Current problem statement
Banks encounter multiple risks daily while managing assets and liabilities, including market risk, credit risk, and liquidity risk However, liquidity risk has often received less emphasis compared to market and credit risks.
Effective liquidity management is crucial for institutions to maintain sufficient liquidity to meet payment obligations while also capitalizing on investment opportunities As funding sources become increasingly volatile and expensive, proactive liquidity management allows institutions to stay competitive in the market.
In recent years, the Vietnamese banking system has faced significant liquidity challenges, particularly during the late financial year and the Lunar New Year, when cash demands from organizations and individuals surge This seasonal strain is often reflected in elevated interbank interest rates and increased participation in open market operations, refinancing, and discount activities The liquidity crisis first became apparent in early 2008, prompting the State Bank to implement regulations aimed at enhancing liquidity security However, by 2011, liquidity issues persisted throughout the year, becoming especially critical in the latter months.
In recent months, liquidity has emerged as a significant challenge for commercial banks due to the central bank's stringent monetary policies aimed at controlling inflation This liquidity crisis has prompted the central bank to prioritize its resolution, as banks exhibit reluctance to lend, exacerbating the issue of bad debts within the banking system For instance, some banks have raised their deposit interest rates to 19-21%, far exceeding the regulatory ceiling of 14%, highlighting severe liquidity concerns Additionally, the primary market is experiencing tension as banks increase internal lending, with lenders opening loan and deposit accounts totaling around 500 trillion dong The inter-bank market has also faced unprecedented challenges, such as the requirement of mortgages for inter-bank borrowing amidst a rising bad debt ratio The asset quality of the banking system is deteriorating due to high credit growth, limited risk management, and ongoing issues with monetary and interest rate policies Furthermore, the capital adequacy ratio (CAR) is sharply declining, with a significant increase in the number of banks failing to meet regulatory standards—from two out of 47 banks in June 2011 to 17 out of 42 by the end of the third quarter Many lenders have resorted to using nearly 100% of short-term funds for medium and long-term loans, deviating from the central bank's guideline of 30-40%, resulting in a severe liquidity crunch as the central bank tightens its monetary policy.
Truong Dinh Tuyen, a senior economist and former Minister of Trade, highlights that addressing the liquidity issue is the immediate priority for Vietnam's economy, rather than focusing solely on high inflation He emphasizes that weak bank liquidity poses the greatest risk, and improving it is essential for stabilizing the macro economy Once liquidity is enhanced, commercial banks can lower interest rates, which is crucial for revitalizing the real estate and securities markets A market recovery will enable banks to resolve bad debts, facilitating the successful implementation of the government's national economic restructuring plan.
The recent liquidity crisis faced by banks and financial institutions in Vietnam has brought about the need to review their existing Liquidity Management Polices, Practices and Procedures
This article investigates liquidity management in Vietnamese commercial banks from both theoretical and empirical perspectives, aiming to succinctly address key components related to the topic.
Literature review
In other countries
A variety of newest studies can be counted as researches of Thailand Fiscal Policy Research Institute (2010), Dr Raymond Van Ness (2010), Nicola Cetorelli and Linda Goldberg (2011)
The Fiscal Policy Institute of Thailand analyzes the regulatory landscape and supervision of bank liquidity risk management across Asian countries The study aims to identify best practices in regulation and offers key recommendations for effective liquidity risk management, emphasizing the importance of monitoring liquidity and funding as essential components.
Dr Raymond Van Ness's article on "Bank Liquidity Management" analyzes macroeconomic data stemming from the ongoing financial crisis that began in 2007 It emphasizes the critical role banks play in managing liquidity creation and associated risks The paper highlights the delicate balance banks must maintain between their own liquidity and their function as liquidity creators, particularly during periods of financial distress or crisis.
Nicola Cetorelli and Linda Goldberg examine liquidity management in the context of internal capital market recessions, highlighting strategies employed by globally active banks to effectively manage liquidity across their entire banking organizations.
In Viet Nam
In Vietnam, existing studies on liquidity management primarily examine individual banks, such as Nguyen Tuong Van's (2004) analysis of Vietinbank, Le Tuong Thuy's (2009) exploration of Agribank, and Nguyen Thi Dong's (2009) research on BIDV These studies focus on key liquidity indicators, including banks' payment liquidity, cash-to-total assets ratio, treasury bills-to-total assets ratio, loans-to-total assets ratio, deposit structure, capital mobilization, and capital utilization However, there is a noticeable gap in the comprehensive examination of liquidity management across the entire commercial banking system and its alignment with State Bank of Vietnam (SBV) policies.
