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CHAPTER INTRODUCTION ON THE RESEARCH 1.1 The essentiality of the thesis As the financial intermediary organizations, the commercial banking system supports the rotation, allocation and effective use of financial resources in the economy, thereby facilitating sustainable economic growth In the other hand, the commercial banking system somehow brings severe vunerability to the economy A commercial bank is an organization having money business and has strict relationships with many different areas and entities in the economy, so its operations are exposed to a lot of risks among which liquidity risk is considered as one of the core risks in commercial banks; not only increase costs and reduce the Bank's net income as interest risk or market risk caused, liquidity risk at high levels may cause loss of bank liquidity, leading to bankruptcy, impacting to the entire banking system The Depression of capitalism, 1929-1933 period, economic crisis in East Asia in 1997 or the great monetary-financial crisis from 2008 has caused large damages for the global finance as well as Vietnamese economy, the main reason is from liquidity risk The State Bank of Vietnam (SBV) was awared of that, always enhancing the management, however, liquidity risk management in Vietnam reveals weaknesses Therefore, to find a solution to the issue of liquidity risk management enhancement is biggest consideration and urgent task at present, because it not only ensures safety and stability in each bank’s operation; helping the bank to stand steadily in the process of integration, but also open the door for the banking system, the financial system as well as the entire Vietnam economy towards sustainable development The subject: "Liquidity risk management in commercial banks of The State Bank of Vietnam" is post graduate’s selection to study to meet current urgent demands in the field of banking and finance 1.2 Research objectives The purpose of the thesis is to make a systematic and comprehensive research on the liquidity risk management methods of the central bank for the commercial banking system (i) systemizing the basis on the liquidity risk of the commercial banks, liquidity risk management of the central bank for the commercial bankings The problems will be approached based on the principles of the Basel II Principals (ii) making research on the experience, liquidity risk management models of several central bank worldwide, the factors of the model and the ability to apply in "the scene" of monetary policies in Vietnam, thereby drawing some lessons for Vietnam (iii) clarifying the status of liquidity risk management system of commercial banking system of SBV, proposing solutions and recommendations 1.3 Scope and objects of research (i) the scope of the thesis is liquidity risk management of SBV and some commercial banks 15 commercial banks with large market share in Vietnam commercial banking system (according to figures up to the year 2015) in the period from the year 2011-2015 (ii) the research object of the thesis is the following issues: -the basis of the central banks’ monetary policies and of liquidity risk management of the central bank for commercial banks.NHTW and about RRTK of NHTW management for URBAN COMMERCIAL -experience in managing liquidity risk of central banks in the world -the situation of liquidity risk in Vietnamese commercial banking system, the status of liquidity risk management of SBV 1.4 Overview of the research 1.4.1 Overseas research The most classical theory of liquidity risk is given by Thornton (1802) and Bagehot (1873): liquidity risk is resulted from an amount of money requested to be withdrawn out of the banking system from the depositors and the banks not have the ability to pay for the amount of money In order to well manage liquidity risk, the bank should hold more "good asset" Goodhart (1999) stressed: the standard of the lenders is a condition to minimize risk, is the way to have the "good asset" Therefore it is necessary to establish and measure these standards to minimize the risk of liquidity in the Bank The banks desiring to well manage liquidity risk need to have a clear mechanism to identify, measure, manage and mitigate risks liquidity (Comptroller of the Currency 2001) Tobin (1956) and Niehans (1978) studied some more liquidity characteristics of assets and savings They built the model evaluating liquidity risk and used the fluctuation in property values of commercial banks as the basis of liquidity risk, and equity is the only solution to prepare for the loss caused by liquidity risk and loss of a race to withdraw deposits However, the authors also highlight the downside of the model is the value property of the commercial banks fluctuates randomly and is quite dynamic therefore it is less correlated with the model The study of Aspachs (2005) point out the factors that decide the policies of liquidity of banks in the UK, the relationship between macroeconomic policies and economic cycles impact liquidity support level Research of Aspachs and ctg (2005), indicating the relationship between the banks to each other on interbank markets, interbank interest rates and the influence of the risks and the possibility of the account of the Bank In 2011, Vodová 's research has identified the determinants of liquidity of commercial banks in Czech, shows the positive relationship among bank liquidity and bank capital adequacy ratio, the percentage of bad debt and lending interest rates on inter-bank trading market, the inverse relationship of the rate of inflation, business cycles and financial crisis with liquidity Deep and Schaefer (2004) have constructed a measure of liquidity by determining the liquidity gap for evaluation of liquidity risk Also in the year 2011, the study of Vodová was launched but the author only focus on a single country is Czech, not of interest to many countries of Bonfim and Kim The purpose of this study is that identifying the determinants of liquidity of commercial banks in the Czech Republic The data cover the period from 2001 to 2009 The results of the regression analysis of the data shows that there is a positive relationship between bank liquidity and capital adequacy ratios, the percentage of bad debt and lending interest rates on interbank trading market At the same time, the author has found an inverse relationship of the rate of inflation, business cycles and financial crisis with liquidity Conclusion given that the banks are not willing to create more liquidity So the need of intervention from the central bank by monetary policy tools to ensure the liquidity for the commercial banks Cũng năm 2011, nghiên cứu Vodová đưa tác giả tập trung vào quốc gia Séc, không quan tâm đến nhiều quốc gia Bonfim Kim Mục đích nghiên cứu qua xác định yếu tố định tính khoản ngân hàng thương mại Séc Các liệu bao gồm giai đoạn từ 2001 đến 2009 Các kết phân tích hồi