Operational risk management in top 10 vietnamese commercial banks

Trang 1 BANKING ACADEMY OF VIETNAM FACULTY OF FOREIGN LANGUAGUES ------ GRADUATION THESIS TOPIC: OPERATIONAL RISK MANAGEMENT IN TOP 10 VIETNAMESE COMMERCIAL BANKS Trang 2 CERTIFIC

BANKING ACADEMY OF VIETNAM FACULTY OF FOREIGN LANGUAGUES - - GRADUATION THESIS TOPIC: OPERATIONAL RISK MANAGEMENT IN TOP 10 VIETNAMESE COMMERCIAL BANKS Student : Nguyen Thi Thao Class : K22ATCA Academic year: 2019 – 2023 Student ID : 22A7510090 Advisor : Mr Ngo Tung Anh (MA) Hanoi, May 2023 CERTIFICATE OF ORIGINALITY I hereby declare that this graduation thesis is the product of my own work and effort under the guidance of Mr Ngo Tung Anh, except as cited in the references The research results and data in the thesis are reliable and have obvious sources The thesis has never been submitted for any degree or published in any previous work Hanoi, 22nd May, 2023 Signature Nguyen Thi Thao I ACKNOWLEDGEMENTS First and foremost, I would like to give a special thank and gratitude to Mr Ngo Tung Anh, my enthusiastic supervisor, for his valuable instruction, useful advice, great recommendation as well as comments to assist me during the journey of completing my graduation thesis I also sincerely express my appreciation to all lecturers in Foreign Language Faculty – Banking Academy, who have been dedicated to provide such a huge support and necessary knowledge throughout my four-year learning process so that I can apply it in the progress of studying and working Additionally, my thesis can not be completed without mentioning my beloved family and friends for always inspiring, encouraging, loving and taking care of me throughout my years of education Due to time constraints and my limited capacity, this thesis may contain some certain defects I, therefore, hopefully receive any feedbacks from the instructors and readers for improving my thesis II TABLE OF CONTENTS CERTIFICATE OF ORIGINALITY .i ACKNOWLEDGEMENTS ii TABLE OF CONTENTS iii LIST OF ABBREVIATIONS vi LIST OF TABLES vii LIST OF FIGURES viii CHAPTER 1: INTRODUCTION 1.1 Introduction 1.2 Objectives of the study 1.3 Significance of the study 1.4 Scope of the study 1.5 Structure of the Thesis CHAPTER 2: LITERATURE REVIEW 2.1 Introduction 2.2 Review of previous studies on operational risk management 2.2.1 International studies on operational risk management 2.2.2 Studies on operational risk management in Vietnam 2.3 Overview of risk in commercial banking activities 2.3.1 Definition of risk 2.3.2 Risk classifications 2.3.3 The formation and role of Basel against risk 2.4 Theory framework of operational risk in Commercial banks 11 2.4.1 Definition and Features of operational risk 11 2.4.2 Classification and Impacts of operational risk on commercial bank activities 12 2.4.3 The relationship between OR and other risks 16 2.4.4 OR assessment model 19 2.5 Theory framework of operational risk management in Commercial banks21 2.5.1 Concept of operational risk management 21 2.5.2 Principle of operational risk management 21 2.5.3 Operational risk management process 23 III 2.6 Experience for Vietnamese commercial bank in operational risk management of foreign banks 28 2.6.1 From Deutsche Bank 28 2.6.2 From Hong Kong and Shanghai Banking Corporation (HSBC) 30 2.7 Summary 32 CHAPTER 3: RESEARCH METHODOLOGY 33 3.1 Locale of the study 33 3.2 Research design 33 3.3 Sources of Secondary Data 33 3.4 Evaluation of Secondary Data 35 3.5 Framework of Operational risk management 35 3.6 Validity and Reliability 37 3.7 Summary 37 CHAPTER 4: RESULTS AND DISCUSSION 39 4.1 Situation of operational risk management at Vietnamese commercial banks 39 4.1.1 Regulatory framework for risk management according to Basel II in Vietnam 39 4.1.2 Current state of Basel II operational risk management in Vietnamese commercial banks 40 4.2 Operational risk management incidents of Vietnamese commercial banks in recent years 46 4.3 Discussion of the current situation of operational risk management in certain Vietnamese commercial banks 52 4.3.1 BIDV 52 4.3.2 Agribank 56 4.3.3 VPBank 59 4.4 Summary 63 CHAPTER 5: SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION 64 5.1 Summary of findings 64 5.2 Recommendations 64 5.2.1 To the Government 65 5.2.2 To the State Bank of Vietnam 65 5.2.3 To the commercial banking systems in Vietnam 66 IV 5.3 Conclusion 69 5.4 Summary 70 REFERENCES 72 V LIST OF ABBREVIATIONS ABBREVIATIONS MEANINGS AFC Anti-Financial Crime Agribank Vietnam Bank for Agriculture and Rural Development AMA Advanced Measurement Approaches BCBS Basel Committee on Banking Supervision BIA The Basic Indicator Approach BIDV Joint Stock Commercial Bank for Investment and Development of Vietnam CAR Capital Adequacy Ratio CBs Commercial banks IT Information Technology KRI Key Risk