Research questions and objectives
Research questions
The research problem defined above leads to the following research questions:
What is liquidity management and objective of liquidity management?
How is Vietnam commercial banks’ performance in recent years?
How are liquidity difficulties in commercial banks?
What are causes of liquidity problems?
How are SBV and commercial banks liquidity management?
What are recommendations to improve liquidity management?
Research objectives
In solving research problem and answering research questions mentioned previously, this study has some following objectives:
To make clear about understanding of liquidity (nature, components, measures) and liquidity risk in commercial banks
To present the essential of liquidity management as well as facts of liquidity management in Vietnam banking system Đàm Thị Phương ATCA-K11
To analyze liquidity difficulties and liquidity management of SBV and commercial banks
To submit recommendations to control liquidity problems and improve liquidity management.
Scope and limitations
The thesis graduation concentrates on research of theoretical framework according to international practices and Vietnam legal regulations related to liquidity management in commercial banks
It also investigates and analyzes liquidity management covering Vietnam commercial bank system in period mainly from 2008 to the beginning of 2012.
Methodology
This study examines the liquidity challenges faced by the banking system in Vietnam, with a particular emphasis on the liquidity management practices of commercial banks To collect relevant data, the researcher employed a descriptive method that integrated both qualitative and quantitative approaches.
The credibility of research findings relies heavily on the quality of the research design, data collection, management, and analysis This chapter outlines the methods and procedures used to gather and analyze data, ensuring a robust interpretation of results By justifying the approaches taken in the study, this section enhances the purpose and validity of the research, ultimately leading to truthful and analytical conclusions These elements are crucial for effective data processing and the formulation of reliable conclusions.
In this research, a descriptive method will be employed to gather information on the current existing conditions This approach aims to accurately describe the nature of the situation at the time of the study and explore the underlying causes of specific phenomena The researcher has chosen this method to obtain first-hand data from respondents, enabling the formulation of rational conclusions and sound recommendations for the study.
This study employed both qualitative and quantitative research methods The qualitative approach offers flexibility and an iterative process, while the quantitative method enables the identification of dependent and independent variables and facilitates longitudinal assessments of the research subjects' performance over time.
Qualitative research is valuable due to its inherent flexibility, allowing researchers to adjust and refine their ideas throughout the inquiry process Unlike experimental studies, qualitative research focuses on understanding phenomena in their natural states without manipulating the research environment.
The quantitative method is well-suited for this study as it enables a precise examination of the research problem Additionally, it clearly defines both the independent and dependent variables being investigated, ensuring a structured approach to data analysis.
In this study, the researcher employed secondary documentary data, including articles from books, reports, magazines, and newspapers, focusing on liquidity management and related literature to achieve the study's objectives.
Definition of liquidity and liquidity management
From asset perspective: Liquidity is the ability which assets can be converted to cash A liquid asset must have three characteristics:
First, a liquid asset has a ready market so it can be converted easily into cash without delay
The asset maintains a stable price, ensuring that even urgent or large-scale sales can be executed without causing a notable drop in value, thanks to a deep and resilient market.
Third, it is reversible, meaning the seller can recover his or her original investment (principal) with little risk of loss
Among the most popular liquid assets are Treasury bills, federal funds loans, certificates of deposit, municipal bonds, federal agency securities, bankers’ acceptance, and Eurocurrency loans
From banking management perspective: Liquidity is an ability a commercial bank (CB) readily accesses immediately spendable funds at reasonable cost at precisely the time those funds are needed
The risk of illiquidity may increase if principal and interest cash flows related to assets, liabilities and off-balanced sheet items are mismatched
Sound liquidity management involves prudently managing assets and liabilities on a daily basis to ensure that cash outflow suitably matches with cash inflow.
The demand and supply of liquidity
The primary source of funding for commercial banks is the influx of new customer deposits, which typically peaks at the beginning of each month due to business payroll disbursements and again around the middle of the month when bills are paid Additionally, liquidity is bolstered by customer loan repayments and the sale of assets, particularly marketable securities from the bank's investment portfolio Revenue from non-deposit services, along with borrowing from the money market, also contributes to the bank's liquidity.
