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1 EXECUTIVE SUMMARY 1. THE NEEDS OF PROJECT Liquidity is available capital to meet the financial obligations of credit institutions (CIs) or banks. Capital is to meet the requirements of central bank reserves and compulsory excess to perform its payment obligations to customers, with the state budget, dealing with partners, pay debt to the central bank. The banks will maintain liquidity in two forms: in the funds deposited at the central bank and credit institutions. The excess liquidity is the highest portion of liquid, banks will determine the proportion of money kept in bank or deposited at the central bank based on payment demand. Thus, the liquidity kept in the central bank include the required reserve deposits and a part of excess reserves to meet the needs of payment. The central bank manages the deposited liquidity by setting the regulation and policy system, building the rules of intervention, dominating the transaction volume of liquidity in currency markets to adjust liquidity status in the interbank market, dominating the behavior of balance adjustment between deposited liquidity and fund in bank to ensure its proper operation, thereby affecting market interest rates in order to achieve the ultimate goal of the monetary policy. To execute the liquidity management, central bank needs to forecast liquidity status in the market, determine the value needed to intervene and propose the solutions to adjust liquidity status in the market to achieve the goal of monetary policy execution. Depending on the nation, with the characteristics of political institutions, the stage of economic development as well as the effectiveness in monetary policy operation of central bank; the impact of each element that causes the supply and demand of liquidity at the central bank as well as the prediction and control of single component in central bank liquidity also differ. The State Bank of Vietnam is gradually improving the management of liquidity such as complete forecasting methods, provide sources of information for the forecast reports, improve uniformity of intervention system, Despite many efforts, the results gradually are more accurate prediction, the tools are used flexibly, creating volatility in line with market requirements and achieve the State Bank goals, but the result of liquidity management of the central bank faces many constraints, liquidity status of the market reflects positive changes after the central bank intervened, directed interest rate does not drive market interest rates, the operating activities of SBV go after market, the market is not interested in the operating from the central bank. Causes affecting the results on liquidity management of State Bank of Vietnam is the 2 lack of reporting system, forecasting techniques are short-term, predictable and management on liquidity are limited, the coordination of macroeconomic policies is inconsistent leading the central bank in the passive state of liquidity adjustment to achieve the objectives of monetary policy. Starting from practical requirements outlined, this project have selected research topic is: "Liquidity management in monetary policy of the State Bank of Vietnam" contributing more fully to the scientific arguments management of liquidity, practical implementation at the State Bank of Vietnam and then to propose solutions to improve the efficiency of the management of liquidity in order to meet the requirements of operating monetary policy effectiveness. 2. LOCAL AND GLOBAL RESEARCH Globally, there have been many studies related to the topic of monetary policy (the tools of monetary policy, the objective of monetary policy ), and money market. However the material directly related to liquidity management of central bank in monetary policy execution in the world are not published much. The author represents the study of this problem: Bindseil Ulrich (2000), Falko Fecht, Kjell G. Nyborg, J'org Rocholl (2007), Simon T Gray (2008), Mohamed Afzal Norat (2008). In addition, organizations such as the International Monetary Fund (IMF), European Central Bank and the U.S.Federal Reserve Board also has a number of research articles related to the topic. In studies in Vietnam, the research topics related to monetary policy, the tools of monetary policy, the transmission channel of monetary policy action has been much research interested, however, directly related to the operation of the executive liquidity management in the monetary policy of the central bank is only "Improving prediction method to enhance Liquidity regulatory capacity of central bank in money market" of Deputy Governor – SBV Nguyen Dong Tien (2006). Totally, in the world and in Vietnam, the researchs on liquidity management of the central bank is limited and has not been verified and systematiced as well as a verification completely and comprehensively, the study made no difference about liquidity concept in terms of commercial banks and the central bank in every aspect, the liquidity status changes affect each market and at different levels. So choose the thesis focuses on systematic reasoning related to the management of the central bank in terms of liquidity, and study the performance of this work at the State Bank of Vietnam to increase operating efficiency of monetary policy. 3. PURPOSE To clarify the theory on liquidity management operations: The concept of 3 liquidity, supply and demand of liquidity, content management of liquidity, forecasting methods of liquidity Research on experience of management and forecasting liquidity in some countries around the world, to figure out the lessons for Vietnam. - Analysis of the management situation and forecast the liquidity of SBV in operating monetary policy by itself. - Propose solutions to address the issues raised in the liquidity management of the SBV, improve quality and improve the management of liquidity to contribute and enhancing the effectiveness of monetary policy. 