quy liệu cho thấy có mối quan hệ đồng biến khoản ngân hàng tỷ lệ an toàn vốn, tỷ lệ nợ xấu lãi suất cho vay thị trường giao dịch liên ngân hàng Đồng thời, tác giả tìm thấy mối quan hệ nghịch biến tỷ lệ lạm phát, chu kỳ kinh doanh khủng hoảng tài với tính khoản Kết luận đưa ngân hàng không sẵn sàng để tạo nhiều khoản Do cần có can thiệp từ NHTW công cụ CSTT để đảm bảo khả khoản cho NHTM Discussion on liquidity risk management for commercial bank posted by Barth (2003) towards main schools: According to Hagen and Ho (2003), when liquidity in the commercial bank is ascending, the central bank have to directly intervene in the money market Thus, according to this author, the money market pressure indicator may be an effective indicator for the central bank to measure liquidity risk of each commercial bank (i) the school supporting for having a unified administration: creating a safety and healthy, reducing the differences in management, solving the internal contradictions, creating flexibility in operations management The school proved effective in management as well as allocation of resources (ii) the school against having a unified administration: many agencies can create different lessons for each other, however, management cost is higher The concentration of power in one agency can cause the risk of autocratic (ii) Trường phái chống lại quan quản lý hợp nhất: nhiều quan khác tạo nên học cho nhau, nhiên, chi phí quản lý lại cao Sự tập trung quyền vào quan gây rủi ro chuyên quyền 1.4.2 Domestic research There are quite a lot of the domestic research on the liquidity of the bank and the bank's liquidity risk management The subject of the PhD level science Ngoc Hung (2007), the doctoral thesis of Nguyen Thi Minh Hue (2010), Nguyen Duc Trung (2012) mainly stop in the study of some indicators of the liquidity of the commercial banking system and reviews the carrying capacity to liquidity risk; systemizing the acivities of monitoring, analysis, reviews and give some solutions to the risk management for the banking system; or making interpretation of the problem of ensuring the safety of operations based on the international standard, but have not put the issue of liquidity risk management in the context of the implementation of monetary policies from the central bank Doctoral thesis of Nguyen Tuong Van (2013) has taken the arguments about capital availability, its role in liquidity risk management or of Le Van Hai (2013) studies the impact mechanism of monetary policy tools to liquidity risk but does not review on the connection between the tools The studies related to the central bank’s liquidity risk management of commercial banks as the article by Nguyen Duc CUONG (2006), was referring to the application of the principles of Basel in liquidity risk management but could not rely on the voluntarily of the commercial banks, the central bank should have specific sanctions and orientation to intervene Posts by Huỳnh Thị Rosemary (2011) emphasized the introduction of the requirements for the work report of the commercial banks to the central bank 1.4.3 The differences between this research and previous studies Using the new standards on liquidity risk management the Basel II to approach to the model, building appropriate liquidity risk management methods The research of the central bank’s liquidity risk management of commercial banking system was implemented on all commercial banks rather than particular commercial bank, at the same time the thesis reach the liquidity risk management in the aspect of the central bank, in the context of monetary policy operating of the central bank Research by Etienne Bordeleau and Christopher Graham (2010) about the impact of liquidity to the profitability of the bank indicates that in the US and Canada, bank profits will be significantly improved when it has strong liquidity, holds a lot of liquidity assets But to a certain degree, owning more liquidity assets will reduce the profitability of the Bank, it makes to the fact that banks "are not ready to create more liquidity." 1.5 research methods Methods of descriptive statistics and regression analysis: - Analysis method: quantitative analysis, qualitative analysis, aggregate analysis, using models based on hypothetical situations, thereby giving the reviews, the conclusions, these scientific recommendations, consistent with the theory and practice of liquidity risk management for commercial banks in Vietnam - Comparative method: clarify the same and differencies of the research issues through the years, the countries from which giving the comment, review and propose the solution to SBV’s liquidity risk management for commercial banks in Vietnam -Prediction methods: giving the model predictions, forecasts and analysis of the trend of fluctuations of the independent variables, which predicts the trend of the dependent variable which is liquidity risk management of commercial banks in the future -Method of obtaining expert opinion: using questionnaires and interviews expert for the commercial banks’ officer, depositors , setting of scientific issues for the thesis 1.6 The contribution of the thesis In terms of theoricality: highlight the importance of the liquidity risk management at banks in many countries Through which to draw lessons from the commercial banking system worldwide in liquidity risk management Study on the standards of the Basel II, especially the standard on the liquidity risk, consider the feasibility to apply in Vietnam In terms of practicality: review the situation of liquidity risk management at commercial banks, thereby giving the warnings, recommendations, and requirements to ensure the level of safety in the operation of the banking system, put out the liquidity risk approach starts from the profit of the bank , which can increase the sense, the attitude of the banks towards liquidity risk The post graduate will propose solutions to improve the management of SBV liquidity risk management activities for the SBV to commercial banking system in the direction of ensuring the safety of the banking system in general and commercial bank in particular CHAPTER GENERAL PRINCIPLES ON LIQUIDITY RISK MANAGEMENT AT COM.MERCIAL BANKS OF THE CENTRAL BANKS 2.1 Liquidity risk of commercial bank 2.1.1 The views about the liquidity risks at commercial banks Under the angle of assets: "the liquidity of an asset is the ability to convert it into money over time and the cost of the conversion was the lowest A property is considered good liquidity when it meets the following criteria: available to buy or sell, available market to transact, available time to transaction, reasonable price" Under the commercial bank angle: "liquidity is the ability of commercial bank to fully and timely meet the financial obligations incurred in the course of the trading activities as paying deposits, loans, payment and other financial transactions" Due to having to make payments