Liquidity demands often stem from customer deposit withdrawals and credit requests from reliable borrowers, including new loan applications and draws on existing credit lines Additional liquidity needs arise from repaying previous loans obtained from other banks or the central bank Furthermore, covering operating expenses, taxes related to service production and sales, and periodic cash dividends to shareholders also contribute to the necessity for readily available cash.
The net liquidity position (L) of each central bank (CB) at any given time (t) is determined by the interplay of various sources of liquidity demand and supply Specifically, Lt is calculated by subtracting liquidity demands from liquidity supplies.
When liquidity demand surpasses its supply, management must proactively address a liquidity deficit by determining the optimal timing and sources for raising additional funds Conversely, when liquidity supply exceeds demand, management should strategize on how to effectively invest surplus liquid assets to maximize returns until they are required for future cash needs.
Reasons of liquidity problems and objectives of liquidity
Reasons of liquidity problems in financial firms
Most financial institutions face major liquidity problems This significant exposure to liquidity pressures arises from several sources:
Depository institutions often borrow substantial short-term cash from individuals, businesses, and other lenders, which they then use to provide long-term credit to their customers This creates a mismatch in the maturity dates of their liabilities, as incoming cash flows from assets rarely align perfectly with the outgoing cash needed to meet these liabilities.
Depository institutions face a significant maturity mismatch challenge, as they maintain a large share of liabilities that require immediate payment, such as demand deposits and money market borrowings These institutions must be prepared to fulfill substantial cash demands, particularly at the end of the week, the beginning of each month, and during specific seasonal periods.
Sensitivity to market interest rate changes can lead to liquidity issues for financial institutions When interest rates increase, customers may withdraw their funds to seek higher returns, while borrowers might delay new loan requests or quickly utilize credit lines with lower rates These fluctuations in interest rates significantly influence both deposit and loan demand, impacting the liquidity of depository institutions Additionally, changes in market interest rates can alter the market values of assets that financial firms might need to sell for raising funds, as well as directly affect borrowing costs in the money market.
Financial firms must prioritize liquidity to maintain public confidence, as a failure in this area can lead to significant trust issues For instance, if a bank runs out of cash, resulting in closed teller windows and ATMs, customer reactions would be negative A liquidity manager's key responsibility is to maintain close communication with major fund providers and holders of large credit lines to anticipate withdrawals and ensure sufficient funds are available to meet customer demands.
Objectives of liquidity management
1 Ensure ability to meet all payment obligations at all times, including those under adverse market conditions
2 Minimize the costs of foregone earnings on idle liquidity
3 Satisfy minimum reserve and other regulatory requirements regarding the cash position
4 Avoid additional costs of emergency borrowing and forced liquidation of assets
Strategies for liquidity managers
Asset liquidity management strategies
The traditional method for addressing liquidity needs is asset conversion, which involves holding liquidity in assets like cash and marketable securities When cash is required, specific assets are sold to generate the necessary funds until all liquidity demands are satisfied.
A financial firm's liquidity position can be enhanced by holding more liquid assets; however, this alone does not guarantee that the institution will be considered liquid The overall liquidity is also affected by the liquidity demands placed on the firm A financial institution is deemed liquid only when it can access liquid funds at a reasonable cost, in the exact amounts needed, and at the precise time required.
The asset conversion strategy is a preferred liquidity management approach for smaller financial institutions, as it is perceived to be less risky than borrowing However, this strategy is not without costs; selling assets results in lost future earnings and incurs opportunity costs Additionally, asset sales often involve transaction fees and may occur in declining markets, heightening the risk of significant losses To mitigate these risks, management should prioritize selling assets with the lowest profit potential first This practice can weaken the balance sheet's appearance, as low-risk government securities are frequently sold, potentially giving a misleading impression of financial strength Furthermore, liquid assets typically yield the lowest returns, meaning that investing in them entails forgoing potentially higher returns from other asset classes.
Borrowed liquidity management strategies
For decades, major global banks have increasingly opted to raise liquid funds by borrowing in the money market, a strategy known as purchased liquidity or liability management This approach involves securing immediately available funds to meet all anticipated liquidity demands Today, a diverse range of financial institutions employs this effective liquidity management strategy.