4. OBJECTS AND SCOPES Objects: research will focus on the basic theory in terms of liquidity management of the central bank, the status of liquidity to execute the monetary policy of the central bank by forecasting method from currency balance sheet and propose management solution on liquidity of the central bank monetary policy. Scopes: the project researches on the management aspects of the central bank, using data on the Cash flow balance sheet of SBV primarily and analyzing from 2000 to 2012. 5. METHODOLOGY The research applies deductive methods, systems analysis, reflecting analysis, comparison, surveys, statistics, combining theory and practice, Qualitative analysis combines quantitative models used single regression. 6. RESULTS Thesis is the first science research project deeply and completely on the liquidity management (in terms of the central bank) in the monetary policy of the State Bank of Vietnam. Especially used qualitative research methods to clarify the scientific arguments. 7. RESEARCH STRUCTURE Besides Executive summary, Conclusion, the research has 3 chapters: - Chapter 1: General theory of Liquidity management in the monetary policy operation of the central bank - Chapter 2: Status of Liquidity management in the monetary policy operation of the State Bank of Vietnam - Chapter 3: Solution to improve the Liquidity management in the monetary policy of the State Bank of Vietnam 4 CHAPTER 1 GENERAL THEORY OF LIQUIDITY MANAGEMENT IN THE MONETARY POLICY OPERATION OF THE CENTRAL BANK 1.1. OVERVIEW ON LIQUIDITY AND ITS MANAGEMENT IN MONETARY POLICY OPERATION OF THE CENTRAL BANK 1.1.1. Liquidity 1.1.1.1. Concept "Liquidity" means funds available to meet its financial obligations, such as customer cash, payment requirements, to meet loan commitments to customers, payment for budget and credit repayment for central bank of the bank. Under banking system perspective: Liquidity is capital strength of a financial institution, is located in the banks' available capital. On the management of the central bank: capital availability deposits at central bank - is the amount of reserves that banks send to the country's central bank. It includes: compulsory reserve deposits, demand deposits, etc. 1.1.1.2. Demand and supply on liquidity at the central bank Demand on liquidity at the central bank The demand on liquidity is understood as a set of demands to be met to make the financial obligations of the banks with our partners, including central bank, the state budget, other financial institutions and especially customers of the banks. The demand on liquidityis formed by two parts: the free availability of capital and policy requirements. The free availability of capital: As the demand to meet the payment comes from the intrinsic factor in the activity of credit institutions and outside the direct control of the central bank. The liquiditypolicy: the implementation of the central bank requires that banks have to deposit an amount known as the reserve requirement. The relationship between the free liquidityand the liquiditypolicy: a close relationship with each other through the closing balance date of the payment deposit accounts. In which the demand on capital availability depends on the required reserve policies, the institutional factors and not change daily. The rest on the central bank deposit accounts in order to meet the demand of liquidityitself. Supply on Liquidity at the central bank Supplying liquidity is the amount of money that the banks used to meet its 5 financial obligations to stakeholders such as customers, budgets, with other banks or the central bank. Basically, the supply of liquidity of the banks is formed from two main sources: (i) raising capital from the economy, (ii) additional supply from the central bank through the channels: buying foreign currencies, the budget loans, loans for financial institutions and a number of other terms. When considering the central bank provides capital availability, the research focused on providing the liquiditycomes from the change of the elements on the cash flow balance sheet of the central bank. - The autonomous supply factors including net foreign assets, government net lending, Other net assets. - The supply on policy factors include Refinancing for banking activities in the market. 1.1.2. Managing Liquidity of the central bank in monetary policy operation 1.1.2.1. Concept Liquidity management is the task of central bank forecasting liquidity generally for the whole system, establishing rules of conduct and the use of interventions to adjust monetary conditions and the state of supply and demand of liquidity used in the interbank market to achieve the ultimate objective of monetary policy. 