Indicators LDC Loss Data Collection NPL Non-Performing Loan OR Operational risk ORM Operational risk management RCSA Risk and Control Self-Assessment ROE Return of Equity SBV State Bank of Vietnam TRA Transformation Risk Assessment TSA The Standardised Approach VND Vietnam Dong VPBank Vietnam Prosperity Join-stock Commercial Bank VI LIST OF TABLES Table 2.1: Business Lines and Beta Factors 20 Table 2.2: Action Plan of the Bank 27 Table 3.1: Operational risk management framework for Vietnamese Commercial banks 36 Table 4.1: Charter capital & CAR in each type of banks in October 2022 42 Table 4.2: Business results report of BIDV 54 Table 4.3: Business results report of Agribank 57 Table 4.4: Business results report of VPBank 61 VII LIST OF FIGURES Figure 2.1: Risk classifications in bank operation Figure 2.2: Three pillars of Basel II 10 Figure 2.3: Basel II Operational risk classification 13 Figure 2.4: Operational risk event types 14 Figure 2.5: Enterprise Risk Management Wheel (ERM) 17 Figure 2.6: Relation between Operational risk and other risks 18 Figure 2.7: Process of ORM 24 Figure 2.8: HSBC privacy policy 31 Figure 3.1: Top 10 banks with the largest charter capital on June 30, 2022 34 Figure 4.1: Capital Adequacy Ratio (CAR) at Quarter IV/ 2022 of 17 bank (%) 43 Figure 4.2: Capital Adequacy Ratio (CAR) of banks in ASIA in 2022 (%) 44 Figure 4.3: Non- Performing Loan (NPL) of some banks at the third quarter of 2022 (%) 45 Figure 4.4: Operational risk management model of BIDV 53 Figure 4.5: Operational risk management model of Agribank 56 Figure 4.6: Operational risk management model of VP Bank 60 VIII ABSTRACT In Vietnam, banking system plays the most significant part in financing the economy so that operational risk management has always been a perennial problem and needs special attention Operational risk is derived from a variety of factors, including human error, internal and external events or systems in the banks Additionally, in the light of globalization, especially with the adoption of technological advancements, it is strictly essential for Vietnamese commercial banks to reinforce and optimize the entire operational system, strengthen the foundation for increment In actuality, the operational risk issues are still there and persist in many ways over a vast scope of branches with no signs of abating From the aforementional concern, The topic “Opertional risk management in Top 10 Vietnamese commercial banks” was chosen as my graduation thesis This research aims to analyze and assess the current situation of operational risk management on the scale of Vietnamese commercial banks in order to determine whether it is feasible to identify relevant responses and offer some recommendations for any long-lasting operational issues, contribuing to further manage operational risks for commercial banks The study integrates theories and research findings as well from previous researchers to construct a framework for risk management and evaluate the banks’ ability to meet the criteria in this framework Key words: Operational risk, operational risk management, banks, commercial banks IX Following the establishment of a legal framework for operational risk management, the State Bank ought to impose sanctions for misconduct, encourage compliance obligations among bank staff Depending on the severity, the SBV may charge administrative fines and warnings or restrict the scope of activities Furthermore, it is evident that the handling of violations must be conducted publicly and transparently in the banking system to boost deterrence and serve as a lesson for others Create a central database among commercial banks It plays a vital part for the SBV to establish a database for OR that can be properly shared in the scope of Vietnamese CBs, equips them with finding additional sources for investigating further and restricting the shortage of information The SBV also has to supply more reliable information and data in order for banks to make more accurate assessments and provide quick responses to scenarios with OR events ensuring consistency as much as possible Strengthen monitoring and inspection initiatives The SBV needs to collaborate with inspection organizations to frequently carry out inspections and supervision without announcement in advance in order to guarantee strict compliance with the rules and regulations of commercial banks in ORM In addition, these duties must be executed regularly along with the current state based on both remote and on-site monitoring techniques to keep up with changes banking profession, upgrading services and cutting-edge technological applications Especially at a period of progressively finishing Basel II and getting started toward Basel III, they need to prioritize resources to inspect and examine for