Liquidity management in commercial banks the case of vietnam,graduation thesis

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty GRADUATION THESIS Liquidity Management in Commercial Banks The case of Vietnam Student name : Dam Thi Phuong Class : ATCA-K11 Lecturers : MA Nguyen Minh Nguyet MA Bui Le Minh June, 6th 2012 Graduation thesis Banking Academy Table of contents chapter one: General introduction 1.1.Current problem statement 1.2 Literature review 1.2.1 In other countries 1.2.2 In Viet Nam 1.3 Research questions and objectives 1.3.1 Research questions 1.3.2 Research objectives 1.4 Scope and limitations 1.5 Methodology CHAPTER TWO: Theoretical framework 2.1 Definition of liquidity and liquidity management 2.2 The demand and supply of liquidity 2.3 Reasons of liquidity problems and objectives of liquidity management 2.3.1 Reasons of liquidity problems in financial firms 2.3.2 Objectives of liquidity management 10 2.4 Strategies for liquidity managers 10 2.4.1 Asset liquidity management strategies 10 2.4.2 Borrowed liquidity management strategies 11 2.4.3 Balanced liquidity management strategies 12 2.5 Estimating liquidity needs 12 2.5.1 The sources and uses of funds approach 12 2.5.2 The structure of funds approach 13 Đàm Thị Phương ATCA-K11 Graduation thesis Banking Academy 2.5.3 Liquidity indicator approach 14 CHAPTER THREE: Empirical data and analysis 16 3.1 Overview on Vietnamese commercial banks’ performance 16 3.1.1 General assessments to Vietnam’s commercial bank system 16 3.1.2 Facts of business performance in Vietnam’s commercial banks 17 3.2 Empirical data and analysis 19 3.2.1 Real situation of liquidity difficulties in Vietnam’s banking system 19 3.2.2.Some major reasons for liquidity difficulties in banking system 29 CHAPTER FOUR: conclusions and recommendations 32 4.1 General recommendations on bank liquidity management 32 4.1.1 As for the State Bank of Vietnam 32 4.1.2 As for commercial banks 32 4.2 Conclusions 34 Đàm Thị Phương ATCA-K11 Chapter one General introduction 1.1 Current problem statement In managing a variety of assets and liabilities, banks face various risks, such as market risk, credit risk, liquidity risk, etc, everyday Among these, liquidity has not been stressed as much as market or credit risk In practice, every institution needs levels of liquidity high enough to meet its payment obligations and low enough to take advantages of any investment opportunities As sources of funding become ever more volatile and costly active liquidity management enables institutions to keep ahead of the competition In recent years, one of the key problems in Vietnamese banking system is liquidity Liquidity in the banking system often strains in the period of late financial year and lunar New Year, when cash requirements from organizations, enterprises and individuals usually increase These are seasonal tensions and signs often only expose in market II: interbank interest rates move up higher than normal levels and demand to participate in the open market, refinancing or discount operations often increase during that period But in early 2008 the shortage of capital has been seen in all markets and was considered as a liquidity crisis After that time, the State Bank has issued several regulations to ensure the security of liquidity in the system but in 2011, liquidity in banking system became a hot issue in almost the year round and special problem in late period In recent months, liquidity has been considered one of the biggest challenges to commercial banks due to the central bank’s tightened monetary policies to curb inflation Liquidity problem of commercial banks is so serious that the central bank will focus on resolving this problem The banks remain so panicked that they not dare to lend The weak liquidity is the root of the bad debts in the banking system For example, several banks had recently pushed up their deposit interest rates to 19-20%, or even 21%, regardless of the regulatory Đàm Thị Phương ATCA-K11 ceiling of 14% Such phenomena revealed liquidity problems at several banks In addition, the liquidity situation also becomes tense in the primary market, as the banks are boosting internal lending Lenders are opening both loan and deposit accounts that are worth as much as 500 trillion dong combined There are more potential risks in the banking system’s liquidity, given the recent upheavals in the inter-bank market For the first time in history, mortgages are required for inter-bank borrowing, while the bad debt ratio continues to surge The system’s asset quality is worsened by high credit growth while risk management is still limited and shortcomings remain in operating monetary and interest rate policy Also, the capital adequacy ratio (CAR) tends to drop sharply, with more banks failing to satisfy the regulated CAR As of June-end in 2011, two out of 47 banks failed to meet the regulated CAR, but at the end of the third quarter, this figure rose to 17 out of 42 banks In the past time, some lenders even used nearly 100 percent of short-term funds to provide medium and long-term loans, compared to only 30-40 percent as regulated by the central bank, adding that for a long time, local banks have mainly funded short to lend long As a result, when the central bank pursued tightening monetary policy to curb inflation last year, these institutions face severe liquidity crunch Truong Dinh Tuyen, a senior economist, former Minister of Trade has emphasized that the priority task for the immediate time is to settle the liquidity problem, and then deal with the relation between growth and inflation: “The most worrying problem for the Vietnam’s national economy in the near future is not the high inflation, but the weak bank liquidity Therefore, in order to stabilize the macro economy, it is