Borrowing liquid funds offers significant advantages for financial firms, allowing them to access necessary capital without the need to maintain a constant reserve of liquid assets, which can diminish potential returns This approach enables institutions to preserve their asset portfolio's volume and composition while meeting liquidity demands, unlike selling assets, which reduces overall size and holdings Additionally, liability management provides flexibility in controlling borrowing costs; firms can adjust interest rates to attract the required amount of funds, raising rates when more capital is needed and lowering them when less is necessary.
Borrowing liquidity is a high-risk strategy for addressing liquidity issues, yet it offers the potential for the highest expected returns This approach is influenced by the volatility of interest rates and the swift changes in credit availability.
Financial service providers frequently face challenges in acquiring liquidity, especially during times of high cost and limited availability The unpredictability of borrowing costs exacerbates earnings uncertainty Additionally, when a financial firm encounters difficulties, it often requires borrowed liquidity the most, as awareness of its troubles leads to customer withdrawals Concurrently, other financial institutions become hesitant to lend to the distressed firm due to the associated risks.
Balanced liquidity management strategies
Most financial firms adopt a balanced liquidity management strategy to mitigate the risks associated with borrowed liquidity and the costs of storing it in assets This approach involves allocating some expected liquidity demands to marketable securities while securing lines of credit from potential fund suppliers for additional support For unforeseen cash requirements, firms typically rely on near-term borrowings, while long-term liquidity needs are strategically planned by investing in short-term and medium-term assets that can generate cash when necessary.
Estimating liquidity needs
The sources and uses of funds approach
The sources and uses of funds method for estimating liquidity needs highlights that a bank's liquidity improves with rising deposits and reduced loans, while it diminishes when deposits fall and loans rise.
A liquidity gap occurs when there is a mismatch between sources and uses of liquidity, quantified by the difference in their amounts When a financial firm experiences a positive liquidity gap, characterized by greater sources of liquidity—such as increased deposits or reduced loans—than uses, it creates a surplus This surplus must be promptly invested in earning assets to prepare for future cash requirements Conversely, if the uses of liquidity surpass the sources, the institution faces a negative liquidity gap, necessitating the urgent acquisition of funds from the most cost-effective and timely options available.
The key steps in the sources and uses of funds approach are:
1 Loans and deposits must be forecast for a given liquidity planning period
2 The estimated change in loans and deposits must be calculated for that same period
3 The liquidity manager must estimate the net liquid funds’ surplus or deficit for the planning period by comparing the estimated change in loans (or other uses of funds) to the estimated change in deposits (or other funds sources)
The structure of funds approach
In the case of a bank, deposits and non-deposit liabilities are firstly divided into three categories based upon their estimated probability of being withdrawn:
Hot money liabilities, also known as volatile liabilities, refer to deposits and other borrowed funds that are highly sensitive to interest rate changes or are expected to be withdrawn within the current period.
2 Vulnerable funds-customer deposits of which a substantial portion, perhaps 25-30 percent, will probably be withdrawn sometime during the current time period
3 Stable funds (often called core deposits or core liabilities)- funds that management considers unlikely to be removed (except for a minor percentage of the total)
Second, the liquidity management must set aside liquid funds according to some desired operating rules for each of the funds sources
Banks must always be prepared to provide quality loans that meet the legitimate credit needs of customers who meet their lending standards To effectively manage this, banks should estimate the maximum potential for total loans and maintain sufficient liquid reserves or borrowing capacity to cover the difference between the actual loans outstanding and this maximum potential.
Finally, we combine both loan and deposit liquidity requirements for the bank’s total liquidity requirement.
Liquidity indicator approach
Many CBs estimate their liquidity needs based upon experience and industry averages This often means using certain liquidity indicators, for example:
1 Cash position indicator: Cash and deposits ÷total assets, where a greater proportion of cash implies the bank is in a stronger position to handle immediate cash needs
2 Hot money ratio: Money market (short-term) assets ÷volatile liabilities measure ability to cover those liabilities by selling money market assets
3 Liquid securities indicator: Government securities ÷total assets, which compares the most marketable securities with the overall size of bank’s asset portfolio; the greater the proportion of government securities, the more liquid the bank tends to be
4 Capacity ratio: Net loans and leases ÷total assets, which is really a negative liquidity indicator because loans and leases are often the most liquidity of assets
5 Core deposit ratio: Core deposits ÷total assets, where core deposits include total deposits less all deposits over $100,000 Core deposits are primarily small-denomination checking and saving accounts that are considered unlikely to be withdrawn on short notice and so carry lower liquidity requirements
6 Deposit composition ratio: Demand deposits ÷time deposit, where demand deposits are subject to immediate withdrawal via check writing, Đàm Thị Phương ATCA-K11 while time deposits have fixed maturities with penalties for early withdrawal This ratio measures how stable a funding base each bank possesses; a decline suggests greater deposit stability and a lesser need for liquidity Đàm Thị Phương ATCA-K11
Overview on Vietnamese commercial banks’ performance
General assessments to Vietnam’s commercial bank system
Vietnam's commercial banks play a crucial role in the country's financial landscape by channeling credit to the commercial sector and promoting financial inclusion Since the initiation of economic reforms, this sector, while largely remaining public, has experienced significant changes in size, operational efficiency, and financial stability.