promptly inappropriate activities detection and adjustment As a result, CBs are able to grow in the correct form with appropriate ORM approaches 5.2.3 To the commercial banking system in Vietnam In terms of human resources: Enhance bank staff training/ coaching Human is one of the causes leading to OR in the banking sector CBs, therefore, need to set up training or coaching courses about ORM for every staff about ethics 66 and techniques in their job performance, especially OR identification and prevention The purpose of training courses is to share experience, exchange information among staff while the leadership promptly adjusts suitable regulations or processes with the current situation with the aim of minimizing OR Annual exams are also suggested organizing to check knowledge and evaluate risk managerial performance (including factors of qualifications, experience in handling OR, discipline, customer feedback and so on), then arranging suitable positions based on their abilities and credentials The majority of research and documents of ORM are in English language so it is important to require each employee to standardize the English language certification for further research Besides, the executive department ought to propose an equal system of punishments and rewards inspiring the bank staff to best serve the assigned work by sharing knowledge and mastering the regime Internal rotation policy So as to monitor the transparent and shifting environment of operational risk management among different levels within the same branch or head office, the rotation of leaders plays a significant part in the operating process Additionally, each leader will have particular abilities to assist with perfecting the procedure, dealing with errors and providing the best solutions for managing OR In terms of Operational risk management framework: Raise awareness for Executive Department It is extremely important to enhance the seriousness of OR for the Administrative Council and Board of Directors who play a key role in directly supervising and managing OR Management should regularly update and discuss the process of OR assessment, especially events such as putting a new product into official operation or implementing a new business strategy After that, they must ensure that the ORM culture and adherence of all employees in the bank to their ORM responsibilities are continuously maintained Improve the efficacy of internal audit in managing Operational risk The internal audit department should pay attention to evaluating ORM and suggesting strategies for the Executive department to verify and resolve instead of just focusing on traditional aspects like credit or accounting If the internal audit 67 department possesses the requisite expertise, actively researches requirements and takes part in seminars and training courses relating to ORM, it will be highly effective Along with that, it needs to comply with the processes and regulations to detect potential risks and weaknesses in risk management, then offer appropriate solutions and minimize losses in time; regularly reset inspection activities based on international principles and standards, the actual situation and the latest investigation results on banking supervision In terms of process and regulations: Modify the quality to satisfy customers’ demand Conduct an overall review and assessment of the services and products quality and effectiveness that customers are using, paying particular attention to the question: "Are those products or services suitable with the target audience, region or religion?" to adjust, replace appropriately with the aim of improving customer satisfaction, competitiveness and reputation of CBs in Vietnam Keep the reporting process brief and understandable The time given for the preparation and analysis of reports on operational hazards at branches should be shortened from quarterly to monthly or even weekly in CBs, thus, the detailed information on these risk events will be kept up-to-date as needed to assist the Central ORM Department in controlling in time With the goal of minimizing the recurrence of risks and errors in the system as much as possible, the unit managers take responsibility for monitoring and informing their staff of defects and mistakes that might result in significant losses In terms of technological system: Ensure technological equipment maintaining well The IT departments in each CB should periodically keep track and monitor the operation of technological equipment and machinery in order to remain stable, safe and continuous operation in the core bank, data center and OR forecasting system with as few errors and risks as possible from technological factors In case of arising any mistakes relating to IT, banks need to associate with Informatics