necessary to improve the liquidity” Only when the liquidity problem is settled will commercial banks be able to reduce the interest rates And only when the interest rates go down will Vietnam be able to recover the asset markets (real estate and securities markets) Once the markets recover, banks will be able to clear bad-debt which paves the way for the Đàm Thị Phương ATCA-K11 successful implementation of the national economy restructure initiated by the government 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 In order to further explore this issue, subject of “Liquidity management in Vietnam commercial banks” was conducted from theoretical and empirical perspectives to address a major set of components relevant to the subject matter in a brief and concise manner 1.2 Literature review 1.2.1 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) “Regulation and supervision for sound liquidity risks management” by Fiscal Policy Institute, Thai Land provides data of the overall of status of regulation and supervision of bank liquidity risk management in Asian countries The objective is to find the regulatory best practices and major recommendations for liquidity risk management depending on crucial element of monitoring liquidity and funding “Bank liquidity management” by Dr Raymond Van Ness uses macro-economic data due to the financial crisis that began in 2007 and is still affecting the economy today Regarding liquidity banks are responsible for managing liquidity creation and liquidity risks This balancing between a banks own liquidity and its role as a liquidity creator, especially in times of financial distress or crisis is the focus of his paper Nicola Cetorelli and Linda Goldberg review liquidity management according to internal capital market recession It presents how globally active banks manage liquidity across their entire banking organization Đàm Thị Phương ATCA-K11 1.2.2 In Viet Nam In Viet Nam, there are some studies about liquidity management but most of them focus only in a particular bank For example, Solution to improve liquidity management in Vietinbank by Mrs Nguyen Tuong Van (2004), Liquidity management in Agribank by Mrs.Le Tuong Thuy ( 2009), in BIDV by Mss Nguyen Thi Dong (2009) Lists of above studies similarly highlight liquidity issue through banks payment liquidity, cash/total assets indicator, treasury bills/ total assets indicator, loans/total assets indicator, deposit structure, capital mobilization and capital uses However, liquidity management issue is not considered deeply over the commercial bank system as well as through SBV’s policies 1.3 Research questions and objectives 1.3.1 Research questions The research problem defined above leads to the following research questions:  What is the liquidity?  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? 1.3.2 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 1.4 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 1.5 Methodology This study was conducted in order to present the liquidity difficulties Vietnam banking system The focus of presentation was on the commercial banks liquidity management In order to gather the necessary data, the researcher utilized the descriptive method, using both qualitative and quantitative approaches The credibility of findings and conclusions extensively depend on the quality of the research design, data collection, data management, and data analysis This chapter will be dedicated to the description of the methods and procedures done in order to obtain the data, how they will be analyzed, interpreted, and how the conclusion will be met This section is to justify the means in which the study was obtained and will help in giving it purpose and strength as it will then be truthful and analytical All these will help in the processing of the data and the formulation of conclusions In this research, I will use descriptive method of research to gather information about the present existing condition The purpose of employing this method is to describe the nature of a situation, as it exists at the time of the study and to explore the cause/s of particular phenomena The researcher opted to use this kind of research considering the desire of the researcher to obtain first hand Đàm Thị Phương ATCA-K11 data from the respondents so as to formulate rational and sound conclusions and recommendations for the study For this study, the research used qualitative and quantitative approach The qualitative method permits a flexible and iterative approach, while the quantitative research method permits specification of dependent and independent variables and allows for longitudinal measures of subsequent performance of the research subject The value of qualitative research can best be understood by examining its characteristics One of the primary advantages of qualitative research is that it is more open to the adjusting and refining of research ideas as an inquiry proceeds Also, the researcher does not attempt to manipulate the research setting, as in an experimental study, but rather seeks to understand naturally occurring phenomena in their naturally occurring states On the other hand, quantitative method is compatible with the study because it allows the research problem to be conducted in a very specific and set terms Besides, quantitative research plainly and distinctively specifies both the independent and the dependent variables under investigation With this particular study, the researcher utilized documentary secondary data (in the form of articles from books, reports, magazines, and newspapers) that are generally about the liquidity management as well as relevant literatures in order to meet the objectives of this study Đàm Thị Phương ATCA-K11 Chapter two Theoretical framework 2.1 