Improving organization structure BOD, BOM Establish ALCO committee BOD Restructure Risk Management Division and establish Liquidity Risk Management Dept BOD V Improving human resources BOD, BOM, HR Recruit new employees HR Design specific training HR, The project team Training HR, The project team 106 TIEU LUAN MOI download : skknchat@gmail.com 3.2 Some petitions for SBV Develop legal frame which is both stable and flexible for banking operations Apply monetary policy instruments flexibly in order to minimize the possible shock towards commercial banks The planning and managing of monetary policy instruments must be in accordance with market principles in order to stabilize the currency, to curb inflation and to foster stable economic growth The degree and frequency of the application of policy instruments must be carefully considered in order to enable commercial banks to approach the refinancing sources from SBV, thus SBV plays the role of the ultimate lender effectively Consolidate and develop the money market in terms of size and quality Diversify and standardize debt instruments in the money market, reasonably loosen criteria for market entrance, standardize transaction procedures and modes in order to support commercial banks to improve funding effectiveness and enhance the prevention of liquidity risk Develop non-cash payment, channel the payments to interbank payment system in order to enable SBV of Vietnam to monitor, control and send out the warnings on liquidity risk Strengthen the inspection of credit institutions and develop early warning systems: management quality enhancement, close cooperation between SBV inspector and commercial banks, sufficient investment, reinforcement of forecasting competence and development of early warning systems so as in case of negative changes both domestically and overseas affecting the banking systems commercial banks can actively take precaution and necessary steps, thus reduce risks and damages Tighten the procedure for issuance of banking license; closely monitor banking operations, specifically at small, newly established banks; ensure the business growth to be accordance with current 107 TIEU LUAN MOI download : skknchat@gmail.com regulations on safety standards, reduce systematic risks Promote the activities of derivatives market: derivatives such as forward contracts, currency swaps, and options are effective hedging instruments widely used in global financial markets yet very new and underdeveloped in Vietnam At the current stage, SBV of Vietnam acting as the monetary policy administrator should issue legal documents and guidance to facilitate the operations of this market, create conditions for commercial banks to participate the market and promote the market development Promote the information propaganda, especially when there are changes in monetary policy management, implement public orientation, improve intellectual standards and enhance public trust in the banking 3.3 Some petitions for Government Stabilize the macro-economic environment Control and promptly cope with potential causes of macro-economic instability Monitor and manage closely the overall current account balance, currencycommodity balance; monitor and reduce trade deficit and government overspending 108 TIEU LUAN MOI download : skknchat@gmail.com Conclusion Through research on both theoretical and practical, the thesis has shown the importance of liquidity risk management to ensure sustainability and growth in specific business activities of banks But in LienVietBank, liquidity risk management has not received proper attention and investment of the board of directors Recognizing this, the author has studied in depth theoretical issues, refer to the recommendations of the Basel Committee, review and evaluate basically current situation of liquidity and liquidity risk management in LienVietBank On that basis, the thesis offers recommendations and solutions to improve liquidity risk management, ensuring the feasibility, scientific and consistent with the development orientation of LienVietBank 109 TIEU LUAN MOI download : skknchat@gmail.com REFERENCE S.Rose, Peter, 2001, “Managing commercial banks” Ha Noi, Financial Puplisher S.Rose, Peter and C.Hudgins, Sylvia, (2008), Bank management & Financial Services, McGraw Hill, Singapore Autorite Des Marches Financiers, (2009), Liquidity risk management guideline HM Treasury, (2004), The Orange Book Management of Risk-Principles and Concepts, HMSO, Great Britain Council of Standards Australia, (1999), Risk Management, Standards Association of Australia, Australia State Bank of Pakistan, (2002), Risk Management- Guideline for Commercial Banks & DFIs Basel Committee on Banking Supervision, (2008), Liquidity Risk: Management and Supervisory Challenges, Bank for International Settlements, Switzerland Basel Committee on Banking Supervision, (2008), Principles for sound liquidity risk management and supervision, Bank for International Settlements, Switzerland Bank Supervision Department, (2008), Liquidity Risk Management Guideline, The Central Bank of Barbados 10 Citibank, (1996), Introduction to Risk Management, Training and Development Centers, Asia Pacific 11 HSBC Holding plc, (2008), Capital and Risk Management Pillar Disclosures as at 31 December 2008, HSBC, United Kingdom 12 Reserve Bank of Fiji, (1995), Liquidity risk management requirements for banks, Banking supervision Policy Statement No: 9A 13 Eastern Caribbean Central Bank, (2006), Guidelines on Liquidity risk Management for institutions licensed to conduct banking business under the banking act 110 TIEU LUAN MOI download : skknchat@gmail.com 14 Asia Commercial Bank, Annual Report, 2008, 2009, Financial Statement, June 2010 15 Vietnam Technological and Commercial Joint stock bank, Annual Report, 2008, 2009, Financial Statement, June 2010 16 Sai gon Thuong tin bank, Annual Report, 2008, 2009, Financial Statement, June 2010 17 The Bank for Foreign Trade of Vietnam, Annual Report 2008, 2009, Financial Statement, June 2010 18 Lien Viet Commercial Joint Stock Bank, Financial Statement, 2008, 2009, June 2010 111 TIEU LUAN MOI download : skknchat@gmail.com Appendix Organization Structure of LienVietBank (2008) 112 TIEU LUAN MOI download : skknchat@gmail.com Appendix Organization Structure of LienVietBank (June 2010) 113 TIEU LUAN MOI download : skknchat@gmail.com Appendix LienVietBank Liquidity Profile (GAP report) Date : By : Liquidity Risk Management Dept Currency: Assets Cash Balances with SBV Current Account with other credit institutions Placements with & loans to other credit institutions Investment in Securities Loans and advances to customers Investment in other entities and long term investments Fixed Assets Derivatives and other financial instruments Other Assets Total Assets Liabilities Due to government and borrowing from SBV Deposits and borrowing from other credit institutions Deposits from customers (no fixed term) Term deposits from customers Certificates of deposits and bonds Other liabilities Shareholders' equity Total liabilities and Shareholders' equity GAP Overdue O/N Up to M 1-3 Ms 3-6 Ms 6-12 Ms 12-24 Ms Over Ys Total - GAP Cumulative GAP/Total assets 114 TIEU LUAN MOI download : skknchat@gmail.com Appendix LienVietBank - Daily Liquidity Ratios Date: by Liquidity Risk Management Dept Ratios Value Limit Note Payment reserves ratio Payment reserves /Total Assets Cash position ratio (Cash + Bank balances with other banks)/Total Assets Credit commitments ratio Credit commitments/Total Assets Liquid securities ratio Government securities/Total Assets Loan to Deposit ratio Loan outstanding/Customer deposit Deposit structure ratio Saving deposit/Term deposit Off-balance sheet commitment ratio Off-balance commitment/Total Assets 115 TIEU LUAN MOI download : skknchat@gmail.com ... savings from the people and mobilize saving for investment in industrial project or making loans to individuals The investors borrow from banks to finance the projects Special funds are provided... long-term financing or borrowed too much from the interbank market to provide for adjustment lending had to increase deposit rates to attract funds from corporate and individuals From July to November,... entire banking system In Vietnam, liquidity risk can be a problem just say "old problem" was just a matter of "new problem" Calling it "an old problem" is because any bank manager knows about this