primarily in cash, the liquidity of a commercial bank also primarily related to the cash flow The fail or not complete payment obligations will lead the bank to a shortage of liquidity or inability Liquidity supply is the amount of money available or possible in the short time to NH used Liquidity demand reflects cash withdrawal demand from NH in different times Derived from the liquidity supply and demand, Net Liquidity Position (NLP-Net Liquidity Position) or also called the liquidity gap of commercial bank is calculated by: liquidity supply - Liquidity demand If NLP > then the commercial bank has surplus in liquidity If NLP < then the commercial bank has deficit in liquidity Liquidity risks at commercial banks is the kind of risk when commercial banks cannot afford the full amount of the money supply for immediate payment demand; or supply enough but with high costs Liquidity risks at commercial banks are divided into four groups as follows: • liquidity risk from cash withdrawal before maturity: When individuals, organizations place money at commercial banks withdraw money at any time during the time of deposit instead of waiting till the maturity, customers withdraw large amount in advance This activity may cause liquidity risk to commercial banks • term liquidity risk: When the loan, mortgage loans due but are not paid to the bank under a credit contract was signed before for any reason from the borrower This can cause difficulties for the structure of asset-capital of banks and thereby also caused liquidity risk to the Bank • funding liquidity risk: If an asset was not reasonably funded, subsequent funding may have to be performed in adverse conditions in terms of cost, meaning the higher spreads The Bank may not have enough capital to meet the needs of capital available • liquidity risk the market: The market conditions changes adversely could reduce the ability to convert assets into cash or the ability to perform the necessary funding 2.1.2 Causes of liquidity risk at commercial banks Liquidity risk may come from the liabilities or assets, or from the offbalance sheet operations of commercial banks (Valla and Escorbiac, 2006) - pursuing short term profit: the pursuit of short-term profit goals that increased lending, investment - lending boom and property price slump: large loans and uneffective lending lead to market bubbles - The tenor mismatch between asset and liabilities: The capital sources are often short term, while funding for loans and investments are over the long term, cause liquidity surplus or deficit -the special nature of the money business industry requires commercial banks to be always ready to meet liquidity requirements: this is an inherent characteristic of monetary business Any problem about liquidity can cause anxiety in the public mentality -some other causes: • Systematic links between among commercial banks to ensure the security of payment, the differences between the interest rates among banks could lead to money withdrawals in the commercial banks leading to liquidity risks for them • liquidity management in the commercial banks is not good, weakness from the liabilities - assets management of commercial banks and the lack of effective management tools will also cause liquidity risk for commercial banks, • causes derived from the customer, the customer's sensitivity to the change of interest rates, of the credit regulations, collateral and other tools make difficulties to effective regulation on the bank liquidity • the nation's economic cycle, seasonality of the economic cycle may cause unexpected changes in liquidity supply-demand, putting commercial banks to face liquidity risk • risks from unstable liquid asset, the bank's credit ratings decrease may reduce asset liquidity, bring liquidity risk to the system There are many other causes, depending on the political characteristics in each period, in each countries and each bank 2.1.3 The influence of liquidity risk of commercial banks - Influence the activity of individual banks and the banking system Firstly, the collapse of a commercial bank may affect the entire banking system, Secondly, liquidity – profitability trade off Good liquidity, low profit or high profit, low liquidity are detrimental for bank operations Thirdly, the opportunity cost of dealing with liquidity risk Fourthly, liquidity difficulties may hamper the business, lead the bank to be dominated by other organizations, or to have to change business strategy, - Influence the economy Illiquidity caused by liquidity risk not only affect commercial banks themselves but also affect the whole commercial banking system, affect the financial system, to the economy and national politics 2.2 The central bank’s liquidity risk management of commercial banks 2.2.1 The central bank and the function of the central bank The central bank has function of management on monetary circulation, credit and banking system's activity in a country, including two models: dependent and independently from the Government The function of the central bank: the purpose of the activity of the NHTW is not for profit but stablizing monetary, credit and banking activities, from which to facilitate economic development The function of National Bank: monopoly on the currency issue, the bank of the banks, the Government's Bank Macro management function of money, credit and the banking activity: construct, enforce national monetary policies, inspect and supervise banking system activities 2.2.2 The central bank’s management on commercial bank liquidity risk The central bank’s management on commercial bank liquidity risk is the process of identification, measurement, control and funding to prevent liquidity risk when a commercial bank could not meet timely and fully the liquidity demand from clients The relationship between liquidity risk and the other risks in commercial banks: have strict relationships with each other, this risk is the cause of the another risks In credit operations, high bad debt rate, low debt recovery capabilities will lead to liquidity risk When liquidity risk happens, the bank have to borrow money in the market, mobilize capital with a higher interest rate, leading to capital risk and interest rate Operational risks that occur by human causes, the incomplete or bad operation in the processes, systems, external events again cause credit risk and foreign exchange risk, The need to have the tight management of liquidity risk from the central bank to commercial banks: commercial bank is intermediary moving and rotating economic capital, holding public savings, are strictly regulated by the ability to "make money" , because they provide personal and business loans, consumer financing or investment funding Content of the central bank’s management on commercial bank liquidity risk: Based on 25 Basel 2, the central bank’s management on commercial bank liquidity risk includes: - ability to manage liquidity risk - assess the capital adequacy open market, influencing commercial bank reserves, impact credit provision - assess risk related assets, provisions and reserves Credit interest rate: changes in provisions on discount limit, discount rate and the rediscount conditions will affect the borrowing from the central bank in two aspects: volume and price Credit limit tool: is the maximum level that the central bank forced commercial banks to comply when granting credit for the economy The content of management are expressed in the form of the steps: Indentify risk Measure risk Determine tool to intervene Chart 1.1: Liquidity risk management procedures Sources: Basel committee on Banking Supervison (July 2005) Identify liquidity risk: to provide the central bank information on risk trends on the market without its intervention, help the central bank prepare monetary policy solutions to intervene, to ensure the safety and healthy for credit institutions Identify through some evidence about the liquidity adequacy ratio, interest rate for borrowing, loan interest, discount rate, rediscount rate, maturity structure, Measure liquidity of commercial banking system A number of factors impact on the liquidity risk: the level of volatility of the deposits, the level of the dependence on the risk-sensitive capital, availability of liquid assets, the accessibility to the money market, the effectiveness of asset and liabilities management policy and strategy, the compliance with the internal liquidity policy in banks, the content, the scale and the ability to use of expected credit commitments The post graduate would like to clarify: (i) the theoretical explanations of risk liquidity; (ii) some measure of liquidity for commercial bank, (iii) the method of the central bank’s liquidity risk management Liquidity risk measurement of commercial bank: LLSS ratio (long-term loans/short-term mobilization)-basic measurement of the liquidity of commercial bank long-term loans LLSS = short-term mobilization The more LLSS ratio declines, the more secure the bank is LLSS ratio also identified Bank profits, the higher LLSS means higher profits Define monetary policy tool to intervene in the commercial bank liquidity risk Required reserve ratio: it is the ratio between the amount of liquidity needed disabled on total deposits mobilised in order to adjust liquidity (or lender) of the commercial bank Increase the required reserve ratio increase, decrease the amount of currency in circulation (tightening monetary policy) Decrease the required reserve ratio, increase lending capacity (loosening monetary policy) Open market operations tools: the central bank buy, sell short-term valuable papers (Treasury bills, centrak bank notes, deposit certificates, ) on the 2.3 Factors affecting the central bank’s liquidity risk management on commercial banks 2.3.1 The objective factors - Macro-economic environment: awaring the economic factors, culturalsocial factors, policies of the State, the development of science-technology , the central bank identify opportunities, challenges, forecast future trends, help commercial banks to release appropriate solutions and strategies for the liquidity risk - Investment environment: the change of the capital flow will affect the operation of the liquidity risk management of commercial banks - Awareness of the commercial banks: positive coordination from two sides the central bank and commercial banks 2.3.2 The subjective factor - The system of monetary policy goal: giving priority to interest or to regulate the volume of money supply - The compliance with the Basel principles: compliance with these guidelines will help commercial banks achieve the goals of liquidity safety - Liquidity Risk identification methods of the central bank: choose the appropriate identification method with characteristics of each countries, for each period of the economy - Regulation and sanctions on the monetary market: markets which are full organized and have full legal framework will facilitate the central bank transparently control of information and market signals 2.4 Experience in commercial bank liquidity risk management from foreign central banks 2.4.1 Experience from the People Bank of China Some bank regulators include: – The Ministry of Finance: the Finance Ministry as a member of the State Council is responsible for the financial management and coordination between the agencies - The people's Bank of China: the PBOC has the function of creating and enforcing monetary policy, financial risk mitigation, and protecting financial stability 10 - The Management Committee of the Bank of China (CBRC): responsible for managing the operations and financial institutions across the territory How the People Bank of China manages commercial bank liquidity risks Using the principles of CAMELS in the whole banking system, including quantitative indicators (60 points) and qualitative indicators (40 points) By using monetary policy tools, PBOC will intervene the commercial bank which has internal lower rank, then reset the balance between its current and future liquidity and the ratios of capital management practices 2.4.2 The experience of the U.S Federal reserves Bureau (FED) Organizational structure management system - Federal Reserve System: manages the State Banks - Currency Administration Agency: Manages and inspects domestic banks - The Federal Deposit Insurance Corporation: the deposit insurance for banks: - Department of justice: review and approve the proposed merger of the Bank and the holding companies - The Securities and Exchange Commission: approve proposal on banks’ securitiy issuance and the holding companies - The Council of State: manages and inspect state banks How FED manages commercial bank liquidity risks • Open market operations: the FED use OMOs to adjust money supply, keep the interbank interest rate fluctuate around interest rate target • Lending: the FED made discount for the purpose of limiting the pressure on overnight interest rates, by providing credit to meet the reserve deficiency levels or avoid end day overdraft • Required reserve: Credit institutions keep required reserves partly as cash, and mainly in the deposit at FED The FED does not change the ratio but changes the limit of deposits correspond to fixed rates of 0%, 3% and 10% The FED released the policy impact on the entire financial system to support liquidity for the banking system or proposed separate policies, impacting directly on specific bank: guarantees and commits to support liquidity for the banks having difficulties, high liquidity risk, implements banking restructure: seek partners for merging, nationalize the banks which not have the possibility of merging 2.4.3 The experience of the Reserve Bank of Australia (RBA) Organizational structure management system - The Australian Prudential Regulation Authority ( (APRA): ensures the security for the Bank and the other credit