1.1.2.2. The needs on liquidity management in monetary policy operation of the central bank The central bank controls liquidity to improve the effectiveness in monetary policy operation The central bank approves the forecast on capital availability state of the market, determine the exact dosage and duration of the intervention will be the incentive to market dynamics change in a positive direction, thereby achieving goals central bank sets. We can say, central bank well manage the liquidity will improve the impact of the policy tools to the real variables of the economy were chosen as policy goals in each period, the national monetary policy. Support the central bank to adjust the state of liquidity of the banking system The forecasting liquidity of credit institution system will help the central bank understands normal and abnormal of the market, then propose solutions on the state capital availability on time through pumping money, adjusting the price mechanism. It is important to keep the central bank to adjust the state of liquidity, because the central bank understands that when the state of supply and demand imbalance in liquidity - whether surplus or deficit - will push the central bank to implement the 6 undesired behavior, so the central bank will be able to satisfy the requirements of the market to implement the planned monetary policy. 1.2. CONTENT AND PROCESS OF LIQUIDITY MANAGEMENT IN MONETARY MANAGEMENT OPERATIONS OF THE CENTRAL BANK 1.2.1. Process of liquidity management in monetary policy management operation of the central bank 1.2.1.1. Forecasting the liquidity in monetary policy execution The role of liquidity forecasting in monetary policy operation Forecasting liquidity as a basis for central bank can set the operating solution monetary policy appropriately, contributing to capital availability, regulatory market interest rates on monetary policy objectives in each time period. Forecasting liquidity method  Base on Cash flow balance sheet of the central bank  Forecasting approach: approaching cash flow balance sheet of the central bank allows the use of the data items on the balance sheet to predict the state of available capital. The change of each factor on the balance sheet will affect the Liquidity of the whole banking system. Supply of liquidity= (net foreign assets + Government net lending + other net assets - cash) + bank’s loan from the central bank Demand of liquidity= required reserves + reserve for payment  Liquidity (bank’s reserves at the central bank) =  net foreign assets +  Government net lending +  bank’s loan from the central bank + other net assets -  cash [37]  Procedure on liquidity forecasting in monetary policy operation Step 1: Identify factors to predict Step 2: Create the set of data history on supply factors – demand on Liquidity in period of time Step 3: Analyzing the factors impact on forecasting: this step is the most important and sofisticate in forecasting procedures.  Forecasting factors on liquidity  Autonomous liquidity supply Government net lending: To predict the trends of the movement items for Government net lending, forecasting departments need to monitor the movement of lending and cash of the Government, in particular through revenues and operating expenses of the government guarantee. The effect of this factor prediction depends 7 on: the relationship between the MOF and the central bank decided to smooth the information exchange; Opening of Government Accounts at commercial banks, central bank or open in 2 places will affect the capital movement and affect forecasted results. Net foreign assets: In the short term, the change in net foreign assets by the central bank intervened in the foreign exchange market, the long term: The change in net foreign assets have been affected by the changes in the components of the balance of international payments. Cash in circulation: In the short term, cash requirements primarily influenced by seasonal factors such as salary payment date, day off, day to spend money to increase salaries, the forecast on money factor need to rely on historical data to analyze to find out the seasonal factors, in long-term, factors affecting cash requirements are: (1) growth trend and cyclical demand cash, (2) growth rate of nominal GDP (3) the changing trend in the relationship between the Government and cash needs, Net other items: In the short term, the net accounts negligible fluctuations. In general, if there is no specific information in advance, able to forecast unchanged except receivables and payable.  Supply on capital availability policy: Depends on the monetary policy objectives of each plan period and providing credit through the banking system, then forecasting is high certainty and accuracy  Forecasting the demand factors of available capital: To predict the availability of capital of the whole banking system, central bank interesting in total liquidityrequirements of the whole system without the capital requirements seperately, except in some countries there is a separation of the currency market.  Forecasting the demand on required reserve: This amount is affected by the required reserve management methods and factors affecting the average amount of money raised by the banks. How to forecast of total deposits or on the composition of deposits may use structure models or time model, taking into account the seasonal nature of the deposits factor  Forecasting the exceeded reserves: this needs almost no sensitivity to interbank rates changes. There are three factors that affect the demand for this balance: efficient payment process, the expectations of central bank behavior in the provision for credit loss reserves at no penalty rates; interbank market status Step 4: Analysis pre-prediction failure Step 5: Forecasting implementation: Solution 1: analysis base on historical 8 data and seasonal adjustment; Solution 2: Based on the data analysis by planned or expenditures due under the contract, such as loans, bank’s debt collection for central bank, due date of the sale and purchase contracts with terms limited to the central bank In particular, Solution 1 is active forecasts of the central bank, solution 2 is higher accuracy, but the central bank depends upon the data collection. Also, able to combine quantitative methods to measure the impact of individual components to the state of supply and demand of the central bank Liquidity in each period, then having more solid deligence for the decision to use central bank intervention to achieve monetary policy operation. The model indicated mostly single regression model, reflecting the impact of a factor on the supply / demand Liquidity Step 6: Summary of forecasting results  Pros and cons of forecasting method  Pros: Increasing the autonomy of the central bank forecasts; negligible bias in the short-term.  