As of late 2011, Vietnam's commercial banking system comprises five state-owned banks, 37 commercial joint-stock banks, four joint venture banks, five fully foreign-owned banks, and 54 foreign bank branches The central bank's data indicates consistent growth in this sector since late 2009, with commercial joint-stock banks experiencing particularly rapid expansion and increasing market share By October 2011, the total assets of the commercial banking system exceeded 4,713 trillion dong, reflecting a 13.5% growth from the end of 2010, while commercial joint-stock banks outpaced this average with a notable 16.4% increase.
Besides, Vietnam’s system of commercial banks has some following weaknesses:
Most commercial banks in the country have registered capital that is only 10-20% of their regional counterparts, indicating a significant disparity Furthermore, the operational areas of these banks lack sufficient diversification, which limits their growth potential.
A significant drawback of commercial banks in Vietnam is their uneven growth across various sectors, especially as their administrative mechanisms have failed to keep pace with the rapid expansion of their operational scope and capital.
Vietnam's banking technology lags behind, with insufficient implementation of computerized transactions, leading to longer processing times compared to foreign banks Additionally, the professional knowledge and skills of banking staff fall short of the required standards.
That means measures to settle these weaknesses are crucial for development of Vietnam commercial banks.
Facts of business performance in Vietnam’s commercial banks
Capital mobilization is crucial for commercial banks as it secures essential funding In response to challenges such as fluctuating interest and exchange rates, as well as increased competition, Vietnamese commercial banks have focused on diversifying their product offerings to attract more customers and increase market share From 2008 to 2011, there has been a consistent growth in capital mobilization among these banks.
Table 3.1: Capital mobilization from the economy
(Source: The State Bank of Vietnam)
Foreign currency depositVND deposit Đàm Thị Phương ATCA-K11
According to the table, capital mobilization increased in VND and foreign currency by 52.6% and 53.8% respectively
In response to the growing competition within Vietnam's banking sector, commercial banks have adopted effective strategies for credit extension and growth, alongside adjustments in credit structure Recent years have seen a consistent upward trend in credit activities, highlighting the banks' proactive approach to meet market demands and enhance their competitive edge.
In 2010, credit growth was notably high across all financial institutions, with joint-stock commercial banks leading at 44.12% This was followed by state-owned commercial banks at 27.85%, joint-venture banks and foreign bank branches at 24.47%, and finance and leasing companies at 20.91%.
We can see details in following pie-chart:
(Source: The State Bank of Vietnam)
Table 3.2: Credit to the economy by groups of credit institutions for year 2010
Joint-stcock commercial banksState-owned commercial banksJoint-venture and foreign banks finance and leasing companies Đàm Thị Phương ATCA-K11
Empirical data and analysis
Real situation of liquidity difficulties in Vietnam’s banking system 19
Liquidity challenges in the banking system are evident in the competitive capital mobilization within the interest rate market, despite the regulatory measures implemented by the State Bank and the assurances provided by commercial banks.
In February 2008, commercial banks implemented significant interest rate hikes, with many raising rates multiple times within a week SCB notably increased its rates four times in just 20 days Short-term deposit rates surpassed long-term rates, leading to a fierce competition for VND deposits Consequently, the overnight interest rate in the inter-bank market skyrocketed to an unprecedented 43% on February 19, 2008, compared to around 25% the previous week and a maximum of 17% in 2007 Despite these high rates, borrowers faced challenges in securing funds due to limited loan capital availability.