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 Second, it has a reasonably stable price so that, no matter how quickly the asset must be sold or how large the sale is, the market is deep enough to absorb the sales without a significant decline in price 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 2.2 The demand and supply of liquidity The most important source commercial bank normally is receipt of new customer deposits The deposit inflows tend to be heavy on the first day of each month as business payrolls are dispensed, and they may reach a secondary peak toward the middle of each month as bills are paid Another important element in Đàm Thị Phương ATCA-K11 22 Table 3.3: Deposit structure at commercial banks on 30/09/2011 (Source: The State Bank of Vietnam) Clearly, source of deposits tended to shorten It could be seen from mobilized capital structure at commercial banks that excluding some big banks who had longterm deposits and many small banks had got no deposit with maturity over years Their deposits mostly fell into the period from month to months For example, by the end of Quarter 3/2011, deposit with maturities less than year at NVB was 91.76% In which, maturities less than month accounted for 25.17%, maturities, from month to months were 66.35% and no maturity was over years The same situation could be seen at SHB with 99.85% of deposits less than year, in which the maturities of less than month were 71.7% 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 23 (Source: the State Bank of Vietnam) Medium and long term lending in banking system recent years often made up 40% of total outstanding loans while deposit in the same period accounted for less than 20% of total deposits Despite the fact that SBV specified that commercial banks are allowed to take no more than 30% of short term capital to lend medium and long term but at some credit institutions this ratio reached 60 70%, particular case was up to 100% So, there was a large mismatch on maturities between source of capital and capital in use Therefore, many banks took short term capital to lend longer term This mismatching would cause unfavorable effects on banks’ balancesheet when interest rates move up In addition, source of capital at some credit institutions depended on inter bank market Because some small banks which found it hard to mobilise funds from individual depositors considered inter bank market an important source to get funds These acitvities would contribute volatility to maturity risk because interbank market mainly supplies short term funds Furthermore, interest rate Đàm Thị Phương ATCA-K11 24 races and unfair competitions as the strongest instrument of small commercial banks was interest rate which has been capped made capital went around banks and threaten liquidity in the whole system if some or even one bank was not illiquidity but insolvency - Growth and quality of credits Credit growth rate kept the pace of strong increase in years and was higher than mobilization growth rate and GDP Credit increased by 32% per year on average during the period of 2000-2010, while deposit went up by 29%, and GDP rose by just 7.15% during this period Credit growth move up faster than deposit growth in many years will result in the misbalanced between assets and liabilities and intensify liquidity risk in the banking system We can see details if chart of credit growth, deposit growth and GDP 2000-2010 in the banking system Table 3.5: Credit growth, deposit growth and GDP growth 2000-2010 The quality of credits at many credit institutions is doubtful According to SBV bad debts ratio in 2011 in banking industry was 3.2% (and around 3.6% by the end of Quarter I/2012) As Vietcombank Security reported bad debt ratios in 2011 of 16 in 18 commercial banks (excluding VCB and Viet Capital Bank) that Đàm Thị Phương ATCA-K11 25 published their number increased over 2010 Bad debt ratio went up strongly in 2011 at Agribank and HBB In addition, direct outstanding loans in real estate sector accounted for about 10% of total outstanding loans but outstanding loans in the system that were guaranteed by real estate were very large at about 60% These loans would be at risk as real estate market falls down Table 3.6: Bad debt ratios at some commercial banks (Source: The State Bank of Vietnam) However, published numbers may not reflect the real situation on bad debt In a recent analysis, professionals from the information center and socioeconomic forecast show that according to Fitch Rating, a credit ratings agency, bad debt ratio in Vietnam could be about time as much as the public number in 2011 In reality, there is a relatively large difference between Vietnamese loan classification standard (VAS) and international standards (IAS) Most commercial banks in Vietnam are classifying their debts based on quantitative methods Qualitative analyses have not been taken into account such as financial standing and business outcomes of enterprises This method may lead to the fact that the current debt classification does not reflect the debts in substance Đàm Thị Phương ATCA-K11 26 Currently commercial banks have ranked parts of a loan which are not paid in time among the bad loans, while the rest of a loan is considered as a qualified debt Besides, according to Maritime Bank’s economic analysis team, if the accounting was made in a right way of international accounting standards bad debt in banking sector would be at least at 10%, (over USD 10 billion equivalent), accounting for 10% of Vietnam’s GDP Moreover, some banks have turned to debt rescheduling, which is a normal operation at the banks, into a method to reduce their bad debts because extended debts are not included in bad loans so that they can limit their debts in group 3-4, reduce their provisions for credit