Center and suppliers to quickly respond to system issues and design effective support plans, 68 especially in the digital era of launching hundreds of online products and services in e-banking systems Save data and information in a safe way CBs continuously build a technological infrastructure for sustainable growth, storage cyber communication, momentous data and backup information systems carefully Apart from that, they need to propose strategies and solutions to mitigate potential OR for the magnetic card system, strengthen transaction safety and payment systems, typically the current popular trend of non-cash payment Deploy an online platform for ORM The IT center of each CB ought to build an online operational monitoring and inspection system Thereby, it is very convenient for the Supervisory or ORM board at the head office to keep track, detect and assess the level of any OR in the whole system, then instantly announce to the branches causing to handle this risk in the most reasonable way If the Supervisory Board strictly adheres to the supervision process on the online system, it will bring great benefits in preventing and minimizing losses, ensuring the business operations of CBs 5.3 Conclusion The commercial banking system in Vietnam has existed for a long time, but with the present trend of global economic integration, both its operations and international standards have been continuously updated along with science and technology have also become advanced The workload is going to be higher when there are more opportunities available, necessitating an improvement in receptivity, adaptability, and awareness The efficacy of business practices, the abundance of financial resources and risk management within acceptable limits may all likely play a role in building trust and enhancing the reputation of the banking sector In order to boost competitiveness and position, it needs to control and manage risks in accordance with the risk appetite, culture and characteristics of each bank, including OR As a result, OR is quite potential to have significant consequences, disrupting both banks' operations and the whole economy However, unlike other types of risks like credit risk or liquidity risk, ORM has not been paid attention to, investigated and 69 offered comprehensive solutions for Vietnamese CBs In addition, the impact of the Covid-19 epidemic was considered a notable factor in ensuring business continuity plans and ORM For these reasons above, the topic "Operational risk management in Vietnamese commercial banks" was selected for the graduation thesis with the following main objectives: To begin with, the researcher studied theoretical issues about Basel II Treaty, OR and ORM in the banking sector as well as investigations into ORM from CBs throughout the world, thereby providing useful lessons and experiences for Vietnamese CBs Second, the author applies the previously mentioned theoretical concerns to research, analysis and assess the current state of ORM in the Vietnamese CBs in the years from 2019 to 2022 by using qualitative method, in addition to utilizing quantitative method for the purpose of collecting data and further research associated with reality, then giving discussion and of the achieved results as well as notable limitations Third, this graduation thesis gave recommendations to the Government and the SBV - the primary authorities with the duty of issuing circulars and regulations together with directing and administering in order to prevent, reduce and enhance the effectiveness of ORM in the Vietnamese CBs Last but not least, I hope the research will be a vital part of enhancing the significant role as well as awareness of ORM in Vietnamese commercial banks Due to time limitations and my personal constraints, this thesis may not be completely free of imperfections Thus, I would greatly appreciate any feedback from both the instructor and readers to better my thesis 5.4 Summary The final chapter summarized achievements and defects as well in ORM of Vietnamese commercial banks from 2019 to 2022 After that, the research mainly concentrated on finding and suggesting the best recommendation for CBs, Government and SBV Based on a variety of factors that are the main reasons resulting in OR of CBs, the author made an effort to research and propose the 70 appropriate recommendation to both the current economic situation and strategies, business operations in each CBs, with the final goal of meeting international standards, boosting the quality of the entire system in managing, mitigating OR and losses, building a healthy commercial banking system in Vietnam 71 REFERENCES Annual Report 2019 – 2022, Agribank Annual Report 2019 – 2022, BIDV Annual Report 2022, 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