institutions - Securities Investment Commission (ASIC): responsible for market behaviour How RBA manages commercial bank liquidity risks Issueing surveillance documents, based on the report of the risk appetite of the business units, using the technique, the measure set to determine the risks The Australian Reserve Bank asked the commercial banks to maintain the asset ratios with minimum at 6% of the total liabilities Commercial banks may discount the high liquid asset, but have to pay a penalty rate 2.4.4 The experience of the European Central Bank organization structure management system Organizational structure management system European Central Bank (ECB) consists of 16 Member Nations To implement the monetary policy of the ECB and in the matter of bank risk management, liquidity risk in banks in member countries, ECB regulates that the credit institution members (NCB) are responsible for forecasting the liquidity risk of each country ECB made the prediction method on the balance sheet of the central bank, combined with aggregation, analysis of the liquidity supply forecasting report of the Member States, as a basis for the decision implementation approach of open market operations tools, primary tool in the ECB's monetary regulations How ECB manages commercial bank liquidity risks Monetary policy tools of the ECB are: open market operations, the regular means and minimum reserves Open market operations, including four groups: main refinancing operations, month refinancing, temporary market invervene operation and immediate structure adjustment Long term operations: done regularly every month in the form of auction of interest rate, conducting small adjustments, are made through reverse contracts, FX swaps, purchase or receive fixed-term deposits by means of quick auctions or bilateral transactions; market structure changes made in the form of reverse transactions or released valuable papers to adjust the liquidity supply - demand Regular means: means of regular credit and means of regular deposits; oneto provide and one to absorb capital of commercial banking system Regular credit: end-day debts at credit institutions are considered a request to use the credit from the central bank credit institutions can request credit level regularly during the day Means of regular deposits: the partners can place deposits overnight at the national central banks To reach the means of regular deposits, partners must submit a request to the NCBs in the day Lessons learned for SBV Determine the nature of the liquidity risk in each period: understanding the nature of liquidity risk help SBV timely processing of SBV handle and regulate the root of problem, avoid temporary handling which has no effect in the long term Mergers and acquisitions of small, poor liquid banks: with influences from the world financial crisis, SBV has been flexible in adjusting its policies to 11 12 support commercial banking system However, SBV, realized that the instability of the banking system is located in the small bank with weak risk management, and exposures to liquidity risk From the year 2012, SBV embarked on the restructuring the weak banks, the classification of banks SBV stands out in searching partners and guarantees for merger activities between the banks, nationalizes the banks which are in danger of bankruptcy and could not find a partner to a merger or acquisition However, the SBV’s acquisition, restructure and direct manage on multiple small commercial banks will reduce the effectivity of the banking system performance SBV should soon give the mechanism and legal corridor to allow weak banks to be bankrupt, to ensure effective operation of the system, thereby also enhancing the ability of the system to take risks in the long term Implement monetary policy as the last recourse: SBV needs to play this role well in a timely manner accompanied by adequate sanctions Monetary policies should be in line with specific context: the different entities requires different policies, policies consistent with each economic era THE CONCLUSIONS OF CHAPTER Operation of the commercial banking system always face many different risk types, in which liquidity risk is the most considered by commercial banks as well as the banking regulators of URBAN COMMERCIAL very concerned and is the main content in commercial bank administration and in the central bank’s management Under the aspect of the banking system regulator, the central bank has many reasons to raise the role of liquidity risk management of commercial banking system and often expressed that through the monetary policy tools it released The management activities currently are based primarily on the principles launched by the Basel Committee Liquidity risk is a factor in the commercial bank operation The central bank as well as commercial banks are making efforts in liquidity risk management From the experience of developed countries, SBV needs to determine for themselves the right strategy in strengthening management to prevent and minimize the liquidity risk in commercial banking system Chapter • The joint stock banks • single member limited liability banks • joint venture banks • foreign bank branch • 100% foreign capital commercial banks Various scale and unfair competition of commercial banks has created a huge challenge of resources as well as risk management Chartered capital has important implications, such as buffer for commercial banks From 2008 to the present, the URBAN COMMERCIAL has started active in raising capital 500000 460,279 435,649 450000 400000 372,824 384,861 80 350000 70 300000 60 250000 50 200000 40 38.26 150000 30 100000 20 50000 10 8.72 2011 2012 5.65 4.11 3.22 2013 Authorized capital 2014 2015 Growth rate Chart 3.1: System-wide chartered capital through the years Source: annual report of SBV and the author's synthesis Business situation - Capital mobilasation activity THE SITUATION OF COMMERCIAL BANK LIQUIDITY RISK OF THE STATE BANK OF VIETNAM 3.1 Overview of Vietnam commercial bank system - Vietnam commercial bank system structure • The State commercial banks, mainly State – owned commercial banks 13 100 90 400,695 14 - Hot growth credit led to redit quality deterioration: resulted tin increased bad debt The risk in commercial banking system in Vietnam: • credit risks: credit risks associated with the credit operations of the Bank, was expressed through the rate of bad debt Bad debt rate tended to fall for the period, especially after the establishment of Vietnam asset managing company (VAMC) Chart 3.3: financing growth of commercial banking system in Vietnam Source: annual report of SBV Mobilization of capital increase continuously through the year However the crisis period has seen the decrease Interest rate financing have complicated development: interest race shows signs of the weak liquidity of the commercial banking system, the real interest rate expand the legal interest rate frame set by SBV