losses and therefore, avoid bad impacts on their profits NPLs at commercial banks increased partly due to economic difficulties in general: Inflation since late 2007, the adjustments in exchange rate more frequently but unsmooth, tighten credit policy making enterprises difficult to approach to capital have pushed many companies into difficulties and made NPLs in the banking system increase But objectively, main problems may come from operations in the banking industry: Corporate governance qualifications at many commercial banks have not kept pace with the massive development of the system in recent years; Credit growth maintaining high rates in the long run may contribute to undermining the credit quality because lending standards often tend to ease as banks expand their lending continuously - Assets and liabilies High inflation from late 2007 undermined the belief in VND To attract depositors, deposit interest rates at banks showed upward tendency Expectation of higher interest made individual place their money in shorter term Moreover, operating monetary policy in Vietnam seemed not to show a clear goal Monetary policy has been conducted in the direction of “flexibility” No message to implicate that depositors will be able to be paid positive or nagative interest rates, or at least, they can get a fomal forecast from authorities on inflation target in the future In fact, a inflation rate has been often projected in early years and Đàm Thị Phương ATCA-K11 27 would be readjusted due to the real situation Therefore, depositors might find it hard to plan their maturities and prefer short term periods Since banks are experiencing negative differences in maturities between their asset and liabilities while increasing in NPLs, the amount of their mobilization and lending would put pressure on their liquidity 3.2.1.3.Policies of the State Bank of Vietnam  During the period from 2003 to 2007, easing monetary policy applied, money supply increased about 25% annually on average, many times as high as the rate of economic growth while the base rate and reserve requirements unchanged from late 2005 to 2007 has spurred the rapid growth of credit (70% per year in stock commercial banks sector and 20% per year state-owned commercial banks in 2007) The inflation rate also jumped up to over 12% in the end of 2007  Late January 2008, State Bank increased its base, refinancing and discount interest rates On 13/02/2008, State Bank announced it would release VND 20.3 trillion compulsory SBV bills to 41 commercial banks These Bills were not allowed to be used as collateral in refinancing and open market operations These administrative and fast tightening activities probably caused the liquidity shock to the system in early 2008 Because commercial banks had only a few weeks to gather funds for the State Bank’s requirement while there were some signs of cash constraint in the banking system Immediately, commercial banks had to borrow in inter-bank market and pushed up VNIBOR to a seriously high level The consequence of this is loss in commercial banks due to the fact that they not only had to borrow money with high interest rate to buy Bills with lower interest rate but also did not have enough money for lending as planned On the other hand, that shock reacted passively to the State Bank To prevent liquidity losses in banking system, State Bank pumped short- term borrowed money continuously into interbank system (33 trillion in a weak) Therefore, commercial banks faced liquidity problems until they got enough money for Đàm Thị Phương ATCA-K11 28 required Bills Liquidity problems also continued when the short term loans of SBV came to maturity Therefore, SBV had to pump money up frequently to meet liquidity requirements Regarding the deposit market, SBV has issued many policies to stabilize the market Since 2008, many regulations have imposed caps on deposit rates then lending rates and turning into the deposit rates again but they have been not strictly complied with by commercial banks In terms of the management, after the liquidity crisis in 2008, SBV has attempted to regulate the management of liquidity in the banking system Addition to existent regulations of security, SBV supplemented many regulations related to the liquidity management at commercial banks For example, circular 15/2009/TT-NHNN specified that commercial banks are allowed to use up to 30% of their short-term funds for medium and long term lending, directive 01/CT-NHNN dated 01/03/2011 on reminding credit institutions to secure their business with many limitations and requirements like that: credit institutions have to maintain their adequacy ratios in accordance with SBV’s provisions, lower their rates and proportions of outstanding loans over their total outstanding loans in non production sectors to the maximum level of 22% by 30 June 2011 and 16% by 31 December 2011, quote their lending interest rates at appropriate levels, purchase corporate bonds in accordance with provisions However, many banks did not strictly follow some indicators and there was no any heavy punishment that was applied for their violations With the aim of strengthening the commercial banks financial capacity, SBV has issued regulations to put commercial banks under obligation to increase their charter, in which, many banks would have to increase from VND 1,000 billion in 2008 to VND3,000 billion by the end of 2011 This requirement might cause negative effects as follows: (i) when charter capital raised commerical banks also had to increase their total asset in proportion to their liabilities Thus they would give impulses to open their branches and look for borrowers Small Đàm Thị Phương ATCA-K11 29 banks with less reputation would find it difficult to expand lending Then, the easy outlet for