Since late 2009, interest rates across short, medium, and long terms at banks have remained nearly uniform and close to the established ceiling To attract larger deposits, commercial banks have implemented various bonuses, resulting in real interest rates that exceed their advertised rates Additionally, many banks have adopted internal policies aimed at preserving their deposit balances through various strategies.
In December 2010, a surge in interest rates was initiated by smaller banks such as SHB, Seabank, and Navibank, leading Techcombank to offer a competitive deposit interest rate of 17% per year for one-month maturities Seabank quickly followed suit, raising its rate to 18% per year, which prompted a widespread interest rate race across the commercial banking sector In response to this market volatility, the State Bank implemented several regulatory measures to stabilize interest rates On December 10, 2010, the State Bank's Hanoi branch convened a meeting with leaders from 12 northern commercial banks to negotiate interest rate commitments A similar meeting took place for southern banks, culminating in Document No 9779/NHNN-CSTT issued on December 14, 2010, which mandated that deposit interest rates in VND, including promotional expenses, should not exceed 14% per year.
Despite the State Bank's efforts to enforce deposit interest rate ceilings, compliance was lacking, prompting the issuance of Circular No 02/2011/TT-NHNN on March 3, 2011, to reinforce regulations Following this, competition for deposit interest rates in VND eased, while rates in USD began to increase In response, the SBV issued Circular 14/2011-NHNN on June 1, 2011, to set ceilings for USD deposit interest rates However, ongoing challenges in securing deposits led to fierce competition among commercial banks, prioritizing their individual benefits and causing VND deposit interest rates to surge to between 19% and 21% per year.
In response to regulatory pressures, many credit institutions have adjusted their yield curves by setting short-term deposit interest rates (1 day to 2 weeks) at the maximum cap of 14% per year This prompted the State Bank to issue Circular 30/2011/TT-NHNN on September 28, 2011, which replaced Circular 02 and established a maximum interest rate of 6% per year for deposits with terms under one month, while allowing rates of up to 14% per year for deposits with maturities of one month or longer.
Shortly after the new circular was implemented, inter-bank interest rates began to rise significantly, with initial rates reaching as high as 16% By mid-October 2011, short-term rates (overnight to one month) surged to between 18.5% and 25%, and the one-month rate occasionally hit 30% To mitigate risks from delayed loan repayments in the inter-bank market, large commercial banks started requiring collateral for loans, marking a shift from previous practices The turnover in the interbank market increased, with very short-term loans (overnight and one week) making up 68% of total transactions, indicating that some banks were seeking immediate liquidity solutions As stricter market discipline on deposit caps was enforced, smaller banks faced diminished competitiveness, leading to a shift in deposits towards larger banks such as ACB and VCB.
Vietinbank were major lenders in the market and many small banks like SCB,
Habubank, also known as Southern Bank, faced challenges as borrowers amid liquidity strains affecting smaller banks This situation compelled these smaller institutions to seek loans from larger banks, often at significantly elevated interest rates.
A review of operational aspects in commercial banks reveals that since 2005, the significant increase in the number of banks, branches, and asset scale, coupled with sustained high credit growth, poses an implicit threat to the liquidity of the banking system.
Small banks faced challenges in attracting deposits due to imposed caps on deposit rates, leading them to flatten their yield curves to remain competitive As a result, short-term interest rates became higher than long-term rates, causing capital to concentrate in short-term investments.
Table 3.3: Deposit structure at 7 commercial banks on 30/09/2011
(Source: The State Bank of Vietnam)
The trend in deposit sources has shifted towards shorter maturities, particularly among commercial banks While some large banks still maintain long-term deposits, many smaller banks lack deposits with maturities exceeding five years, with the majority of their funds concentrated in the one to three-month range For instance, at the end of Q3 2011, deposits with maturities of less than one year were predominant.
NVB reported a liquidity ratio of 91.76%, with 25.17% of deposits maturing in less than one month and 66.35% maturing between one and six months, while no deposits had maturities exceeding five years Similarly, SHB demonstrated a high liquidity ratio of 99.85%, with 71.7% of its deposits maturing in less than one month.
Meanwhile, the lending demand for medium and long term capital accounted for large proportion:
Table 3.4: Lending structue of listed banks on 30/09/2011 Đàm Thị Phương ATCA-K11
(Source: the State Bank of Vietnam)
In recent years, medium and long-term loans in the banking system constituted approximately 40% of total outstanding loans, while deposits during the same period represented less than 20% of total deposits Although the State Bank of Vietnam (SBV) has stipulated that commercial banks should not allocate more than 30% of short-term capital for medium and long-term lending, some credit institutions have exceeded this limit, with ratios reaching as high as 60%.