Credit operations: ountstanding debt increased quite quickly with the average speed of 21.2% Đơn vị tính: % 25 20 18.1 15 14.2 12.51 12.62 10 8.85 Biểu đồ 3.5: Tỷ lệ nợ xấu hệ thống NHTM Việt Nam qua năm Nguồn: Tổng hợp từ báo cáo thường niên NHNN Việt Nam Chart 3.5: The ratio of bad debt in Vietnamese commercial banking system through the years Source: annual reports from the synthesis of the SBV • interest rate risk: by reasonable money injection measures aimed to stabilize the liquidity for banks through the open market, interest rates had a decrease and went into more stable • Exchange rate risk: with the big fluctuations of the exchange rate, Forex trading activity of large commercial banks are affected seriously Due to SBV’s strict monitor and effective foreign exchange rate adjustment, rates increasingly reflect market supply and demand, helping minimize Exchange rate risk for commercial banks 3.2 The situation of liquidity risk at Vietnamese commercial banks Năm 2011 Năm 2012 Năm 2013 Năm 2014 Năm 2015 Chart 3.4: Credit growth of commercial banking system in Vietnam Source: annual report of the SME, Vietnam Outstanding credit growth showed Vietnamese banking system has contributed greatly to the development of the economy - The ratio of loans to mobilized capital is far beyond the levels allowed by the SBV, which makes the system's liquidity always stressful 15 With indexes including minimum capital adequacy ratio (CAR), the cash position, liquid security ratio are used by the post graduate to reflect and measure the liquidity risk at Vietnamese commercial banks The race of banks to ensure a minimum CAR ratio (9%) made many small banks in trouble With the modernization of the Bank, withdrawals from the banking system is very simple, so the banks need to maintain stable cash position In general, banks are trying to adjust to a more effective ratios 16 Liquid security ratio collected by the author shows that commercial banks mainly hold liquid securities in the form of Treasury bills, SBV bills The cause of liquidity risk including capital and loan growth rate, maturity structure imbalance, condition of borrowing on the interbank market is heating up on both the value and the interest or small capital scale, unsufficient financial resources of banks The factors that increase the risk of liquidity for the Vietnam commercial banks in recent years are macroeconomic policies and inflation situation, investment capital flow or unhealthy and untransparent business environment In addition to these objective factors, there are also subjective elements such as the psychological effects of the depositors, rumors The Government’s monitoring, implementation of the regulation were not closely, creating loopholes to splenic law, which is also the cause of risk of liquidity 3.3 The situation of SBV’s commercial bank liquidity risk management After the renovation in 1986, the financial system began to be liberalized With the first regulation as capital mobilized over equities and provisions does not expand 20 times These regulations also rudimentary, penalties were not strict, leading Vietnam banks in trouble Until 1997, the international standards began to be specific and set out in the legal documents In 2005, a decision on adequacy rate of credit institutions was released Accordingly, the credit institution must maintain: (1) Capital Adequacy Ratio (2) Payment Serving Ratio = = = (for each currency, gold) (3) Payment Serving Ratio Equities Risk adjusted Asset Asset available for payment Liabilities due > = 8% > = 25% = = Equities Risk adjusted Asset Adequacy = (2) Payment Serving Ratio == (3) Payment Serving Asset available for payment Liabilities (in days) > = 9% > = 15% Asset due Liabilities due == Ratio (VND, EUR, GBP, USD) >= 1% (in thời gian days) (4) the ratio of the credit amount granted over capital mobilized for commercial banks is 80% (article 18, paragraph 1) (5) the maximum ratio of short-term capital used for medium and long-term loans were modified in Circular 15/2009/TT-NHNN issued on 10/8/2009 is 30% for the commercial banks In 2014, the circular 36 was issued in order to improve safety standards, enhance transparency in operations, limiting cross-ownership status Some indicators are changed during this period: (1) The ratio of liquidity reserve High liquid assets == (2) Payment Serving Ratio (VND) > = 10% Liabilities = Net cash outflows in 30 following days (in days) > = 1% (for each currency, gold) (in days) (4) build a breakdown of the assets available for payment and liabilities payable for each currency in each time period: day; from to days; from days to month; from to months; from months to months (5) the maximum rate of short-term capital is used for medium and long-term lending for commercial banks is 40% and for other credit institution is 30% 17 (1) Capital Ratio High liquid assets (in one month duration) Asset available for payment Liabilities due In 2010, the SBV issued a new circular, requiring credit institutions to establish Asset Management Division with the system of measurement, evaluation and reporting on liquidity Some indicators are changed: (3) Payment Serving Ratio in 30 days (Foreign currency) > = 50% High liquid assets > = 10% Net cash outflows in 30 following days (4) the maximum ratio of short-term capital used for medium and long-term loans for commercial banks is 60% (5) the rate of outstanding loans compared to total deposits for State commercial = 18 banks is 90% and 80% is for joint stock commercial banks SBV identifies liquidity risk by approaching, checking the balance sheet and by the method based on historical data, with seasonal adjustment: the loan items, cash in circulation items of other net asset items Liquidity demand forecasting: determine the level of demand in each moment and predicts volatility in the future SBV use the monetary policy tool to intervene in the commercial bank liquidity risk Some of the tools are open market operations; liquidity support for the system, the discount rate have direct influence and positive effect In addition, the introduction of the asset management company (VAMC) has helped to significantly change the situation of bad debt at banks With SBV's policies and efforts in the liquidity risk management of commercial banking system, SBV has gained substantial achievements The currency market gradually came into the framework, the problem of interest rates, exchange rates, gold prices, bad debt or liquidity of the system reduced However, SBV’s management still exists limitations: the scale of capital and capital adequacy standards remains low, the tool does not yet support to handle bad debt entirely, credit risk provision is not high and not corresponding to risk level The coordination between monetary policy and fiscal policy are not yet good Each policy pursues particular short term goals therefore conflict sometimes still occurs THE CONCLUSIONS OF