Cons: Depending on the coordination of information between the central bank and the MOF, forecasting results for the Liquidity of the whole system under this approach depends on a number of fundamental conditions: (i) any payment of CIs are made through the payment system of the central bank, (ii) money market has no separation.  Forecast approaching from CIs  Forecast literature This prediction method is based on figures reported by Cis and the central bank, aggregation on liquiditystatus of the market at the time of management.  Forecasting method For good data forecasting from banks, central bank needs to standardize forecasting methods liquidityin the system, each bank have been tracking systems to execute cash flow analysis of their units on the basis of management and monitoring of all on-line entries arising property and asset and Liability in each bank.  Pros and cons of forecasting method base on balance sheet approaching of bank Pros: Helps central bank to forecast more accurate and complete the liquidityof the whole system; central bank easily requires banks to report the status of liquidityfrom time to time for the central bank. Cons: The role of the central bank initiative in forecasts is limited; require each bank to invest in infrastructure for information and billing systems and human resources to implement the centralising management capital and on-line in their system entirely. 9 1.2.1.2. Determination of intervention: (i) target of monetary policy each period, (ii) Based on forecast results of available capital, (iii) The situation of the previous session, (iv) Review review of market parameters such as interest rates, changes in capital requirements Then the monetary policy committee (in some countries by the Commission open market operations) will determine intervention 1.2.1.3. The intervention solutions to achieve goals Open market operations: The operations and primarily used frequently in the short-term intervention and immediate availability of capital management Tools are often used to supplement the impact to the state's last liquiditymarket after the open-market operations ending the day session or extended impact to the state capital of some banks that can not join OMO operations. Obligatory reserves: The intervention measures provide long-term adjustment strongly to the status of capital availability in the market through the central bank requires banks to hold a prescribed amount of money based on the required reserve ratio and the amount send to mobilize each period. 1.2.2. Timeframe of forecasts and Liquidity management Short term forecast: short-term forecast period depends on the length of the period and the ability to maintain an accurate forecast of the central bank. Forecast period is usually today (t = 0), the next day (t = 1), from today to the end of maintenance period. Long-term forecast: central bank can help more easily in the operating plan. The long-term forecasts on a quarterly basis, the next year to help the central bank determines an interest goals or payment term of OMO operation. 1.2.3. Factor impacts on liquidity management in monetary policy operation of the Central bank 1.2.3.1. Objective factor The relationship between the Central Bank and the Government: Basically, this relationship affects the ability of the central bank planning to government net lending in liquidityforecasting method that based on cash flow balance sheet of central bank. The planning is whether or not driven by an independent central bank with the Government, under the Government. The effect of the capital flows transfering between lenders and borrowers in the interbank market: will affect the maintenance of the status and estimated availability of capital, the interbank market is complicated by the uncertain behavior of the participating banks in trading capital. 10 The regulatory in capital management of banks: the banks' capital management major influence on the ability to exploit capital at a time, to the capital state or the supply of capital to the interbank market demand, thereby affecting on the Liquidity management role of the central banks. The banks have two forms of capital management centralised and decentralized. 1.2.3.2. Subjective factor Target system of Monetary policy: The system selected target oriented operating interest or base on volume will affect the quality of the liquidity management of bank. Methods of forecasting on liquidity of the central bank: Two methods are used in the world: (i) the forecast on the cash flow balance sheet of the central bank that brings proactive in forecasting, (ii) forecast from the banks report provides more accuracy. The rules and sanctions in monetary market: Markets organized and comprehensive legal framework to facilitate the central bank control over information and market signals. 