A significant mismatch in maturities between sources of capital and capital in use has been observed, with instances reaching up to 100% Consequently, many banks have utilized short-term capital to extend longer-term loans This mismatch poses unfavorable risks to banks' balance sheets, particularly when interest rates rise.
Many credit institutions rely on the interbank market for capital, particularly smaller banks that struggle to attract individual depositors This reliance on short-term funding from the interbank market can increase maturity risk volatility Additionally, interest rate competition among small commercial banks, which is constrained by caps, can lead to capital circulating between banks, posing a liquidity threat to the entire financial system if any bank faces insolvency rather than mere illiquidity.
- Growth and quality of credits
Some major reasons for liquidity difficulties in banking system
There are some main causes contributing to liquidity pressure in commercial banks
Liquidity issues stem from the State Bank's policies, which tend to prioritize administrative orders over actual market demands and the principles of supply and demand Additionally, the sanctions for violations are often vague, as many circulars and directives state that the SBV will take necessary measures without clearly defining the punishments The mechanisms to encourage banks to comply with regulations are also notably weak Furthermore, there has been a lack of objective and thorough assessment of market reactions to these policies.
The creditworthiness of most commercial banks is not evaluated by credit rating agencies, and the State Bank of Vietnam (SBV) has not publicly and systematically disclosed its risk assessments of these banks Individual depositors typically categorize commercial banks into two types: state-owned banks, which are viewed as more reputable and trustworthy, and joint stock commercial banks When deciding where to deposit their money, individuals primarily consider the deposit interest rates offered by the latter, which has fueled competitive mobilization among banks.
In 2011, rumors surfaced about liquidity strains and potential insolvencies among joint stock banks in Vietnam, prompting the government to assure the market with a message emphasizing that "no bank will go bankrupt." This commitment has been reinforced by the fact that no commercial bank in Vietnam has officially declared bankruptcy, which has helped to alleviate depositor anxiety and prevent bank runs on institutions deemed risky However, this reassurance has led depositors to focus on banks offering high interest rates, often overlooking the underlying reasons for these elevated rates, resulting in a competitive mobilization race among banks.
Secondly, reasons come from commercial banks’ performance
Since 2005, the rapid expansion of commercial banks and their branches, coupled with significant asset growth and sustained high credit growth, poses a potential liquidity threat to the banking system.
- Source of deposit growth rate could not keep pace with credit growth rate:
- Mismatching maturities between asset and liability
- Source of capital at some credit institutions depended on inter bank market
- The quality of credits at many credit institutions is doubtful
Small banks exhibit minimal liquidity assets, as evidenced by their balance sheets, which reveal a scarcity of government bonds The list of participants in Open Market Operations (OMO) predominantly includes state-owned banks and a few large commercial banks Consequently, the absence of adequate collateral for OMO participation has compelled these smaller banks to resort to borrowing in the interbank market, even amid elevated interest rates.
The market for derivative products in Vietnam, including Options, Forwards, Futures, and SWAPs, remains underdeveloped These financial instruments are essential for banks to hedge against market interest rate fluctuations and to effectively manage their assets and liabilities However, the use of such products for risk management is still relatively rare in the Vietnamese banking sector.
General recommendations on bank liquidity management
As for the State Bank of Vietnam
To enhance liquidity management, it is essential to establish a comprehensive legal framework for banks, ensuring that laws governing state banks and credit institutions align with socio-economic development and the strategic goals of the banking system This framework should also focus on the development and efficient operation of the money market.
Ensuring safe banking operations following standard in risk management, assets and liabilities management, capital management, modern credit system and credit manual based on international standard
The State Bank of Vietnam (SBV) is closely monitoring the liquidity of the banking sector and credit institutions, particularly those exhibiting signs of liquidity shortages, to provide timely assistance To address these challenges, the SBV may increase the frequency of open market operations (OMO) and adjust the terms with appropriate volumes and interest rates.