CHAPTER Chapter of the thesis was focused on the liquidity risk in Vietnamese commercial banking system for the period from 2011 to 2015 The author has introduced essential Vietnamese commercial bank system operations with the content and situation of liquidity risk management for the system Chapter THE SOLUTION TO ENHANCE THE STATE BANK OF VIETNAM’S COMMERCIAL BANK LIQUIDITY RISK MANAGEMENT 4.1 The operating direction of the State Bank of Vietnam in the time coming In the period 2016-2020, the Government set a goal of banking system restructure: perform powerful movements in the planning and implementation of monetary policy, foreign exchange management, capacity and performance of inspection, renovation in cash circulation In the future, credit institutions continue to innovate in terms of both scale and quality of products and services To accomplish this, a number of tasks need to gain: adjust organizational structure, regulate money market, control more actively inflation, handle the dolarisation, deploy management wholly and consistently for the system, share information between SBV and the other management bodies, expand bank services and restrucre credit institution system 4.2 Solutions to enhance the State Bank of Vietnam’s management on commercial bank liquidity risk 19 Liquidity risk management has a vital role in the bank's activities, a number of solutions are proposed to commercial bank liquidity risk management as: 4.1.1 Improving the standard regulations on liquidity for commercial banking system: implementation of management by the method of CAMELS 4.1.2 Use models to analyze and forecast the trend of commercial bank liquidity risk in planning and operating of monetary policies Model of the factors affecting commercial bank liquidity risk Dependent variable: liquidity risk (LLSS) is measured by the ratio of medium and long-term loans/short-term savings Independent variable: • internal independent variable in the bank The scale (SIZE): use natural logarithm of total assets (SIZE) to represent the bank's scale The ratio of liquidity reserve on total assets (LATA): risk provision is the extracted amount up to reserve for absorb losses that may occur due to the customers of small financial institutions not fulfill the obligation under the loan commitment Own capital ratio of resources (ETA) Credit risk provision over the total outstanding loans (LPTL): the credit risk provision over reserve total outstanding loans (LPTL) is also used to test the impact on liquidity risk • Groups of independent variables: factors in the macro economic environment: economic growth, inflation change, M2 change Results analysis: Models of the thesis using array data-data of large commercial banks within five years from 2011 to 2015 year- regressed in two ways: random effects model (REM) and the fixed effects model (FEM) Use the Hausman (Hausman, 1978) to assess the suitability of the models The results of the econometric model Group of Variabl FE model RE Model variables es -1,2106* -1,5120* SIZE -0,0398* -0,0307** LATA Internal 0,0788** 0,0946 ETA -0,1843* -0,1514** LPTL 0,9112** 0,7902 GDP 0,0059 0,0137 Marcro M2 0,1741** 0,2839* INF P-value of Hausman test 0,004 * confidence of 1%, ** confidence of 5%, *** confidence of 10% Hausman test: P-value = 0,003 < 0,05, shows the regression method in the model of fixed effects (FE) is most appropriate and has statistical meaning Model results shows: all the intrinsic factors in the bank have affected the 20 liquidity risks, with 95% confidence The asset scale, liquidity reserves over total assets or credit risk provision over outstanding loans debt have reverse effect to liquidity risk Among them, the asset scale has the strongest impact In contrast to the original theory, the model results showed that the ratio of equities to total assets increase liquidity risk, with a 5% significance level For the macro factors, GDP growth, inflation changes increase liquidity risk Meanwhile, the volume of money supply did not affect liquidity risk with 10% significance level From the above forecast results, in order to play the good role of State management bodies, reducing liquidity risk in Vietnamese commercial banking system, SBV needs to implement the following solutions: 4.2.3 Measure liquidity risk using suitable models The measurement of liquidity risk of each commercial bank or the whole banking system is related to evaluating cash outflows and inflows of each commercial bank to determine whether there is a possibility of potentially significant decline or not Because during business process, commercial banks are affected by profit pressures from big shareholders, pressure from the competitive process, pressure from the fluctuations of the economy , so how the economic development and market trend monitoring have influence on the basic activities of commercial banks is especially important for central bank’s management on commercial bank liquidity risk (principle in "best practices on central bank’s management on commercial bank liquidity risk" by the Basel Committee issued in 2000) The term scale is a useful tool for comparing cash outflows and inflows on a daily basis and within a defined period of time The analysis of the net financing requirement entails the construction of a term scale and calculation of net capital surplus or deficit for each due date Net financing requirement of a commercial bank is determined by analyzing the cash flows of money in the future based on assumptions about the future performance of the asset - liabilities and off-balance sheet items Then the central bank can calculate the total amount of capital surplus or deficit in a certain period, which can evaluate the liquidity risk exposed to each commercial bank 4.2.4 Set appropriate organization model and renovate liquidity risk management Learning from the regional countries, SBV needs to have the more strict regulations, more detailed management measures: force commercial banks to hold liquid assets, analyze maturity mismatch, manage asset-liabilities management, plan liquidity risk reserve funds, analyse of the test according to scenerios, manage the administration and policy production of credit institutions, analyse liquidity risk in the system, liquidity risk based on currency and the rules of the reporting period 4.2.5 Implement monetary policy flexibility and sufficiently The contradiction between the monetary policy and fiscal policy sometimes occurs or the pursue of too many objectives of monetary policy can reduce efficiency Therefore, the need to clearly identify the most important goals in short term for monetary policy, suitable for each period and the development of the economy 4.2.6 Other solutions Build scenario to deal with liquidity risk, strengthen early warning of liquidity risk Improving the quality of staff training in the management, exploitation and usage of capital, improving the efficiency of remote