them is to loosen their lending standards Consequently, credit quality would be undermined, non performing loans would be likely to rise, bank’s capital turnover and withdrawal would probably be declined (ii) But the topic of interest is that where small comercial banks can take trillions VND to raise their chater capital, especially in the context of stock market depression Some banks got capital from “rotated bonds”, in other words, added their credit to their chater capital in a sophisticated and harmonious cooperation with other banks These actions would make cross holding among banks more complicated and authorities would find it hard to assess exactly commercial banks financial strength 3.2.2.Some major reasons for liquidity difficulties in banking system There are some main causes contributing to liquidity pressure in commercial banks Firstly, liquidity problems come from policies of the State Bank since many policies issued by the SBV lean rather toward administrative orders than actual market requirements or the law of supply and demand in the market Meanwhile, the sanctions for violations often have not specified clearly (because in many circulars and directives the punishments were often quoted in the way like: SBV will apply necessary measures in accordance with the provisions of law for the breaches of discipline or authorities will “apply measures with in their competence to handle credit institutions which break the provisions”) and mechanism to encourage banks to be in compliance with provisions has been very weak Furthermore, the assessment for market reactions to the policies has not been made objectively, adequately and properly yet In addition, creditworthiness of almost all commercial banks is not ranked by credit rating agencies SBV’s assessments of commercial banks risk level in the system have not announced publicly, sufficiently and systematically yet Individual depositors often divided commercial banks into types: State owned Đàm Thị Phương ATCA-K11 30 origin banks which were classified as more prestigious and trustworthy, and, joint stock commercial banks To make decisions to place money at latter banks individual depositors mostly refer to their deposit interest rates This factor contributed to encourage banks in mobilization races During 2011, there was rumor that many joint stock banks were facing liquidity strain and even standing ahead of insolvency To reassure market, government sent a message with an implication for “let no bank go bankrupt” Looking back on the establishment and development history in Vietnamese banking system, no commercial bank has been published bankruptcy so far which consolidated the message Government commitment relieved depositors psychology, avoid the phenomenon of depositors to rush to banks who were in a doubtful list but on the other hand, it made depositors just interested in banks that offered high interest rates although they could be aware of the reasons why those banks had to push their rate to such high levels Thus, mobilization race spread through banks like a contagion Secondly, reasons come from commercial banks’ performance It can be seen from the review of the real situation at commercial banks that the boom in the number of banks and branches and scale of their assets from 2005 as well as high credit growth has been kept in years which may be an implicit threat to liquidity in 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 - Holding a little liquidity assets: It can be seen clearly from commercial banks’ balance sheet that small banks have no or few government bonds in their assets list OMO participant list has mainly turned around state owned banks and some large commercial banks Due to the lack of Đàm Thị Phương ATCA-K11 31 collateral for participating in OMO these banks had to borrow at interbank market even when inter rates were pushed to high levels - Market for derivative products in Vietnam has not developed yet: Derivative such as Options, Forward, Future and SWAP are tools to support banks in hedging risks against market interest rate movements or restructure their assets and liabilities However, applying these kinds of products to hedge risk is uncommon in Vietnamese banking sector Đàm Thị Phương ATCA-K11 32 Chapter four conclusions and recommendations 4.1 General recommendations on bank liquidity management 4.1.1 As for the State Bank of Vietnam  Completing comprehensive bank legal framework in liquidity management (including law on state bank and credit institutions to be in line with socio-economic development, strategy for banking system development, develop and effectively operate 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  Closely monitoring the liquidity of the whole banking sector as well as credit institutions, especially certain credit institutions showing signs of shortage liquidity in order to promptly assist them SBV may increase the number of sessions and varied terms in the OMO with the reasonable volume and interest rate  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 In addition, that developing systematic combination among commercial banks for payment safety and healthy competitive environment is essential as banks can support each other in the illiquidity situation to prevent the liquidity shortage in the whole 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 4.1.2 As for commercial banks  Restructuring assets and liabilities Đàm Thị Phương ATCA-K11 33 This task is very important to manage liquidity in commercial banks that includes issuing priced papers, adjusting capital mobilization mechanism between market I and II, adjusting lending structure in highly sensitive areas, such as, securities, real estates and consuming All banks have to maintain a certain amount of required reserve