Stabilizing inter-bank market, especially adjusting refinancing rate, discount rate, basic rate and OMO rate in compliance with fund demand and supply in the market
Developing a systematic collaboration among commercial banks is crucial for ensuring payment safety and fostering a healthy competitive environment By supporting one another during illiquidity situations, banks can effectively prevent liquidity shortages within the entire banking system.
Applying flexible monetary policy followed market principles to meet monetary stabilizing target as well as lower inflation rate and encourage effective economic growth.
As for commercial banks
Restructuring assets and liabilities Đàm Thị Phương ATCA-K11
Effective liquidity management in commercial banks is crucial and involves issuing priced papers, adjusting capital mobilization mechanisms between markets I and II, and restructuring lending in sensitive sectors like securities, real estate, and consumer loans Banks must maintain a required reserve, which includes cash, central bank deposits, and other liquid assets By combining primary and secondary reserves, banks can actively manage liquidity risk while achieving appropriate profits It is essential for banks to review their asset and liability portfolios to minimize risks, which includes restructuring both short-term and long-term loans and adjusting short-term capital for mid and long-term lending Each bank tailors its products to meet capital mobilization needs based on market demands and business strategies, while prioritizing stable funding sources to enhance capital utilization effectiveness.
Developing structure for managing liquidity
- Each bank should have an agreed strategy for the day-to-day management of liquidity as well as a management structure in place to execute effectively the liquidity strategy
Banks must establish and routinely assess limits on their liquidity positions across specific timeframes Additionally, they should evaluate their short-term liquidity requirements To effectively predict these needs, banks can utilize two primary methods: analyzing the borrowing needs and expected contributions from key clients, and forecasting the anticipated volumes of loans and deposits.
A bank must implement robust information systems to effectively measure, monitor, control, and report liquidity risk Timely reports should be delivered to the bank's board of directors, senior management, and relevant personnel to ensure informed decision-making and risk management.
Internal controls for liquidity management
Every bank must implement a robust internal control system for effective liquidity management A key aspect of this system includes conducting regular independent assessments to evaluate its effectiveness, making necessary revisions or improvements as needed The findings from these assessments should be accessible to supervisory authorities.
Banks must regularly assess their strategies for building and sustaining relationships with liability holders, ensuring a diversified liability base while enhancing their ability to liquidate assets effectively.
Every bank must implement a robust measurement, monitoring, and control system for its liquidity positions across the key currencies it engages with This involves not only evaluating its overall foreign currency requirements but also conducting a detailed analysis of its strategy for each currency Regular assessments of cash flow mismatches should be established and reviewed over specific time horizons, both for the total foreign currencies and for each significant individual currency in which the bank operates.
Conclusions
Despite recognizing the persistent liquidity risk within the banking system, commercial banks continue to prioritize profit maximization over necessary restructuring and improved corporate governance This focus on credit development, rather than addressing operational weaknesses, has been a recurring issue since 2008 The pursuit of higher profits leads banks to minimize cash reserves and correspondent account balances, ultimately jeopardizing their ability to fulfill customer obligations and maintain financial stability in changing market conditions.
In 2010, credit activities significantly influenced the income structure of commercial banks, with the average return from these activities representing 76.8% of the total income for the ten largest banks.
In smaller commercial banks, the proportion of credit activities exceeded 90%, with Liên Việt Bank at 92.2%, Ocean Bank at 103%, Nam Việt Bank at 93.1%, and Mê Kông Bank at 98% Faced with growth and profit pressures, these banks have made significant efforts to expand their credit operations However, slack governance can be attributed to the policy environment and the phenomenon of "connected lending" observed in certain banks.
Vietnam's financial market is viewed as underdeveloped and vulnerable to shocks, prompting the government to implement measures to prevent bank bankruptcies While these efforts have contributed to system stability, they may inadvertently foster a reliance on the State Bank of Vietnam's rescue solutions, diminishing commercial banks' motivation to enhance their corporate governance Additionally, lenient enforcement of penalties for regulatory breaches may undermine accountability within the banking sector.
Connected lending occurs when corporate owners or major shareholders of banks engage in lending to their own projects or corporations, often circumventing regulations against lending to related parties To bypass these restrictions, they may appoint close relatives as nominal shareholders For instance, by having ten nominal shareholders, each holding approximately 5% of the charter capital, a true owner can effectively retain control of over 50% of the charter capital, undermining the intent of the regulations.
By that way, the owners of banks, whether formal or informal, nearly have the full right to make important decisions, especially related to financing their