management of commercial bank activities Identify weak liquidity commercial banks, adjust liquidity support operations, improve the effectiveness of information provision of credit information center (CIC), establish overall risk management policies for credit institution system Tightly manage of the enforcement of the policy and the compliance with the regulations of the credit institutions, issue the consistent documents about risk management and have enforcement measures to the credit institution which does not comply with the regulations 4.3 Recommendations 4.3.1 Recommendations to the Government Firstly, establish an independent central Bank and strong enough The deep intervention into the market: interest, capital allocation, , led the impact of investment capital and productivity increase not to be promoted effectively Theory and international experience shows the necessity of financial liberalization: delete interest rate control, privatize State financial organizations, loosen the regulation on new financial institution establishment, encourage financial institutions to expand scale, scope and liberalize international capital flows Build strong legal framework, strengthening of state regulators SBV should have relative independence from the Government Secondly, improve the legal system to meet the needs of integration Create favourable and stable macroeconomic factors for sustainable economic growth Adjust, improve the Banking Law, increasing the relationship between SBV and the Finance Ministry as well as related ministries, build information-sharing mechanism between the ministries Thirdly, speed up equitization of State commercial banks Step by step remove the subsidy mechanisms, protection for Vietnamese commercial banks, simultaneously loosen gradually the restrictions for foreign banks along with consolidate current policies 21 22 Enacting the law on deposit insurance, which has an important role in the protection of depositors and contributes to ensure the safety of the financial banking system, raising public confidence Composing deposit insurance Law is very necessary, creating an important legal basis for depositors to be better protected, the State financial management system is better especially in the context of economic integration 4.1.2 Recommendations to the Ministry of Finance Firstly, promote the development of the financial market Underdeveloped financial market means banks face difficulties to access with idle capital through other financing channels SBV may create new products for financial market by offering products to the market through the open market operations, increase liquidity, improve product quality of products in the secondary market by way of being positive, proactive in dealing, strengthen check measurement; manage and intervene into of available capital through monetary policy tools Measures to develop the money market: • expand the trading mean: increase liquidity, increase the possibility of trading • diversify of types of transaction • apply and use modern information technique Secondly, promote activities of the derivatives market The derivatives financial instruments such as: futures, currency swaps, options is the most effective tools to hedge risks THE CONCLUSION OF CHAPTER The orientation of Vietnamese commerical banking system in the coming time is to improve the competitiveness in the integrity trend and building commerical banking system Vietnam to develop sustainably, which aims to maintain stable operations of the banking system To achieve that goal, one requirement is that the commerical banks need to further strengthen liquidity risk management capabilities, strong liquidity risk management will be platform to stabilize and develop other activities commerical banking system On the basis of theoretical and practical study of liquidity risk management of SBV, the post gradutate have proposed a groups of solutions and recommendations to SBV, the Government to contribute to strengthen SBV’s liquidity risk management, meeting the practical requirements driven to the following results: The thesis aggregate theories on liquidity risk management of central bank in a market economy, the factors that affect liquidity risk and the central banks’ liquidity risk management methods The thesis also studies the experience of foreign central banks on liquidity risk management for commercial banking system, which draws the lesson that the SBV can study and apply Focus on analysing the situation of SBV’s liquidity risk management for commercial banking system, mainly in the period from 2011 to date Through the analysis, drawing result as well as the weaknesses and their causes in SBV’s liquidity risk management for commercial banking system On the basis of theory study and situation analysis, the thesis has launched a number of predictions and solutions (4 main solution groups) and recommendations (to the Government; The related ministries; Financial intermediary organizations) aims to contribute to improve the management capacity on liquidity risk of SBV From the solution, the thesis put forward a number of recommendations aimed at improving the capacity of SBV’s liquidity risk management for commercial banking system Solutions and recommendations need to be conducted and the implemented consistently and this will contribute to improve the effectiveness SBV’s liquidity risk management on commercial banking system, particularly in the context of the far-reaching integration of Vietnam into the WTO and the economy will be increasingly integrates into the world economy The limitations of the thesis and suggestion for the research after: The new thesis stops at the SBV’s liquidity risk management for commercial banking system in the context of enforcement of monetary policy, so the impact of other activities of the SBV on liquidity risk management are not yet mentioned in the thesis Particularly in the context of international integration, when making the commitment to open under the free trade agreement, when the operation of the commercial banks is increasingly strong, foreign capital outflows and inflows depens very much on political institutions, investment environment, the stability of the financial markets , liquidity risk at commercial banks will bear the significant impact The thesis has shown in quantitative research that the profit - liquidity risk trade-off of commercial bank administrators is the factor having most influence on liquidity risk of commercial banking system and then have impact on SBV’s management on commercial bank liquidity risk Therefore, the study of the change in the other factors on the bank profit and on SBV’s commercial bank liquidity risk management is a suggested research directions in the future CONCLUSION Reffering to research purposes stated in the opening chapter, the thesis on " the State Bank of Vietnam’s management on commercial bank liquidity risk" has 23 24