consisting of cash, deposits in central bank and other liquidity assets) The combination between primary reserve and secondary reserve will help banks not only control actively liquidity risk but also get suitable profits Banks need to review liabilities and assets portfolios to minimize risks That means restructuring lending and borrowing funds in the market I (deposits from institutions and individuals), restructuring outstanding loan with short-term and long-term periods, adjusting short-term capital resources for making mid and long-term loans According to money demands and supplies, business strategies, each bank provides its products to mobilizing capital Besides, to strengthen the effectiveness of using capital banks primarily take care of stable funding resources  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 - Bank should set and regularly review limits on the size of their liquidity positions over particular time horizons Also, banks determine the need for liquidity at least short term As already noted, predicting that needs might be carried out by two methods One of them involves analysis of borrowing needs and anticipated level of contributions of each of the leading clients, the other forecasting the volume of loans and deposits - A bank must have adequate information systems for measuring, monitoring, controlling and reporting liquidity risk Report should be provided on a timely basis to the bank’s board of directors, senior management and other appropriate personnel Đàm Thị Phương ATCA-K11 34  Internal controls for liquidity management Each bank must have an adequate system of internal control over its liquidity management process A fundamental component of the internal control system involves regular independent reviews and evaluations of the effectiveness of the system and, where necessary, ensuring that appropriate revision or enhancements to internal control are made The results of such reviews should be available to the supervisory authorities  Managing market assets Each bank should periodically review its efforts to establish and maintain relationship with liability holders, to maintain the diversification of liabilities and aim to ensure its capacity to sell assets  Foreign currency liquidity management Each bank should have a measurement, monitoring and control system for its liquidity positions in the major currencies in which it is active In addition to assessing its aggregate foreign currency needs, a bank should also undertake separate analysis of its strategy for each currency individually The size of its cash flow mismatches may be set and regularly reviewed over particular time horizons for foreign currencies aggregate and for each significant individual currency in which a bank operates 4.2 Conclusions In summary, financial strength, corporate governance capacity at some commercial banks still have shortcomings They fell into difficult situation when market conditions changed and caused bad impact on the whole system However, the problem here is that the liquidity risk in the banking system has been lingering in recent years Commercial banks surely recognize the danger as they have look at their operational tructures Besides, this problem has been warned repeatedly since 2008 So why did almost all commercial banks look for any way posible to develop their credit instead of concentrating on restructuring their assets or improving their coporate governance? The reason can be seen Đàm Thị Phương ATCA-K11 35 easily that is their profit Maximizing profit requires no storage facilities, and their use for granting loans and investment Because of this need to reduce the cash and balances on correspondent accounts to a minimum, then the maximization of profits threatens the continuity of the bank to meet its obligations to customers In reality, returns from credit activities predominated over income structure at commercial banks In 2010, the average rate of return gained from credit activities accounted for 76.8% of total income at 10 largest commercial banks At the commercial banks with smaller size, this proportion reached even over 90% (Liên việt Bank: 92.2%, Ocean Bank: 103%, Nam việt Bank: 93.1%, Mê kông Bank: 98%) Under the growth and profit pressure, commercial bank made the best attempt to expand their credit activities In addition, reasons for the reality of slack governance also originated from policy environment and partly from the situation called “connected lending” at some banks In terms of policy environment, the financial market in Vietnam has been considered an undeveloped market which has not enough ability to cope with shocks Therefore, the government has tried to prevent banks from going bankrupt This endeavor seemed to stabilise the system but it may make commercial banks rely on SBV’s rescue solutions then lessen their motive power to strengthen their coporate governance capacities and authorities not mete out heavy punishments for breaches of provisions In terms of “connected lending”, some owners of corporations banks are concurrently the owners or major shareholders of banks They tried to lend their projects and their corporations They found many ways to dodge the provision to forbid lending “related person” For example, they let their close relatives act as nominal shareholders With 10 nominal shareholders and each of them kept about 5% of charter capital, a real owner would get over 50% of charter capital 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 Đàm Thị Phương ATCA-K11 36 projects Because of slack administration, easing lending while their resources are short and thin; in the context of economic difficulty, real estate market stagnation, standstill production, the above banks may fall into liquidity stress situation Đàm Thị Phương ATCA-K11