1.3. EXPERIENCE ON LIQUIDITY MANAGEMENT OF MONETARY POLICY OPERATION FROM OTHER COUNTRIES 1.3.1. FED 1.3.1.1. Forecasting method of FED Forecasting methods used are accessible from the balance sheet of the central bank, the duration of the forecast in the U.S. is conducted every two weeks and daily. This two-week orientation constantly updated daily as estimates of reserves needs to be adjusted. Daily Forecasting Division on liquidityis the level 1 agent provides information about the market situation. Every month, the dealer 1 exchanges and assesses the market status with the economic experts, their customers and provide the forecast devision on liquidity Forecasting on Liquidity demand + The reserve requirement forecast: Fed manages the reserve requirement by duplicated partly method. Therefore, the amount of required reserve maintained relatively stable from the first day to the last day of the period. The banks report the amount of deposits to the reserve requirement. Forecast Devision would result in relatively stable data and accurately. + Setlement deposits: Before the required reserve maintenance period, besides the deposit of required reserve, banks are expected to inform the reserves to ensure solvency for the central bank. Forecasting the supply on Liquidity [...]... monetary policy 19 CHAPTER 3 SOLUTION TO IMPROVE LIQUIDITY MANAGEMENT IN MONETARY POLICY OPERATION OF STATE BANK OF VIETNAM 3.1 DIRECTION ON OPERATION AND EXECUTION IN MONETARY POLICY OF THE STATE BANK OF VIETNAM IN THE FUTURE 3.1.1 Direction on operation of the State bank of Vietnam Towards a model of modern central bank, reached the advanced level in Asia after 2010; develop and implement effectively... Market development - Develop and improve monetary market structure of Vietnam; - Establish, develop market makers and other members participated monetary market; - Infrastructure development and completion of the transaction rule in monetary market of Vietnam; - Continuing to accelerate the process of restructuring banking system in Vietnam 3.3 RECOMMENDATION 3.3.1 To the Government - Adjust, complete Banking... changing state has become special strongly from 2008 to 2011 This not only make the factors of self oriented supply and policy supply on the SBV’s payment balance sheet changed without order, but also resulted difficulties in liquidity forecast This thesis avaluate the affective level of some factors on liquidity supply, that the net foreign exchange credit asset has strongly influence on liquidity supply... research: New topics in the central bank stopped managing the liquidity for Vietnam, so the interaction between the volatility of the exchange rate to the liquidity management and vice versa is not mentioned in thesis Especially in the context of international integration, exchange streams flowing in and flowing out of Vietnam depends heavily on political institutions, investment environment, the stability... in under decree 18 - OMOs expressed effectively Liquidity management step by step - OMOs’s interest change closely with interbank’s 2.3.2 Some disadvantages - Forecast results is not stable yet caused strongly changing forecast factors - Activities on management and market interfere have not created oriented impacts - Informatics sharing mechanism does not adequate, data system is at a start reported,... whole market - Interbank transactions have not reflected correctly common liquidity state of banking system 2.3.3 Reasons 2.3.3.1 Objective reasons: - Macro- economic environments is not stable - Vietnamese interbank divided, that has not attracted many partners - Interbank modern transactions methods have not applied widely - Legal document regulated interbank activities is not specific - Inadequate... national reports, intervention options to adjust the capital status of market Besides, from experience managing liquidityin monetary policy operating in several countries in order to draw 7 lessons for Vietnam 14 CHAPTER 2 THE STATE OF LIQUIDITY MANAGEMENT IN SBV’S MONEYTARY POLICY PERFORMANCE 2.1 THE STATE OF SBV’S MONEYTARY POLICY PERFORMANCE 2.1.1 The targets 2.1.1.1 Policy targets: According to 2010... implementation of the industrialization and modernization of the country 3.1.2 Direction on execution in monetary policy and liquidity management in monetary policy operation of the State bank of Vietnam SBV defined direction, target in monetary policy operation for the period 20102015: (i) Continued on executing tightly the monetary policy and flexibility to prioritize the inflation control, macro-economic... direct and guide financial institutions to comply with the accounting regime, statistical reports 20 3.2 SOLUTION TO IMPROVE LIQUIDITY MANAGEMENT IN MONETARY POLICY OPERATION OF THE STATE BANK OF VIETNAM 3.2.1 Legal solution 3.2.1.1 Promulgate additional legal documents relating to the Liquidity management of the central bank: Currently, the documents system directly related to the liquiditymanagement... central bank - The direction on changes and supplement the liquidity management regulations: Reviewing the concept of available capital; Adding the purposes of liquiditymanagement of the State Bank of Vietnam; Adding liquiditymanagement objectives; Adding forms to collect information, sources of information for forecasting liquidityoperation; Expand the use of forecast results on available capital - The . BANK OF VIETNAM 3.1. DIRECTION ON OPERATION AND EXECUTION IN MONETARY POLICY OF THE STATE BANK OF VIETNAM IN THE FUTURE 3.1.1. Direction on operation of the State bank of Vietnam Towards. policy operation of the State Bank of Vietnam - Chapter 3: Solution to improve the Liquidity management in the monetary policy of the State Bank of Vietnam 4 CHAPTER 1 GENERAL THEORY. policy of the State Bank of Vietnam" contributing more fully to the scientific arguments management of liquidity, practical implementation at the State Bank of Vietnam and then to propose solutions